consumer and real estate lending

Upload: apriansyah-putra

Post on 15-Jul-2015

175 views

Category:

Documents


0 download

TRANSCRIPT

Learning and Management Decision Objectives To learn about the many types of loans banks make to consumers (individuals and families) and to real state borrowers and to understand the factors that influence the profitability and risk of consumer and real estate loans. Introduction In the period since World War II, banks have grown to be the dominant lenders in the consumer field. In part, the dominant position of banks stems from their growing reliance on individuals.and families as a key source of bank funds (deposits). Many households would be hesitant to deposit their funds with a bank if they did not feel there was a good prospect of being able to borrow from that same bank when a loan was needed. Then, too, recent research suggests that consumer credit is often among the most profitable loans a bank can make. Indeed, one of the best-known banks in the world, Citicorp of New York, has been directing a growing share of its rcsources toward consumer banking (especially the marketing of credit cards, residential real estate loans, and electrotic consumer-service facilities) via its thousands of branch offices worldwide. However, banking services directed at consumers cah also be among the most costly anci risky products that a bank sells because the financial situations of individuals and families can change quickly due to illness or loss of employment. Consumer loans must thercfore bp managed with care and with sensitivity to the special problems they present. Types of Loans Granted to Individuals and Families There are several different types of consumer loans, and the number of credit plans to accomodate consumers' financial needs is growing in the wake of deregulation of depository institutions in the United States and in many other industrialized countries as well. We can classify consumer loans by purpose-what the borrowed funds will be used for, or by type of loan-for example, whether the borrower must repay in installments or repay in one lump sum when the loan comes due. One popular classification scheme for consumer loans combines both loan types and loan purposes. For example, loans to individuals and families may be divided into two groups, depending upon whether they finance the purchase of new homes with a residential mortgage loan or whether they finance other, nonhousing consumer activities (vacations, purchases of automobiles, etc.) through nonresidential loans. Second, within the nonresidential category, consumer loans are often Civided into two gubcategories based on type of loan, installment versus noninstallment loans. We will look at the nature of these consumer loan types more closely in the paragraphs that follow. Residential Mortgage Ioans Credit to finance the purchase of a home or to fund improvements on a private residence comes under the general label of residential mortgage loans. The purchase of residential property in the form of houses and multifamily dwellings (including duplexes, triplexes, and apartment buildings) usually gives rise to a long term loan (usually bearing a terrn of 15 to 30 years) and is secured by the property itself. Such

loans may carry either a fixed interest rate or, more cornmonly in recent years, a variable, or floating, interest rate that changes periodically with a specified base rate (such as the market yield on U.S. government bonds) or a national mortgage iuterest rate (for example, the Federal Home Loan Bank Board's average home mortgage yield). A commitment fee (typically I to 2 percent of the face amount of the loan) is routinely charged up front to assure the borrower that a residential loan will be available for a stipulated period. While banks themselves make a significant portion of horne mortgage loans, increasingly in recent years such loans have been made through the mortgage banking subsidiary of a bank holding company. gage loans, increasingly in recent years such loans have been made through the mortgage banking subsidiary of a bank holding company. Nonresidential Loans In contrast to residential mortgage loans, nonresidential (or nonmortgage) loans to individuals and families include installment loans and noninstallment (or single-payment loans). Installment loans. Short-term to medium-term loans, repayable in two or more consecutive payments (usually monthly or quarterly), are known as installment loans. Such loans are frequently employed to buy big-ticket household items (e.g., automobiles, boats, recreational vehicles, furniture, and home appliances) or to consolidate existing household debts. While the installment loan normally carries a fixed interest rate, floating loan rates are becoming more common. Nevertheless, only about one - fourth of all consumer nonmortgage loans have variable interest rates today. Many banks in recent years have handled a significant portion of their consumer installment loans through finance company subsidiaries that are part of a bank holding company. This is advantageous because there are no geographic restrictions on setting up finance company offices, whereas bank branching activity may be hampered by law or regulation. Moreover, finance companies can accept riskier loans with higher expected yields than banks are often allowed to make. Noninstallment Loans. Short-term loans drawn upon by individuals and families for immediate cash needs and repayable in a lump sum when the borrower's note matures are known as noninstallment loans. Such loans may be for relatively small amounts, for example $500 or $1,000 and include charge accounts that often require payment in 30 days or some other relatively short time period. Noninstallment loans are made for a short period (usually six months or less) to wealthier individuals and may be quite large often ranging from $5,000 to $10,000. Noninstallment loans are frequently used to cover the costs of vacations, medical and hospital care, the purchase of home appliances, and auto and home repairs Credit Card Loans One popular form of consumer credit today is accessed via credit cards issued by Visa, MasterCard and several smaller bank and nonbank credit cand companies. Credit cards offer their holders access to either installment or noninstallment credit because the customer can charge a purchase on the account reprcsented by the card

and pay off the charge in one billing period, often escaping any finance charge, or choose to pay off the purchase price gradually, incurring a monthly finance charge that is based on an annual rate usually ranging from 12 percent to about 18 percent. Bank card companies find that installment users of credit cards are far more profitable due to the interest income they generate for the bank than are noninstallment users, who quickly pay off their card charges before interest can be assessed. Banks also earn discount fees (usually 1 to 6 percent of credit card sales) from the merchants who accept their cards. So rapid has been the acceptance of bank-issued and other charge cards that more than one trillion are estimated to be in use today around the world. Bank credit cards offer convenience and, a revolving line of credit that the customer can assess whenever the need arises. Bankers have found, however, that careful management and control of their credit card progams is vital due to the growing proportion of delinquent borrowers and the large number of cards that have been stolen and used fraudulently. There is evidence that significant economies of scale pervade the credit card field for, in general, only the largest bank card operations are consistently profitable. Nevertheless, the future of the credit card appear bright because of advancing technology that will eventually give most cardholders access to a full range of financial serrices, including savings and payment accounts and revolving credit lines. Characteristics of Consumer Loans By and large, consumer loans are regarded by bankers as profitable credits with "sticky" interest rates. That is, they are typically priced well above the cust of funding them, but their contract interest sales usually don't change with market conditions during the life of the loan as do interest rates on most business loans today. This means that consumer loans are exposed to interest rate risk if the bank's funding cost rises high enough. However, consumer loans are usually priced so high (i.e., with a sufficiently large risk premium built into the loan rate) that market interest rates on bank borrowings and default rates on the loans themselves would have to rise substantially before most consumer credits would become unprofitable. Why are interest rates so high on most consurner loans? One key reason is revealed by the Functional Cost Analysis (FCA) program conducted annually by the Federal Reserve banks. This cost accounting system suggests that consumer loans are among the most costly and most risky to make per dollar of loanable funds of any of the loans that banks grant to their customers. Consumer loans also tend to be cyclically sensitive. They rise in periods of economic expansion when consumers are generally more optimistic about the future. On the other hand, when the economy turns down into a recession, many individuals and families become more pessimistic about the future, particularly when they see growing unemployment, and reduce their bank borrowings accordingly. Moreover, consumers seem to be relatively unresponsive to changes in interest rates when they go out to borrow money. Household borrowings appear to be relatively interest inelastic. consumers are more concerned about the size of monthly payments required by a loan agreement than the interest rate charged (though, obviously, the contract interest rate on a loan influences the size of required loan payments). While the level of the interest rate is often not a significant

consiious factor among household borrowers, both education and income levels do materially influence consumers use of credit. Individuals with higher incomes tend to borrow more in total and relative to the size of their annual incomes. Those households in which the head of the household or the principal breadwinner has more years of formal education also tend to borrow more heavily relative to their level of income. For these individuals and families, borrowing is viewed more as a tool to achieve a desired standard of living rather than as a safety net to be used only in serious emergencies.

Concept Checks l9-1. What are the principal differences among residential loans, nonresidential installment loans, noninstallment loans, and credit card loans? l9-2. Why do interest rates on consumer loans typically average higher than on most other kinds of bank loans Evaluating a Consumer Loan Application Character and Purpose. The key factors in analyzing any consumer loan application are the character of the borrower and the borrower's ability to pay. The loan officer must be assured that the borrowing customer feels a keen sense of moral responsibility to repay a loan fully and on time. Moreover, the borrower's income level and valuable assets (such as holdings of securities or savings deposits) must be sufficient to reassure the loan officer that the customer has the ability to repay the loan with a comfortable margin for safety. For this reason, a consumer loan officer nearly always checks with the local or regional credit bureau concerning the customer's credit history. More than 2,000 credit bureaus exist across the United States; these institutions hold files on most individuals who at one time or another have borrowed money, indicating their record of repayment and credit rating. Often the fundamental character of the bonower is revealed in the purpose of the loan request. The loan officer must ask: Has the customer clearly stated what he or she plans to do with the money? Is the stated purpose of the loan consistent with the bank's written loan policy? Is there evidence of a sincere intention to repay any funds borrowed? Some senior loan officers often counsel new loan officers to take the extra time to visit wich each customer, because such conversations often reveal flaws in character and sincerity that have a direct bearing on the likelihood of loan repayment. Frequently, experienced loan officers fill out the loan application rather than letting the borrowing customer do it alone. By asking the customer pertinent financial questions as the application is being filled out, a skilled lender often can make a better call on whether the customer's loan request meets the bank's quality standards. The customer's spoken answers may be far more revealing about character and sincerity of purpose than anything written on a piece of paper or typed in a computer file. Unfortunately, economic pressures encouraging automation in the consumer lending process have led many banks, particularly larger institutions, to spend less time with the customer. Information gathering and loan evaluation increasingly are being turned over to computer programs. The result is that many consumer loan officers today know very little about the personality and

character traits of their customers beyond the information called for on a credit application, which may be faxed or telephoned in or sent via computer to the bank. In the case of a borrower without a credit record or with a poor track record of repaying loans, a cosigner may be requested to support repayment. Technically, if the borrower defaults on a cosigned loan agreement, the cosigner is obligated to make good on the loan. However, many bankers regard a cosigner maiply as a psychological device to encourage repayment of the loan, rather than as a real alternative source of security. The borrower may feel a stronger moral obligation to repay the loan knowing the cosigner's credit rating also is on the line. But bankers often hesitate to pursue a cosigner vigorously, because this can mean the loss of all the cosigner's banking business and perhaps the accounts of other sympathetic customers aswell Income Levels. Both the size and stability of an individual's income are considered important by consumer loan officers. They generally prefer the customer to report net salary, or take-home pay, as opposed to gross salary, and will often check with the customer's employer to verify the accuracy of customer-supplied income figures, length of employment, residence address, and social security number. Deposit Balances. An indirect measure of income size and stability is the daily average deposit balance maintained by the customer, which the loan officer normally will verify with the bank involved. In most states, a bank is granted the right of offset against the customer's deposit as additional protection against the risks of consumer lending. This right permits the bank to call a loan that is in default and seize any checking or savings deposits the customer may hold with the bank in order to recover its funds. However, the customer normally must be notified at least l0 days in advance before this right is exercised, which can result in the funds disappearing before the bank can recover any portion of its loan Employment and Residential Stability. Among the many factors considered by experienced consumer loan officers is duration of employment. Most lenders are not likely to grant a sizable loan to someone who has held his or her present job for only a few months. Length of residence is also frequently analyzed because the longer a person stays at one address, the more stable his or her personal situation is presumed to be. Frequent changes of address are it strong negative factor in deciding whether to grant a bank loan. Pyramiding of Debt. Consumer loan officers are especially sensitive to, evidence that debt is piling up relative to a consumer's monthly or annual income. Pyramiding of debt - where the individual draws credit at one lending institution to pay another - is frowned upon by most bank loan officers, as are high or growing credit card balancer; and frequent returned checks drawn against the customer's deposit account. These items are viewed as indicators of the customer's money management skills. Customers lacking these basic skills may be unable to avoid taking on too much debt and thereby get themselves in serious trouble with the bank.

How to Qualify for a Consumer Loan. Are there ways to improve one's chances of getting a bank loan? One positive factor is home ownership or, for that matter, ownership of any form of real property, such as land or buildings. Even if such property is not posted as collateral behind a loan, it conveys the impression of stability and good money management skills. Having a telephone is also important as a sign of stability and a low cost way for the bank's collections department to contact the borrower in case of trouble. Another positive factor is maintaining strong deposit balances with the bank. Not only do above-average deposit levels suggest a financially disciplined individual determined to meet his or her obligations, but also the bank can profitably use those deposits to fund other loans. The most important thing to do, however, is to answer all the loan officer's questions truth fully. Consumer loan officers look for inconsistencies on a loan application as a sign the borrower is untruthful or, at best, lorgetful. For example, a Social Security or personal ID number often reveals what geographic area a person comes from. Does the borrower's Social Security number match his or her personal history as indicated on the loan application? Are the borrower and his or her employer located at the addresses indicated? Is the amount reported as take home pay or annual income the same as what the employer reports? Has the customer reported all debts outstanding, or does a credit check reveal many unreported obligations the customer has forgotten or simply walked away from? The Challenge of Consumer Lending. Consumer loans are not easy to evaluate. For one thing, it is often easier for individuals to conceal pertinent information bearing on the payout of a loan (such as their health or futurc employment prospects) than for most businesses (whose loan applications are frequently accompanied by audited financial statements). Moreover, a business firm can more easily adjust to ill health, injury, or financial setbacks than can individuals and families. Indeed. the default rate on consumer loans usually is several times higher than that for many types of commercial loans. The key features of consumer loans that help the loan officer hold down potential losses are that most are small in denomination and are often secured by marketable collateral (such as an automobile). The loan officer can experience a substantially greater number of loan defauls in the consumer credit field than in virtually any other type of lending. Example of a Consumer Loan Application We can illustrate some of the most important types of information a consumer loan officer gathers and what these bits of information are designed to reveal by examining the sample loan application shown in Table l9-1. This is a credit application to finance the purchase of a new automobile (one of tte most common and normally one of the more profitable and secure types of loans made by a bank). The customer, J. B. Skylark, is trading in an older used car in order to purchase a new Oldsmobile sedan. The trade-in value and down payment will cover nearly 20 percent of the purchase price, and the bank is asked to cover the remainder (80 percent) of the automobile's price. The bank will take a chattel mortgage against the vehicle in order to gain the legal right to repossess it if the loan is defaulted. As long as cal prices remain fairly stable or increase, the bank s funds should be reasonably well secured.

However, character, stability, and adequate disposable income (not heavily burdened with fixed debt obligations and taxes) are important components of any consumer loan request, and these elements raise serious questions about this particular loan request. Skylark has been at his present address for only l0 months and stayed at his previous address in another city for just one year. He has worked only eight months for his present employer. Many banks prefer to lend only to consumers who have resided or worked in their market area for at least one year, which is often considered a sign of reliability. The loan officer must decide if Skylark's residential and employment situation comes close enough to the bank's standards in this regard. The Skylarks' annual family income is slightly above average and for both husband and wife, amounts to almost $39,000. Of course, this figure needs to be verified with the two employers involved. The family has debt obligations amounting to $102,469, which appears to be high but'is only 2.6 times their annual income and includes their home mortgage loan. Most home mortgage lenders would find a total debt to total annual income ratio of two and one-half to three times income not unusual by today's standards. The monthly payments on this debt are on the high side, however, at $1,078 (including the home mortgage payment). Monthly installment payments account for one child of monthly gross income, not counting the payments of $3 l5 per month that rhe requested car loan will require. Most lenders prefer to see a required monthly payment to income ratio in the range of 25 to 30 percent. However, the bulk of the family's debt and debt service payments are on their home and, in a reasonably strong local real estate market, the value of that home would provide adequate securily for the bank. Moreover, the Skylarks seem to have adequate insurance coverage and above-average holdings of liquid financial investments in the form of stocks. Bonds and other securities. The loan officer's check with both Mr. and Mrs. Skylark's employers revealed that they both have good prospects for continued employment. The Skylarks loan application is for a reasonable purpose, consistent with the bark's loan policy, and the family's reported income high enough to suggest a reasonably strong probability that the loan would be repaid. Accordingly, the loan officer accepted their application and proceeded to check out the Skylark's credit record. When the report from the regional credit bureau arrived on screen, however, the loan officer saw very quickly that there was a serious problem with this loan application. Unforrunately, as shown in Table l9-2, the Skylarks had a mixed credit record, with at least five instances of delinquent or unpaid bills: (a) from Windcrest Apartments (probably unpaid rent), (b) a bank loan that was both unreported and unpaid, (c) past-due creditcard obligations, and (d) a billing dispute rvith Saint Barrio Hospital that the hospiral has charged off as a loss. The other debts were essentially as reported on the loan application with only minor discrepancies. At best, the loan officer would ask the Skylarks about these unreported credits, but more likely this loan request will sinrply be turned down due to an unacceptable credit record. The loan officer clearly would be justified in having doubts about this borrower's sense of judgernent and responsibility in borrowing and repaying the bank's funds. Federal law (specifically. rhe Equal Credit opportunity Acr) requires U.S. banks to notify their credit customers in luriting when they deny a loan request.

They must give reasons for the denial, and where a credit bureau report is used, the customer must be told where that credit bureau is located. This way the customer can verify his or her credit record and demand that any errors found in the report be conected. Table l9-3 shows the credit deni rl report form given to the Skylarks and the reasons they were given on why their loan was turned down. In this case, the loan officer cited the unpaid debts and the relatively short period of time the Skylarks had held their current jobs. A good feature of this particular denial form is that the customer is cordially invited to use other services at the bank and to reapply if his or her financial situation improves. This section on evaluating consumer credit applications concludes by summarizing the key points that consumer loan officers must remember in evaluating requests for household credit. These barometers of credit quality in consumer lending are as follows: 1. Evidence of stability in employment and residence. 2. Consistency of information so that all inforrnation items and figures on the application fit with each orher. 3. Legitimacy of purpose for obtaining credit. 4. Evidence of competent money management skills, as reflected in the conservative assumption of debt and a timely repaymenr record. 5. Good prospects for continuing employment. A bankable consumer loan request will not display a significant weakness in any of the foregoing items. It is when a household loan application is weak in one or two of these features that bank loan officers face tough decisions and often must rely on either some sort of objective credit-scoring system (to be discussed in the next section of this chapter) or some measure of intuition to decide if the bank should risk its owners and depositors' funds. The ultimate decision to deny or accept a particular loan request depends upon the expected return and risk of that loan request relative to the expected returns and risks of other possible loans and investments the bank might make or has already made, bank management's attitude toward risk, and the bank's standing in the eyes of the regulatory community. Credit Scoring Consumer Loan Applications Many banks today use credit scoring to evaluate the loan applications they receive from consumers. In fact, major credit card systems, such as those run by J. C. Penney, MasteCard, Montgomery Ward, Sears, and ViSA, use these systems routinely to evaluate their credit card applicants and growing numbers of banks and other lenders are using credit-scoring models to evaluate auto, home equity, first mortgage and small business loans. Credit-scoring systems have the advantage of being able to handle a large volume of credit applications quicky with minimal labor, thus reducing operating, costs, and they may be an effective substitute for the use of judgment among inexperienced loan officers, thus helping to control bad-debt losses. Many customers like the convenience and speed with which their credit applications can be handled by automated creditscoring systems. often the customer can phone in a loan request and in a matter of minutes the bank can dial up that customer's credit bureau report

through its online computer network and reach a quick decision on the customer's request. Credit-scoring systems are usually based on discriminant models or related techniques such as logit or probit models or neural networks, in which several variables are used jointly to establish a numerical score or ranking for each credit applicant. If the applicant's score exceeds a critical cutoff level, he or she is likely to be approved for credit in the absence of other damaging information. If the applicant's score falls below the cutoff level, credit is likely to be denied in the absence of mitigating factors. Among the most impo'tant variables used in evaluating consumer loans are credit bureau ratings, age, marital status, number of dependents, home ownership, income bracket, having a telephone at home, number and type of bank accounts owned, type of occupation, and time in current job. The basic theory of credit scoring is that the bank can identify the financial, economic, and motivational factor that separate good loans from bad loans by observing large groups of people or businesses who have borrowed in the past. Moreover, it assumes that the same financial and other factors that separated good from bad loans in the past will, with a small acceptable risk of error, separate good from bad loans in the future. Obviously, this underlying assumption can be wrong if the economy or other factors change abruptly, which is one reason good credit scoring systems are frequently retested and revised as morc sensitive prcdicton are identified. Credit-scoring systems usually select between 7 and 12 items from a customer's credit application and assign each a point value from 1 to 10. For example, examination of the bank's consumer credit accounts might show that the factors in the table on page 610 were important in separating good loans (ex. those that paid out in timely fashion) from baci loans (ex. where repayment was seriously delayed or not made at all). The highest score a customer could have in the eight-factor credit-scoring system shown below is 43 points. The lowest possible score is 9 points. Suppose the bank finds that, of those past-approved loan customers scoring 28 points or less, 40 percent (or 1,200) became bcd loans that had to be written off as a loss. These losses averaged $600 per crcdit account, for a total loss of $720,00O. Of all the good loans made, however, only l0 percent (300) scored 28 points or less under this scoring system. At $600 per loan, these low-scoring good loans amounted to $180,00O. ftrercfore, if the bank's loan officer uses 28 points as the criterion score, or break point, the bank will save an estimated $720,000 minus $180,000 or $540,000, by following,the decision rule of making only those loans where the credit applicant scores higher than 28 points. If the bank's future loan-loss experience is the same, denying all loan applications scoring 28 poins or less will rcduce loss accounts by about 40 percent and reject just l0 percent of the good loan customers. The bank's management can experiment with other criterion scores lo determine which cutof, point yields the greatest net savings in loan loses for the bank's consumer loan program. Lets suppose the bank finds that 28 points is, indeed, the optimal break point for maximum savings from loan losses. The bank's consumer credit history could be further analyzed to find out what influence the amount of credit extended to a customer has upon the bank's loan-loss experience. The bank might find that the

point-scoring schedule on page 6l I results in the larqest net savings from consumer credit losses. clearly, such a system removes personal judgment from the lending process and rcduces the bank's decision time from hours to minutes or from week to one or a few days. It does run the risk, however, of alienating those customers who feet the bank has not fully considered their financial situation and the special circumstances that may have given rise to their loan request. There is also the danger of being sued by a customer under federal antidiscrimination laws (such as the Equal Credit Opportunity Act or the Federal Reserve Board's Regulation B) if race, gender, marital status, or other discriminating factors prohibited by statute or court rulings are used in the bank's credit scoring system. Federal regulations allow the use of age or certain other personal characteristics as discriminating factors if the bank can show that these factors do separate, at a statisticatly significant leve{ good from bad loans and that the credir-scoring system is frequently statistically tested and revised to take into account recent changes in actual credit experience. The burden of proof is on the bank to demonstrate that its crcdit scoring system successfully identifies quality loan applications at a statistically significant level. Frequent verifrcaticn and revision of a credit-scoring system is not only wise from a legal and regulatory point of view, but it also mitigates the biggest potential weakness of such systems, their inability to adjust quickly to changes in the economy and in family lifestyles. An inflexible crcdit evaluation system can be a deadly menace to a bank's consumer loan program, driving away sound consumer credit requests, ruining the bank's reputation in the communities it serves, and adding unacceptably high credit risks to the loan portfolio. Concept Checks 19-3. What features of a consumer loan application should a loan officer examine most carefully? 19-4. How do credit-scoring systems work? 19-5. What are the principal advantages to a bank of using a credit-scoring system to evaluate consumer loan applications? 19-6. Are there any significant disadvantages to a credit-scoring system? 19-7. In the credit-scoring system presented in this chapter would a loan applicant who is a skilled worker, lives with a relative, has an average credit rating, has been in his or her present job and at his or her current address for exactly one year, has four dependene and a telephone, and holds a checking account be likely to receive a loan? Please explain why. Laws and Regulations Applying to Consumer Loans Numerous laws and regulations limiting the activities of consumer lending institutions have been enacted during the past four decades. The principal federal laws fall inlo two broad groups: (l)disclosure rules, which mandate telling the consumer about the cost and essential requirements of a loan or lease agreement; and (2) antidiscrimination laws, which prevent categorizing loan customers according to their age, sex, race, national origin, religious affiliation, location of residence, or receipt of public assistance and denying credit to anyone solely because of membership in one or more or these groups. Many bankers view such rules as burdensome and out-of-step with technological and service innovations.

They are also a constant challenge to the enforcement power of the regulatory community, which is burdened with numerous complaints and questions of interpretation. Yet, the flow of adequate financial information to consumers is becoming more and more vital in the wake of deregulation of the financial sector, which has been accompanied by greater risk for both financial institutions and their customer. Customer Discloure Requirements One of fte most prominent pieces of federal legislation in the consumer services field is the Consumer Credit Protection (or Truth-in-Lending) Act, passed in 1968 by the U.S. Congress and simplified in l98l through passage of the Truth-inLending Simplification and Reform Act. The Federal Reserve Board has prepared Regulation Z to implement these two truth-in-lending laws. The express purpose of truth in lending is to promote the informed use of credit among consumers by requiring full disclosure of credit terms and costs. Lenders must tell customers the annual percentage rate (APR or actuarial, rate) on the loan requested, the total dollar amount of all finance charges, and, in the case of home mortgage loans, the required fees for approvals, closing costs, and other loan-related expenses. Subsequent amendments in 1970 and 1974 gave rise to the Fair Credit Reporting Act and the Fair Credit Billing Act. The former expressly grants consumers access to their credit files, usually kept by local or regional credit bureaus. The Fair Credit Reporting Act authorizes individuals and families to review their credit files for accuracy and to demand an investigation and correction of any apparent inaccuracies. The law requires a credit agency to correct these inaccuracies promptly and to allow the consumer to insert a brief statement of explanation for any damaging items displayed in the file. Moreover, the law severely restricts access to consumer credit files, requiring an individual's written consent to access his or her file. Recently, contnoversy has swirled around the credit-reporting industry in the United States. Some credit bureaus have been accused of creating excessive error in consumers credit files (which often result in unwarranted denials of loans), of not fully investigating consumer complains concerning inaccuracies, and of selling information about consumers to mail-order firms. Several bills have been introduced in Congress over the years to impose tighter regulations on crcdit bureau operations and tougher penalties for credit bureau errors. The Fair Credit Billing Act of 1974 permits consumers to dispute billing errors with a merchant or credit card company and receive a prompt investigation of any billing disputes. The consumer may withhold payment on the disputed portions of a bill and cannot be reported as delinquent or forced to pay interest penalties until the dispute is settled. Any creditor that does not respond to a consumer's inquiry about a bill or, having responded, does not investigate and attempt to resolve the matter must ultimately forfeit the disputed charge, up to a maximum of $50. A 30 day notice to customers is required before a lending institution or merchant can alter credit charges or service fees. The Fair Credit and Charge-Card Disclosure Act requires that customer applying for credit cards be given early written notice (usually before a credit card is used for the first time) about required fees to open or to renew a credit account.

Also, if an existing credit card account is about to be renewed and a fee for renewal is charged, the customer must receive written notice in advince. The customer must also be told if there is any change in credit card insurance coverage or fees. These rules are designed especially for credit cards granted to customers following solicitations made by direct mail, by telephone, or through advertisements that reach the general public. Finally, if a credit customer gets behind in his or her loan payments, the Fair Debt Collection Practices Act limits how far a creditor or credit collection agency can go in pressing that customer to pay up. For example, a bill collector is not allowed to "harass" a debtor or use misrepresentation to obtain information about or gain access to a debtor. Calls placed at unusual times or to a debtor's place of work ,are illegal if made without the debtor's permission, nor can a bill collector legally disclose the purpose of the call to someone other than the debtor. These debt collectiog rules are enforced in the United States by the Federal Trade Commission. Outlawing Credit Discrimination Access to credit is an essential ingredient of the good life for the average family today. Recognition of this fact led Congress during the 1970 to outlaw discrimination in rhe granting of credit based on age, sex, race, national origin, religion, location of residence, or receipt of public assistance. The Equal Credit Opportunity Act of 1974 prohibits lenders from asking certain questions of a customer, such as the borrower's age or race. (An exception is made for home mortgage loans so that the federal government can collect information on who is or is not receiving mortgage credit to determine if discrimination is being practiced in this vital loan area.) Also, the loan officer cannot ask about other income sources beyond wage and salary income unless the customer voluntarily supplies this information. Another law, the Community Reinvestment Act (CRA), is designed to prevent a lender of funds from arbitrarily marking out certain neighborhoods deemed undesirable and refusing to lend to people whose addresses place them in the excluded area. The CRA requires each lending institution to delineate the trade territory it plans to serve and to offer all of its services without discrimination to all residents in that particular trade territory. The bank's board of diiectors must review annually the definition of trade territory that management has chosen to see if it is still valid. Moreover, each lending institution's performance in making an affirmative effort to serve the credit and other financial service needs of its trade territory is evaluated by bank examiners (known as a CRA rating). The regulatory authorities take a bank's CRA rating into account when it applies to establish a new branch office, requests approval of a merger or acquisition, or requests permission to offer new services. In August of 1989, Title XII of the Financial Institutions Reform, Recovery, and Enforcement Act required the federal banking agencies to pubtish the CRA ratings of banks so their customers would be aware of which banks are providing broad-based support to their local communities. Each bank must place its CRA performance evaluation in a public file at its head office and in at least one office in each community that the bank serves within 30 days of receiving the examiner's report. This public file must be open for bank customers to inspect during regular

business hours and the bank must provide copies (for a reasonable fee) to anyone requesting materials in the file. CRA ratings are based on 12 "assessment factors" that examiners review when they visit a bank, including the bank's effort to communicate with members of the local community concerning their credit needs, its participation in government related housing programs, the geographic distribution of loans the bank has made, and any evidence of illegal credit discrimination. There are four different CRA ratings assigned by bank examiners: Outstanding (O), Satisfactory (S), Needs to lmprove (N), or Substantial Noncompliance (SN). A banking firm with a low CRA rating (ex., a rating of N or SN) may run into trouble in securing regulatory approval if it seeks permission to expand its service offerings or to acquire another bank. A recent study by the author [5] finds that banks receiving a grade of "O"-the highest CRA rating-have done so by tirst carefully documenting their community oriented activities. They periodically survey their employees who are active in the local community to be able to document their strong community involvement when bank regulators ask for evidence on their community activitics. Toprated banks also frequently survey their customers to determine customer perceptions about the quality of the bank's services and to keep up with changing customer service needs. Banks with the highest community ratings often get involved with local programs to provide affordable housing, hold seminars to counsel small businesses and new home buyers on how to apply for loans, and monitor the geographic distribution of their loans to make sure certain areas of the community are not systematically being shut out in their access to the bank's services. Banks awarded top CRA marks usually get a strong commitment from their boards of directon and senior management to promote greater community involvement, which seems to send a message about the importance of CRA-rclated activities to bank employecs at all levels. Laws that supplement the pervisions of the Community Reinvestment Act are the Home Mortgage Disclosure Act and the Fair Housing Act. The former requires that banks and other institutional mortgage lenders publicly disclose at least once a year the areas of urban communities in which they have granted residential mortgage loans and home improvernent loans. The Fair Housing Act prohibits discrimination in the sale, leasing, or financing of housing because of color, national origin, race, digion, or.sex. The Financial Institutions Refonrm Recovery, and Enforcement Act requires lending institutions to report the regulatorly agencies of all those individuals applying for mortgage loans so that federal regulatory agencies can more easily detect possible discrimination in home mortgage lending. These laws do not tell banks and other financial institutions who should receive credit. Rather, they require each lending institution to focus on the facts pertinent to each individual loan application, case by case, and prevent lenders from lumping their customers into categories (such as by age, sex, or race) and making credit decisions solely on the basis of group membership. Concept Checks l9-8. What laws exist today to give consumers who are borrowing money fuller disclosure about the terms and risks of taking on credit?

l9-9. What legal protections are available today to protect borrowers against discrimination? 19-10. In your opinion, are any additional laws needed in these areas? Real Estate Loans Banks make real estate loans to fund the acquisition of real property homes, apartment complexes, shopping centers, office buildings, warehouses, and other physical structures, as well as land in some cases. Real estate lending is a field unto itself, possesing important differences from other types of bank loans. In banking, real estate loans typically are either short term construction loans, paid out within months or weeks as a building project is completed, or long term mortgages that may stretch out 25 to 30 years in order to provide permanent financing for the acquisition or improvement of real property. Whatever their maturity, real estate loans have been one of the most rapidly growing areas of bank lending over the past decade, climbing at a double digit growth rate to reach nearly a third of all bank assets as the 1990 drew to a close. Unfortunately, such loans are also among the riskiest forms of bank credit. In the early 1990, for example, nonperforming real estate loans represented close to half of all troubled assets held by U.S. banks. Differences between Real Estate Loans and Other Loans Real estate loans differ from most other kinds of loans in several key respects. First, the average size of a real-estate loan is usually much larger than the average size of other loans, especially consumer loans and small business loans. Moreover, certain mortgage loans, mainly on single-family homes, tend to have the longest maturities (from about 15 years to 25 or 30 years) of any loan a bank makes. Long-term lending of this sort carries considerable risk for the lending institution because many things can happen including adverse changes in economic conditions, interest rates, and the financial health of the borrower--over the term of such a loan. With most other types of loans, it is the projected cash flow or income of the borrower that is most important in the decision to approve or deny a loan application. With real estate lending, however, the condition and value of the property that is the object of the loan are nearly as important as the borrower's income. In real estate lending, competent property appraisal is vitally important to the decision on a loan request. Such appraisals must conform to industry and government standards, particularly if it is likely that the mortgage will be sold in the secondary market, enabling the lender to raise additional funds in order to make new loans. One such regulation is the Federal National Mortgage Association's (FNMA, or Fannie Mae) requirement that any home mortgage loans acquired must come from borrowers whose monthly house payment (including loan principal and interest, taxes, and insurance) does not exceed 28 percent of their monthly gross income and the sum of whose regular monthly payments (including housing costs) does not exceed 36 percent of their monthly gross income. The maturity of the home mortgage loan cannot be less than to years or more than 30 years, and the property must be appraised by a Fannie Mae approved appraiser. FNMA regulations also stipulate that the borrower's credit report cannot be more than 90 days old.

While rules such as these represent a burden to the home mortgage lender, they bring an offsetting benefit, because loans conforming to these regulatory standards usually can be sold quite readily in the secondary market to other financial institutions, particularly life insurance companies, savings banks, and pension funds, or to government agencies such as Fannie Mae or Ginnie Mae (i.e., the Government National Mortgage Association, or GNMA). Frequently a bank or other lending institution will package its mortgage loans into GNMA sponsored loan pools and sell securities as claims against those pools to investors, thereby raising funds to rirake still more loans. Changes in regulations and the shifting fortunes of different financial institutions have resulted in major changes in bank and nonbank firms making mortgage loans. While commercial banks often prefer to make shorter term property loans (especially construction loans), the mortgage banking subsidiaries of bank holding companies now account for a major portion of all home mortgage loans. These subsidiary firms have strong market contacts and can usually resell any home mortgage loans they make in short order to long-distance lenders, such as life insurers, savings banks, or foreign investors. Mortgage subsidiaries usually establish short term "warehouse lines" at banks in order to provide them with adequate funding to carry the mortgages they originate or buy until they sell those same loans to other investors. Moreover, the mortgage banking subsidiaries of a bank holding company can branch at will into distant cities and states where bank branching may be limited by law or regulation. Factor in Evaluating Applications for Real Estate Loans In evaluating real estate loan applications, loan officers must consider the following points: 1. The amount of the down payment planned by the borrower relative to the purchase price of mortgaged property is a critical factor in determining how safe a mortgage toan is from lender point of. In general, the higher the ratio of loan amount to purchase price, the less incentive the borrower has to honor all the terms of the loan, because the bonower has less equity in the property. When mortgages reach 90 percent or morc of tlie property's purchase price, mortgage insurance becomes very important and the lender must place added emphasis on assessing the borrower's character and sense of responsibility. 2. Real property loans often bring in other business (such as deposits and future property-improvement loans) from the borrowing customer. Therefore, they should be viewed in the context of a total relationship between borrower and lender. For example, the bank might be willing to give a mortgage loan customer a somewhat lower loan rate in return for a pledge that the customer will use other bank services and keep substantial deposits at the bank. 3. Deposit stability is a key factor for a bank in deciding what volume and type of real estate loans it should make. Banks with more stable deposits usually can be more aggressive with their real estate lending programs and reach for longer term, higher yielding mortgage loans. 4. Home mortgage loans require the bank's real estate loan officer to consider carefully the following aspects of the credit application:

a. Amount and stability of the borrower's income, especially relative to the size of the mortgage loan and to the size of the payments required. b. The borrower's available savings and where the borrower will obtain the required down payment. If the down payment is made by drawing down savings significantly, the customer has fewer liquid assets available forfuture emergencies, such as paying off the mortgage if someone in thefamily gets ill or loses a job. c. The borrower's track record in caring for and managing property. If the mortgaged property is not properly maintained, the bank may not fully recover the loaned funds in a foreclosure and sale. d. The outlook for real estate sales in the local market area in case the property must be repossessed. In a depressed local economy with e. substantial unemployment, many houses, apartments, and business structures are put up for sale, with few active buyers. The bank could wait a long time for the return of its funds. f. The outlook for interest rates if the home mortgage loan carries a floating g. interest rate. While the secondary market for floating-rate mortgage loans has improved in recent years, fixed-rate home mortgages are still easier to sell. During the past two decades severe problems have frequently appeared in the real estate loan portofolios of many U.S. banks. Several of the largest banks in the United states, such as citicorp, chase Manhattan, Security pacific, chemical, Fleet-Norstar, and Wells Fargo, from time to time have foreclosed on and sold substantial commercial and residential properties at deeply discounted prices. In response to these growing problems, Congress enacted Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. Title XI requires the use of state-certified or licensed appraisers for real estate loans that come under the regulatory authority of the federal banking and thrift supervisory agencies. The four chief federal regulators of banks and thrifts have recently ruled that certified or licensed appraisals are required for most real estate loans that exceed $250,000 in amount. (Renewals of existing loans are generally exempt from specific appraisal requirements.) For smaller denomination real estate loans a bank must follow "prudent" evaluation standards and document in writing its valuation of any property that is the basis for a real estate loan, including the assumptions upon which the bank's estimate of property values are based. Further tightening of standards and regulatlons surrounding real estate loans occurred when Congress passed the National Affordable Housing Act in November 1990. This law and its supporting regulations require that applicants for mortgage loans must be given a disclosure statement indicating whether their loan could have ih servicing rights (i.e., the right to collect payments from the borrower) transferred 19 another institution that borrowers will have to deal with during the life of their loan. In an effort to reduce the loss of homes through foreclosure, Congress stipulated that lenders must rell home mortgage borrowers who are delinquent in repaying their loans if the lender counsels home owners or knows of any non profit organizations,that provide quch counseling. Concept Checks

19-12. In what ways is a rcal estate loan unique compared to other kinds of bank loans? 19-12. What factors should a banker consider in evaluating real estate loan applications? Trends in Consumer and Real Estate Credit Consumer loan and credit programs will continue to play a major role in bank management and services in the years ahead. Not only are consumer loans among the most profitable of all types of bank credit, but as consumers become better educated they are making more aggressive use of credit to upgrade their standard of living and to match their spending plans with expected future income. Consumer lending in the future will have to be more convenience oriented, giving individuals and families fast access to credit while still maintaining enough control over customer borrowing to avoid a significant deterioration in loan quality. This will be a serious problem in the future, because aggressive, high-volume consumer lenders will undoubtedly push the concept of "instant credit" to its prudent and practical limits. For example, Citicorp recently launched a program of preapproved horme mortgage loans, and many credit unions offer preapproved auto loans. Moreover, several other credit opportunities to better serve the consumer are unfolding, and to these we now turn. Home Equity Lending In the United States, the 1986 Tax Reform Act opened up even wider the rapidly growing field of home equity loans. Under these programs, home owners whose residence has appreciated in value can use the equiry in their homes - the difference betwcen a home's estimated market value and the amount of the mortgage loans against it - as a borrowing base. Thus, if a home was purchased for $100,000 and has a $70,000 mortgage loan against it today and, due to inflation and growing demand for housing, its market value is now $120,000, the home owner will have a borrowing base of about $50,000 (i.e., $120,000 - $70,000). This base might be drawn upon as collateral for a $50,000 loan to remodel the home, to purchase a second home, or for some other legitimate purpose. Two main types of home equity loans are in use today. The first is the called traditional home equity loan, which is a closed-end credit covering a specific period of months and years and is used mainly for home improvements. Traditional equity credits are normally repaid in equal installments, quarterly or monthly, and are most frequently secured by a second mortgage against the borrower's home. Many banks have recently seized upon the home equity loan opportunity by offering consumers a second and newer type of home equity loan lines of credit against their home's borrowing base. They usually determine the credit limit on these home equity lines by taking a percentage of the appraised value of the borrowing customer's home (say, 75 percent) and subtracting the amount the customer still owes on the existing home mortgage loan. That is: Appraised value of hom Times percentage allowed Equals pcrrentagc ofhonrc's eppraiscd value Minus balance still owed on homc mongage Equals maximum credit line available to customer $150,000 x15% $ 112,00 -60.500 $ 52,000

The maximum loan amount allowed may be adjusted based on the customer's income and other debts incurred plus his or her past repayment record with other loans. These credit lines can be used for any legitimate purpose, not just housing related expenditures. for example, to purchase an automobile or finance a college education. Moreover, many of these credit lines are revolving credits, which means the customer can borrow up to the maximum amount of the loan, repay all or a portion of the amount borrowed, and borrow again up to the stipulated maximum amount any number of times until the credit line matures, which usually occurs at some point within 10 years. Because home equity based credit tends to be longer term and more secure, it often caries a lower loan rate and longer payout period, thus reducing the borrower's installment payments below the required payments on more conventional consumer loans. Traditional home equity loans normally are priced using tonger-term interest rates, while home equity credit lines usually have interest rates tied closely to short term rates (such as the yield on U.S. Treasury bills or the prime lending rate). In recent years, surveys conducted by the Federal Reserve Board ([1], [9]) and other institutions (such as the University of Michigan's Institute for Social Research) have revealed some useful information for both home equity loan customers and banks that make such loans. For example, the home equity market remains quite small relative to the number of home owners less than a fifth of all U.S. home owners have accessed home equiry credit, and this group is about equally split between traditional home equity loans and the newer home equity lines of credit. Thus, the home equity loan market could grow substantially larger with sufficient advertising and economic incentives. In 1986, the Tax Reform Act made interest on home equity loans up to $100,000 tax deductible, and this feature accounts for much of their recent growth. With thc coming of federal tax reform, interest costs on other loans gradually became fully taxable, giving a distinct advantage to home equity credit in the eyes of consumers. Mean loan sizes in recent years have averaged about $18,000 for traditional loans and $20,000 for home equity credit lines. Demographically speaking, home equity borrowers tend to be more affluent than the average homeowner. They report higher levels of personal income and more equity in their homes. Home equity borrowers also tend to be older customers with a longer period of home ownership and a longer record of employment. Most home equity customers are in their late 40s or older; many are in retirement or near retirement and have substantially paid off their first home mortgage. Most equity loans are used ro pay for home improvements, to repay old installment loans, to finance an education, to fund yacations, or to cover medical costs. Bank loan officers need to exercise great care with home equity loan requests. For one thing, they rest on the assumption that housing prices will not decline significantly. Yet there is ample historical evidence that economic downturns and rising unemployment can flood local housing markets with homes for sale, with foreclosures on existing homes rapidly depressing market prices. While in most states a bank can reposses a home pledged as collateral for a loan, often the bank has difficulty selling the home for a price that recoups all its funds plus all the costs incurred in making and servicing the loan and in taking possession of the collateral. There is also room to question the wisdom of using an appreciating asset, such as a

house, to purchase an asset not likely to appreciate, such as most automobiles, furniture, and appliances. Loan,officers must exercise care in granting such credit requests, lending only a portion (perhaps no more than 60 or 70 percent) of the home's estimated equity value in order to allow an adequate cushion should real estate markets turn down. Moreover, strict regulations at the federal level, stemming from the Competitive Equality in Banking Act of 1987 and the Home Equity Loan Consumer Protection Act of 1988, require the lender to put an interest rate cap on how high loan rates can go on floating rate home equity loans. Ienders must also provide their customers with information on all loan charges and significant risks under a required Truth in Lending Act disclosure statement. The consumer's overriding risk is that the barrk would be forced to repossess his or her homc. Not only does such an event destroy customer relationships and result in adverse publicity for the bank, but it may saddle the bank with an asset that could be difficult to sell. The Consumer Protection Act of 1988 prohibits a home equity lender from arbitrarily canceling a loan and demanding immediate payment. However, if the lender can show that the customer has committed fraud or misrepresentation, has failed to Pay out the loan as promised, or has not kept up the value of the property involved, collection of the. loan can be accelerated. The home equity loan customer then has little choice but to pay up or surrender the home that was pledged as collateral, unless protected in some way by federal, state, or local laws. Consumer Cash Management Programs Other promising consumer loan opportunities have recently appeared as well, especially those related to the use of consumer cash management programs. Developed successfully by Menill Lynch in the 1970, these financial packages offer household customers security brokerage and investment services so they can readily invest idle cash in stocks, bonds, and other investment outlets to earn income until those funds are needed to meet current obligations. Recently these cash management packages have been expanded to include checking accounts, savings plans, credit cards, and insurance. The result is onestop convenience for the customer, who is typically sent combined monthly statements , showing the status of his or her savings, loan balances, and investments. Cash management programs can make consumer financial transactions easier and make the use of credit more convenient. While most successful cgsh management programs are aimed mainly at high-income households, the future is likely to bring larger volume programs that reach middle income households. The key to the success of these newer programs will be whether or not they can keep their costs low enough to be ablc to price their services competitively. Changing Demographics and Consumer Borrowing We should not leave the reader with the impression that bank consumer credit programs have no serious problems. In truth, they appear to face significant hurdles in the period ahead. For one thing, the population is aging rapidly in the United States, Japan, and other industialized nations. As people grow older, especially beyond tho age of 40 or 45, they tend to make less use of credit and to pay down their outstanding debt obligations. This suggests that the total demand for

consumer credit per capita may fall, forcing banks and other consumer lenders to fight hard for profitable consumer loan accounls. Moreover, deregulation has brought more lenders into the consumer cedit field. Financial institutions hoping to protect their revenues in this field will need to choose their fee schedules carefully. A related trend in consumer lending-point-of-sale loans- also reflects changes going on in the population to whom banks market their consumer credit services. more loan customers today demand speed and convenience in the lending process. Many consumers want credit available instantly when they are making purchases rather than having to drive to a bank to request a loan. Many banks today are offering indirect loans through dealers in autos, home apliances, and other big ticket items, so that the dealer prepares a credit agreement and phones or faxes the borrowing customer's information to the bank, seeking quick approval. Other institutions are offering "pre approval" credit programs where the customer phones in or mails credit information to the bank and gets approval for a loan before a purchase is made. ln this instance the storc or dealer wherc the customer makes a purchase can simply verify with the bank that a loan has already been approved. These newer approaches sharply reduce the need to enter a bank and result in more indirect lending at the point at which a sale is being made, rather than direct lending to the customer at a bank office. The result is lower transactions cost and greater convenience for the customer, but bank managers must be alert to the added risks involved in making quick credit decisions and the possible loss of closer direct relationships with their customers. Legal and Regulatory Changes Affecting Consumer Lending During the 1990s, personal bankruptcies soared, with court filings averaging a million a year in the United States undcr a widening array of options granted by federal and state bankruptcy laws (including Chapters 7, ll, and l3). In order to keep pace wirh this upsurge in individual and family bankruptcies, consumer lenders have had to become intimately acquainted with the provisions of federal and state bankruptcy codes. Unfortunately, recent changes in bankruptcy laws present serious challenges to consumer lending institutions. Congress passed the Bankruptcy Reform Act in 1978 amending a federal bankruptcy code that had stood since the turn of the century. While subsequent amendments tightened up some of the loopholes in the 1978 law, the most recent reforms tipped the legal scales in favor of individuals filing bankruptcy petitions and more severely limited the amount rnd kinds of debtors' assets that could be converted into cash for pro rata distribution to banks and other creditors. Today, a substantial proportion of household assets may be exempt from liquidation in order to help bankrupt individuals recover financially and, eventually, pay off their obligations voluntarily. For example, a married couple may be able to shelter under federal bankruptcy protection up to $40,000 in such personal assets as the equity in a home, household furniture and apoliances, jewelry, a car, retirement accounts, and any equipment used in the debtor's job. A few states have passed statutes allowing even more assets to be sheltered from creditors, and federal law permits a debtor filing bankruptcy to switch to state bankruptqy rules where this change would be beneficial. Nelrty a third of the states, however, have adopted more conseryative rules that shelter fewer debtor assets than does federal law.

The federal bankruptcy code specifies the rules under which a troubled debtor's personal assets can be sold, with the proceeds allocated to the individual's crediton. The Bankruptcy Act directs the courts to approve a repayment plan that allows a debtor to gradually pay off his or her creditors, who may not repossess or foreclose on any of the debtor's assets as long as the couit-approved payments are being made. The results are to make bankers more cautious about borderline loan requests and probably to encourage banks to include higher risk premiums in their consumer loan rates, which could price many lower-income borrowers our of the market for household credit. Concept Checks 19-13. What is home equity lending and what are irs advantages and disadvantages for banks? 19-14. What problems do banks face in developing consumer cash management programs? 19-15. How is the changing age structure of the population likely to affect bank consumer loan programs? 19-16. What impact have recent changes in U.S. bankruptcy laws had on consumer lending by banks? SummarY Lending to consumers and making real estate loans have been among the most popular financial services for bankers in recent years. These forms of credit help the bank diversify its customer base, bringing in consumer deposits and sources of revenue to supplement and offset the risk of its business loans and deposits. Indeed, many banks in recent years have turned increasingly to consumer and real estate loans to escape or reduce the effects of business cycles, which periodically lead to considerable stress for many of the bank's traditional business credit accounts, and to avoid intense competition from foreign banking firms. Nevertheless, consumer and real estate lending present their own significant challenges for bankers. These loans typically have higher default rates than do most other forms of bank lending, though their gross loan yields also tend to be much higher, making household loans in most years among the most profiuble credit accounts a bank can hold. The keys to making good consumer loans lie in judging the character and sense of responsibility of the borrower. A bank can usually judge these elements by examining the borrower's past loan payment record, which in most cases can be obtained from a local or regional credit bureau. Consumer lending increasingly has been influenced by federal and state laws and regulations. Most of these rules focus upon (1) disclosure to the consumer of all the significant details of a loan agreement and (2) prevention of discrimination on account of age, race, sex, and other factors in granting credit and setting loan rates. These laws and regulations are designed to promote competition, encourage consumers to shop for credit, and aid the individual customer in making an informed credit decision. Real estate loans are often aimed directly or indirectly at the individual consumer. These loans help to finance the construction of new homes, apartments, shopping centers, office buildings, and other forms of real property. Banks make both short-term real estate credit (usually in the form of interim construction loans) and long-term mortgage credit available to individuals and business firms. The most successful real estate loan programs

are generally at those banks possessing a high proportion of longer-term deposits and a staff skilled in the assessment ol property values and in real estate law. More than any other type of loan, real estate credit depends heavily on correctly judging the value of and outlobk for the loan's collateral the land or structures whose purchase is being financed by the loan Mempelajari dan Obyektif Keputusan Manajemen Untuk mempelajari sekitar beberapa jenis dari perbuatan Banks pinjaman ke konsumen (perorangan dan keluarga) dan untuk peminjam status sebenarnya dan untuk memahami faktor pengaruh itu profitabilitas dan risiko dari konsumen dan tetap meminjamkan milik. Pengantar Pada periode sejak Perang Dunia Ii, Banks telah menumbuh pemberi kredit dominan pada bidang konsumen. Di bagian, posisi dominan dari bersumber Banks dari Reliance tumbuh mereka pada keluarga individuals.and sebagai satu sumber kunci dari pembiayaan bank (barang simpanan). Banyak peralatan rumah tangga akan ragu-ragu untuk menyimpan pembiayaan mereka dengan satu bank kalau mereka tidak merasakan di situ adalah satu prospek bajik dari mampu untuk meminjam dari itu bank yang sama ketika satu pinjaman diperlukan. Kemudian, juga, penelitian terbaru menyarankan konsumen kredit itu adalah sering antara pinjaman yang paling untungkan satu bank dapat buat. Bahwasanya, salah satu terbaik yang dikenal Banks di dunia, Citicorp dari New York, sedang mengarahkan satu andil tumbuh dari ini rcsources ke arah bank konsumen (terutama pemasaran dari kartu kredit, tetap meminjamkan milik kediaman, dan konsumen jasa electrotic fasilitas) melalui ini ribuan di seluruh dunia kantor cabang. Bagaimanapun, jasa bank terarah di konsumen cah juga antara yang paling produk mahal penuh resiko anci itu satu jual bank karena keadaan keuangan dari individu dan keluarga dapat berganti dengan cepat sehubungan dengan penyakit atau rugi dari lapangan kerja. Pinjaman konsumen harus thercfore bp mengatur dengan kekhawatiran dan dengan kepekaan ke masalah istimewa mereka tayang. Jenis dari Pinjaman Wariskan ke Individu dan Keluarga Ada beberapa jenis berbeda pinjaman konsumen, dan angka dari rencana kredit untuk menampung konsumen kebutuhan keuangan adalah menumbuh pada bangun dari deregulasi dari institusi penyimpanan pada Amerika Serikat dan pada beberapa negara diadakan industri yang lain juga. Kami dapat menggolongkan pinjaman konsumen oleh penggunaan apa meminjam pembiayaan akan dipergunakan untuk, atau dengan jenis dari pinjaman antara lain, apakah peminjam harus membayar kembali dengan angsuran atau membayar kembali di sesuatu harga borongan ketika pinjaman mendatangi tiba. Satu perancangan klasifikasi populer untuk kombinasi pinjaman konsumen keduanya pinjamkan penggunaan jenis dan pinjaman. Antara lain, pinjamkan ke individu dan keluarga mungkin dibagi ke dalam dua group, tergantung kepada apakah mereka membiayai pembelian dari rumah lagi dengan satu pinjaman penggadaian kediaman atau apakah mereka membiayai lain, konsumen aktivitas nonhousing (liburan, pembelian dari mobil, dsb.) melalui nonresidential pinjamkan. Kedua, pada kategori nonresidential, pinjaman konsumen adalah sering Civided ke dalam dua gubcategories berlandaskan jenis dari pinjaman,

cicilan lawan noninstallment pinjamkan. Kami akan melihat kepada sifat alami jenis pinjaman konsumen ini lebih lekat pada alinea yang katut. Hipotek kediaman Ioans Mata ujian membiayai pembelian dari satu rumah atau untuk membiayai peningkatan pada satu tempat tinggal pribadi tergolong label umum dengan pinjaman penggadaian kediaman. Pembelian dengan hak milik kediaman pada bentuk dari rumah dan multifamily menghuni (rangkap termasuk, tiga lapis, dan bangunan apartemen) biasanya memberikan naik ke satu pinjaman jangka panjang (biasanya melahirkan satu terrn dari 15 ke 30 tahun) dan diamankan oleh hak milik sendiri. Pinjaman demikian mungkin membawa yang manapun satu tingkat bunga tetap atau, lebih cornmonly pada tahun terbaru, satu variabel, atau apung, tingkat bunga perubahan itu pada waktu tertentu dengan satu dasar tingkat ditetapkan (seperti itu hasil investasi pasar pada U.S. obligasi pemerintah) atau satu hipotek nasional iuterest beri peringkat (antara lain, Pinjaman Pembelian Rumah Pemerintah Pusat Papan Bank hipotek rumah rata-rata hasilkan). Satu biaya ikatan (secara khas saya ke 2 persen dari rupa sejumlah pinjaman) secara rutin atas depan tertagih untuk meyakinkan peminjam yang satu pinjaman kediaman akan ada tersedia untuk satu menetapkan periode. Sementara mereka sendiri bank membuat satu bagian berpengaruh nyata dari pinjaman penggadaian horne, terus meningkat pada tahun terbaru pinjaman demikian telah dibuat melalui cabang bank hipotek dari satu perusahaan yang menguasai bank. pinjaman meteran, terus meningkat pada tahun terbaru pinjaman demikian telah dibuat melalui cabang bank hipotek dari satu perusahaan yang menguasai bank. Nonresidential Pinjamkan Berbeda dengan pinjaman penggadaian kediaman, nonresidential (atau nonmortgage) pinjamkan ke individu dan keluarga meliputi pembayaran angsuran dan noninstallment (atau pembayaran tunggal pinjamkan). Pembayaran angsuran . Jangka pendek ke masa medium pinjamkan, yang dapat dibayar pada dua atau lebih pembayaran berurutan (biasanya bulanan atau triwulanan), dikenal sebagai pembayaran angsuran. Pinjaman demikian sering dipekerjakan ke pembelian butir data peralatan rumah tangga karcis besar (misalnya., mobil, kapal laut, kendaraan recreational, alat-alat mebel, dan peralatan rumah) atau untuk memperkuat hutang peralatan rumah tangga yang sudah ada. Sementara pembayaran angsuran secara normal membawa satu tingkat bunga tetap, mengapung kecepatan-angka pinjaman adalah menjadi umum lagi. Meskipun demikian, hanyalah tentang seperempat semua konsumen nonmortgage meminjamkan mempunyai tingkat bunga variabel hari ini. Banyak bank pada tahun terbaru telah menangani satu bagian berpengaruh nyata dari pembayaran angsuran konsumen mereka melalui perusahaan pemberi kredit cabang itu menjadi bagian dari satu perusahaan yang menguasai bank. Ini adalah untungkan sebab tidak ada pembatasan ilmu bumi di dalam membuat kantor perusahaan pemberi kredit, sedangkan aktivitas bercabang bank mungkin dirintangi di mata hukum atau peraturan. Lebih dari itu, perusahaan pemberi kredit dapat

menerima pinjaman lebih berbahaya dengan hasil investasi idaman yang lebih tinggi dibandingkan bank adalah sering mengijinkan buat. Noninstallment Pinjamkan . Jangka pendek pinjaman menggambar pada saat oleh perorangan dan keluarga untuk kebutuhan kas langsung dan yang dapat dibayar pada satu harga borongan ketika catatannya peminjam mendewasakan dikenal sebagai noninstallment pinjamkan. Pinjaman demikian mungkin untuk secara relatif jumlah kecil, antara lain $500 atau $1,000 dan meliputi rekening beban yang sering memerlukan pembayaran pada 30 hari atau beberapa lain secara relatif periode waktu pendek. Pinjaman Noninstallment dibuat untuk satu periode pendek (biasanya enam bulan atau kurang) ke individu lebih kaya dan mungkin sangat besar sering terbentang dari $5,000 ke $10,000. Pinjaman Noninstallment sering dipergunakan untuk liputi biaya dari liburan, medis dan sakit mempedulikan rumah, pembelian dari peralatan rumah, dan reparasi otomatis dan rumah Pinjaman kartu kredit Satu bentuk populer dari konsumen kredit hari ini diakses melalui kartu kredit yang dikeluarkan oleh Visa, MasterCard dan beberapa bank lebih kecil dan nonbank mengkreditkan perusahaan cand. Kartu kredit menawarkan akses pemilik mereka untuk yang manapun cicilan atau noninstallment mengkreditkan karena pelanggan dapat menagih satu pembelian pada rekening reprcsented oleh kartu dan melunasi beban di sesuatu membonkan periode, sering menerlepas apapun pendanaan tagih, atau memilih untuk melunasi harga pembelian secara berangsur-angsur, membuat satu pendanaan bulanan menagih yang adalah berlandaskan satu rate tahunan biasanya terbentang dari 12 persen untuk sekitar 18 persen. Penemuan perusahaan bank kartu cicilan itu pengguna dari kartu kredit adalah jauh untungkan yang lagi sehubungan dengan pendapatan bunga yang mereka hasilkan untuk bank dibandingkan adalah pengguna noninstallment, siapa dengan cepat melunasi beban kartu mereka sebelum daya tarik dapat dikaji. Bank juga patut mendapatkan iuran diskon (biasanya 1 ke 6 persen penjualan kartu kredit) dari jual-beli yang menerima kartu mereka. Sehingga cepat telah penerimaan dari bank keluarkan dan kartu bayar lain yang lebih dari satu trilyun ditaksir untuk berada di dalam penggunaan hari ini di seluruh bumi. Penawaran kartu kredit bank kenyamanan dan, satu batas maksimum kredit berputar itu pelanggan dapat mengaji kapanpun munculkan kebutuhan. Bankir telah temukan, bagaimanapun, itu manajemen saksama dan kontrol dari kartu kredit mereka progams adalah penting sehubungan dengan proporsi tumbuh dari peminjam pelanggar dan sejumlah besar dari kartu yang kecolong dan terpakai dengan curang. Ada bukti yang ekonomi berpengaruh nyata dari skala meliputi medan kartu kredit untuk, di umum, hanyalah bank kartu paling besar operasi secara konsisten untungkan. Meskipun demikian, perdagangan berjangka dari kartu kredit tampak terang karena akibat teknologi pemajuan itu akan secepatnya memberikan paling cardholders mengakses ke satu jangkauan penuh dengan serrices keuangan, meliputi rekening tabungan dan pembayaran dan batas pemberian kredit berputar. Karakteristik dari Pinjaman Konsumen

Umumnya, pinjaman konsumen dipengaruhi oleh bankir sebagai kredit untungkan dengan "lekat" tingkat bunga. Yang, mereka secara khas dihargai baik di atas cust dari mereka pembiayaan, tapi penjualan daya tarik kontrak mereka biasanya tidak mengubah dengan kondisi pasar selama hidup dari pinjaman seperti lakukan tingkat bunga pada paling pinjaman bisnis hari ini. Ini memaksudkan bahwa pinjaman konsumen disingkapkan ke risiko tingkat bunga kalau pembiayaannya bank merugikan naik cukup tinggi. Bagaimanapun, pinjaman konsumen biasanya dihargai sangat ketinggian (yaitu., dengan satu cukup premium risiko besar membangun ke dalam rate pinjaman) itu tingkat bunga pasar pada pinjaman bank dan kecepatanangka baku pada pinjaman diri mereka sendiri akan harus menyingsing pada hakekatnya sebelum paling konsumen kredit akan menjadi tak menguntungkan. Kenapa tingkat bunga sangat tinggi pada paling consurner pinjamkan? Satu kunci alasan diungkapkan oleh Analisa Biaya Fungsional (FCA) program kendali tiaptiap tahun oleh bank memesan Pemerintah Pusat. Sistem akuntansi biaya ini menyarankan bahwa pinjaman konsumen adalah antara yang paling mahal dan paling penuh resiko ke perbuatan per dolar dari dana boleh pinjam dari apapun pinjaman bank itu hibah untuk pelanggan mereka. Pinjaman konsumen juga cenderungkan agar adalah cyclically sensitip. Mereka buntang di periode dengan muaian ekonomi ketika konsumen umumnya lebih optimis tentang masa depan. Pada sisi lain, ketika ekonomi menampik ke dalam satu resesi, banyak individu dan keluarga menjadi lebih pesimistis tentang masa depan, terutama ketika mereka melihat pengangguran tumbuh, dan mengurangi pinjaman bank mereka bersesuaian. Lebih dari itu, konsumen tampak agar secara relatif tak menjawab kepada perubahan di tingkat bunga ketika mereka pergi ke luar meminjam uang. Peralatan rumah tangga meminjam terlihat seperti secara relatif tertarik tidak elastis. konsumen jadilah lebih terkait tentang ukuran dari pembayaran bulanan diperlukan oleh satu kesepakatan pinjaman dibandingkan tingkat bunga tertagih (meskipun demikian, seyogyanya, tingkat bunga kontrak pada satu pinjaman mempengaruhi ukuran dengan pembayaran pinjaman diperlukan). Sementara taraf dari tingkat bunga adalah sering tak satu pun faktor consiious berpengaruh nyata antara peminjam peralatan rumah tangga, Pendidikan berdua dan taraf pendapatan yang materially pengaruhi penggunaan konsumen dari kredit. Perorangan dengan pendapatan lebih tinggi cenderung meminjam lagi secara keseluruhan dan sehubungan dengan ukuran dari pendapatan tahunan mereka. Peralatan rumah tangga itu dimana kepala dari peralatan rumah tangga atau pencari nafkah keluarga terpenting punya lebih tahun dari Pendidikan formil juga cenderung untuk meminjam lagi dengan berat sehubungan dengan bertingkat mereka dari pendapatan. Untuk individu ini dan keluarga, pinjaman dilihat lagi sebagai satu alat untuk mencapai satu tingkat hidup diinginkan agak dibandingkan sebagai satu jala keselamatan dipergunakan hanya pada darurat serius.

Pengecekan konsep l9 - 1. Apakah yang perbedaan terpenting antara pinjaman kediaman, nonresidential pembayaran angsuran, noninstallment pinjamkan, dan pinjaman kartu kredit?

l9 - 2. Kenapa tingkat bunga pada pinjaman konsumen secara khas lebih tinggi rata-rata dibandingkan pada paling pinjaman bank macam-macam lain Mengevaluasi satu Pemberian Meminjamkan Konsumen Karakter dan Penggunaan. Faktor kunci di dalam meneliti apapun pemberian meminjamkan konsumen adalah karakter dari peminjam dan kemampuannya peminjam untuk bayar. Executive pinjaman harus terasuransi itu pelanggan pinjaman merasakan satu rasa tekun dari tanggungjawab moral untuk membayar kembali satu pinjaman sepenuhnya dan tepat waktu. Lebih dari itu, pendapatannya peminjam meningkat dan asset berharga (pemegangan seperti itu dari barang simpanan jaminan sekuritas atau tabungan) harus cukup untuk menghati executive pinjaman itu pelanggan yang punya kemampuan untuk membayar kembali pinjaman dengan satu marjin nyaman untuk keselamatan. Untuk alasan ini, satu executive pinjaman konsumen hampir selalu memeriksa kantor kredit lokal atau regional mengaitkan kreditnya pelanggan riwayat. Lebih dari 2,000 kantor kredit berada ke seberang Amerika Serikat; arsip induk institusi ini pada paling individu siapa pada suatu waktu atau lain telah meminjam uang, menandai rekaman mereka dari pembayaran kembali dan nilai kelayakan pinjam. Sering karakter fundamental dari bonower diungkapkan pada penggunaan dari permintaan pinjaman. Executive pinjaman harus bertanya: Punya pelanggan dengan jelas berkata apa dia atau dia merencanakan dengan uang? Adalah penggunaan dinyatakan dari pinjaman konsisten dengan kebijakan pinjaman tertulisnya bank? Ada di sana bukti dari satu niat ikhlas untuk membayar kembali apapun pembiayaan pinjam? Beberapa senior meminjamkan executive sering menasehati executive pinjaman lagi untuk mengambil waktu ekstra untuk mengunjungi wich masing-masing pelanggan, karena percakapan demikian sering mengungkapkan kekurangan di karakter dan kejujuran yang mempunyai satu langsung menghubungkan kemungkinan dari pembayaran kembali pinjaman. Sering, mengalami pinjaman executive mengisi pemberian meminjamkan agak dibandingkan membiarkan pelanggan pinjaman lakukan ini sendirian. Dengan meminta pertanyaan keuangan bersangkutan pelanggan sebagai aplikasi diisi, satu pemberi kredit trampil sering dapat membuat satu lebih baik mampir apakah pinjamannya pelanggan meminta pertemuan mutunya bank standar. Pelanggan mengucapkan jawaban mungkin ungkap jauh lagi sekitar karakter dan kejujuran dari penggunaan dibandingkan apapun menuliskan secarik kertas atau diketik pada satu berkas komputer. Sungguh sial, otomasi ekonomi menganjurkan desakan pada peminjaman konsumen memproses mempunyai pimpin banyak bank, terutama institusi lebih besar, untuk membelanjakan kurang waktu dengan pelanggan. Evaluasi pengumpulan informasi dan pinjaman terus meningkat diserahkan ke program komputer. Hasil adalah itu beberapa executive pinjaman konsumen hari ini ketahui sangat kecil tentang ciri kepribadian dan karakter dari pelanggan mereka berada di luar keterangan yang diminta pada satu kredit permintaan, yangkah mungkin faxed atau ditelpon di atau mengirimkan melalui komputer ke bank. Pada kasus dari satu peminjam tanpa satu rekaman kredit atau dengan satu catatan rekor lemah untuk membayar kembali pinjaman, satu cosigner mungkin diminta untuk mendukung pembayaran kembali. Secara teknis, kalau baku peminjam

pada satu cosigned meminjamkan kesepakatan, cosigner diwajibkan ke perbuatan baik pada pinjaman. Bagaimanapun, banyak bankir mempengaruhi satu cosigner maiply sebagai satu alat psikologis untuk menganjurkan pembayaran kembali dari pinjaman, rada dibandingkan sebagai satu sumber alternatif kenyataan dari jaminan sekuritas. Peminjam mungkin terasa satu beban moral lebih kuat untuk membayar kembali pinjaman mengetahui nilai kelayakan pinjamnya cosigner juga adalah dengan segera. Tapi bankir sering ragukan untuk mengejar satu cosigner giat, karena ini dapat berarti rugi dari semua banknya cosigner bisnis dan barangkali rekening dengan pelanggan simpatik yang lain aswell Taraf pendapatan . Berdua ukuran dan kemantapan dari pendapatannya perorangan dipertimbangkan penting oleh executive pinjaman konsumen. Mereka umumnya lebih suka pelanggan untuk melaporkan gaji jaring, atau gaji yang diterima, sebagai ditentang ke gaji gross, dan akan sering memeriksa majikannya pelanggan untuk meverifikasi keakuratan dari pelanggan menyediakan figur pendapatan, panjang dari lapangan kerja, alamat tempat tinggal, dan sosial nomor jaminan. Simpan Seimbang . Satu ukuran taklangsung dari ukuran pendapatan dan kemantapan adalah rata-rata harian menyimpan keseimbangan dipelihara oleh pelanggan, yang executive pinjaman secara normal akan meverifikasi dengan bank terbelit. Di paling status, satu bank diwariskan hak dari offset melawan barang simpanannya pelanggan sebagai perlindungan tambahan melawan risiko dari peminjaman konsumen. Permisi benar ini bank untuk memanggil satu pinjaman itu berada di dalam baku dan menangkap apapun barang simpanan pengecekan atau tabungan pelanggan mungkin menggenggam dengan bank agar memulihkan pembiayaannya. Bagaimanapun, pelanggan secara normal harus beritahu paling tidak hari l0 sebelumnya sebelum benar ini adalah exercised, yang yang dapat menghasilkan pada hilang lenyap pembiayaan sebelum bank dapat memulihkan apapun bagian dari pinjamannya Lapangan kerja dan Kemantapan kediaman . Antara beberapa faktor yang dipertimbangkan oleh executive pinjaman konsumen berpengalaman adalah jangka waktu dari lapangan kerja. Paling pemberi kredit mungkin untuk mewariskan satu pinjaman cukup besar untuk seseorang yang punya genggamnya atau pekerjaan hadirnya untuk hanya beberapa bulan. Panjang dari tempat tinggal sering teranalisa sebab seseorang lebih panjang meninggal di satu alamat, kandang kuda laginya atau keadaan pribadinya dikira agar adalah. Perubahan berulang dari alamat adalah faktor negatif kuat ini di pemutusan apakah untuk mewariskan satu pinjaman bank. Pyramiding dari Hutang . Executive pinjaman konsumen adalah terutama sensitip ke, bukti bahwa hutang adalah menimbun sehubungan dengan satu konsumen pendapatan bulanan