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CHAPTER SEVENTEEN
Consumer Loans, Credit
Cards, And Real Estate
Lending
To learn about the many types of loans lenders make
to consumers(individuals and families) and to real
estate borrowers and to understand the factors that
influence the profitability and risk of consumer and
real estate loans. In addition, the chapter examines
how consumer and real estate loan rates may be
determined and the options a loan officer has today
in pricing loans extended to individuals and families.
Types of Consumer Loans
Residential Mortgage Loans
Nonresidential Loans
Installment Loans
Noninstallment Loans
Credit Card Loans
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Residential Mortgage Loans
Credit to Finance the Purchase of
Residential Property in the Form of
Houses and Multifamily Dwellings. This
is Usually a Long-Term Loan Which is
Secured By the Property Itself
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Installment Loans
Short-Term to Medium-Term Loans
Repayable in Two or More Consecutive
Payments, Usually Monthly or Quarterly.
These Are Often Used to Finance Big
Ticket Purchases or Consolidate Existing
Debt.
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Noninstallment Loans
Short-Term Loans By Individuals for
Immediate Cash Needs and Repayable in
One Lump Sum When the Borrower’s
Note Matures
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Credit Card Loans
Credit Cards Offer Holders Access to
Either Installment or Noninstallment
Credit. Banks Find That the Installment
Users of Credit Cards are the Most
Profitable. Banks Also Earn Discount
Fees From Merchants on Credit Cards.
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Debit Cards
Debit Cards Can Be Used To Pay For Goods
And Services, But Not To Extend Credit. They
Are A Convenient Vehicle For Making Deposits
Into And Withdrawals From ATMs And They
Facilitate Check Cashing.
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Characteristics of Consumer Loans
Most Costly and Most Risky to Make Per
Dollar
Cyclically Sensitive
Interest Inelastic
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Evaluating a Consumer Loan
Application
Character and Purpose
Income Levels
Deposit Balances
Employment and Residential Stability
Pyramiding of Debt
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Credit Scoring
Credit Scoring Systems are Based on
Discriminant or Logit Models (Statistical
Techniques) in Which Several Variables
are Joined to Establish a Numerical Score
to Separate Good Loans From Bad Loans
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Laws and Regulations Applying to
Consumer Loans
Truth in Lending Act
Fair Credit Reporting Act
Fair Credit Billing Act
Fair Debt Collection Practices Act
Equal Credit Opportunity Act
Community Reinvestment Act
Home Ownership and Equity Protection Act
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Predatory Lending
An Abusive Practice Among Some
Lenders That Consists of Granting Loans
to Weak Borrowers and Charging Them
Excessive Interest Rates and Fees,
Increasing the Risk of Default
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Real Estate Loans
Among the Riskiest Loans Banks Can
Make
Average Size is Larger Than the Average
Size of Other Loans
Tend to Have Longer Maturities Than
Other Loans
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Factors Used in Evaluating Real
Estate Loans
Size of Down Payment Relative to Purchase Price of
Property
Should Be Evaluated in Terms of Total Relationship
Deposit Stability is a Key Factor
Amount and Stability of Income
Available Savings and Where Down Payment Comes
From
Track Record in Maintaining Property
Outlook for Real Estate Market in Local Area
Outlook for Interest Rates If Variable Rate Loan
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Home Equity Lending
Home Owners Can Use the Difference in Home’s
Estimated Value and Remaining Mortgages as a
Borrowing Base
Two Types of Credit
Closed End Credit
Lines of Credit
Can Be Used for Any Legitimate Purpose
The 1986 Tax Reform Act Has Helped This Type of
Loan Grow in Popularity
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Cost-Plus Model of Pricing Loans
Bank's
Risk
Risk
Loan Rate
Cost of
Nonfunding
Premium
Premium
Desired
Paid by = Raising + Operating +
for
+ for Time + Profit
Consumer
Loanable
Costs
Customer
to
Margin
Funds
Default
Maturity
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Annual Percentage Rate (APR)
The APR is the Internal Rate of Return that
Equates Total Payments With the Amount
of the Loan. The Truth in Lending Act
Requires That This Rate Be Told to
Consumer On All Loans
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Simple Interest
In Simple Interest the Customer Only Pays
Interest On the Amount of the Principal
Left. First the Declining Loan Balance is
Calculated and That Reduced Balance is
Used to Calculate the Amount of Interest
Owed
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Discount Rate Method
The Discount Rate Method Requires the
Customer to Pay the Interest in Advance.
Interest is Deducted First and the
Customer Receives the Loan Amount Less
Any Interest Owed
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Add-On Loan Rate Method
Interest Owed is Added to the Principal
Amount, Then the Loan Payments are
Calculated By Dividing This Sum By the
Number of Loan Payments
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Rule of 78s
A Rule of Thumb to Determine Exactly
How Much Interest Income a Bank is
Entitled to Accrue at Any Point in Time
From an Installment Loan Being Paid in
Monthly Installments.
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Compensating Balance
Requirements
Some Banks Require Customers to Keep a
Certain Percentage of the Loan Amount in
a Deposit Account in the Bank. This
Raises the Effective Cost of a Consumer
Loan.
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Variable Rate Consumer Loan
Floating
Prime
Based
Consumer
Loan Rate
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=
Prime or
Base
Rate
+
Risk
Premium
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Interest Rates on Home Mortgages
Fixed Rate Mortgage (FRM) – 1930s to 1970s Most
Mortgages Were Fixed-Rate Mortgages. They Had a
Fixed Interest Rate That Did Not Change Over the Life
of the Loan
Adjustable Rate Mortgage (ARM) – in the Early 1970s
Adjustable Rate Mortgages Were Allowed. These
Mortgages Have an Interest Rate That Changes Over
the Life of the Mortgage. Roughly One Quarter of All
Mortgages are Adjustable Today
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Mortgage Points
This is an Additional Up Front Charge
Often Required on Home Mortgages. It is
a Percentage of the Loan Amount and
Reduces the Amount of the Loan Available
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