Docstoc

Bank Loans

Document Sample
Bank Loans Powered By Docstoc
					     6          BANK LOANS
          6.1   Consumer Loans
          6.2   Granting and Analyzing Credit
          6.3   Cost of Credit
          6.4   Credit and the Law
          6.5   Bank Loans and Policy

Slide 1                               Copyright South-Western, a division of Thomson, Inc.
          Lesson 6.1
          CONSUMER LOANS
  GOALS
          Define major terms associated with
          consumer lending
          Explain the difference between installment
          loans and open-end loans



Slide 2                         Copyright South-Western, a division of Thomson, Inc.
INSTALLMENT LOANS

     Fixed amount
     Fixed interest
     Fixed period of payback
     Fixed number of payments
     Legal contract of both parties




Slide 3                                Copyright South-Western, a division of Thomson, Inc.
INSTALLMENT LOANS

     Personal loans
          No Specific purpose needed
     Automobile loans
          Most common type of installment loan
     Home equity loans
          Difference between value of home and what is owed
           on first mortgage; It is a second mortgage



Slide 4                                  Copyright South-Western, a division of Thomson, Inc.
INSTALLMENT LOANS

     Education loans
          Stafford loans for students and PLUS loans for
           parents MAY be backed by government
          Low interest
          Usually do not have to be paid back until after
           graduation




Slide 5                                    Copyright South-Western, a division of Thomson, Inc.
SECURED AND UNSECURED LOANS

     A secured loan is one in which some item of
      value backs the loan in case the borrower
      defaults on the loan.
          The item that secures the loan is called collateral.
          A lien is a legal claim to property to secure a debt.
     An unsecured loan is a loan backed only by the
      reputation and creditworthiness of the borrower.
          Unsecured loans are sometimes called signature
           loans.
Slide 6                                      Copyright South-Western, a division of Thomson, Inc.
LENDING TERMINOLOGY

     Principal is the amount borrowed.
     Interest is the amount you pay to use the principal.
          Most installment loans have FIXED rates
          Variable rates: change over time
          Indexed rates: linked to some other rate, FED’s prime
           rate + some other figure
     Very important to know HOW interest is calculated



Slide 7                                   Copyright South-Western, a division of Thomson, Inc.
LENDING TERMINOLOGY

     Fees are other charges for the loan.
          Application fee, document preparation fee, etc
     The finance charge is the total dollar amount to
      be paid for the loan.
          Includes all interest calculation, fees and other costs
     Total payments is the total amount a consumer
      must repay.
          Includes principal and total finance charges


Slide 8                                     Copyright South-Western, a division of Thomson, Inc.
LENDING TERMINOLOGY

     Payment is the amount the borrower repays
      each specified period.
          Acceleration clause may bring entire loan due
           because of missed or late payments
          Missed payments may also be cause for variable
           interest to increase
          Balloon payment—WATCH OUT!




Slide 9                                  Copyright South-Western, a division of Thomson, Inc.
OPEN-END LOANS

    Amount owed is flexible with no set pay-off date
    Credit cards
           Principal goes up and down as does the interest paid
           Grace period
           Some have annual fees
    Lines of credit
           Home equity reserve
           May draw on them as needed

Slide 10                                   Copyright South-Western, a division of Thomson, Inc.
           Lesson 6.2
           GRANTING AND
           ANALYZING CREDIT
  GOALS
           List steps in the credit-approval process
           Identify major criteria in a person’s credit
           rating




Slide 11                           Copyright South-Western, a division of Thomson, Inc.
RISK MANAGEMENT

    Risk management for bankers is the practice of
     minimizing financial loss through effective policies.
    Banks face risks in operations, credit, liquidity,
     legal and regulatory compliance, and even
     marketing matters.
    Risk management policies include consideration of
     the bank’s overall financial position, reserve
     requirements, cash flow, and ratio analyses of
     liabilities and assets.
Slide 12                             Copyright South-Western, a division of Thomson, Inc.
CREDIT-APPROVAL PROCESS

    Application
    Documentation-proof of employment, etc
    Processing: file is created on you; verification
    Underwriting: review…approve or decline
           Collateral
           Capacity
           Credit reputation
    Closing
    Funding
Slide 13                             Copyright South-Western, a division of Thomson, Inc.
ANALYZING CREDIT

    Consumer reporting agencies
    Credit-scoring systems




Slide 14                           Copyright South-Western, a division of Thomson, Inc.
CONSUMER REPORTING AGENCIES

     A consumer reporting agency (CRA) is a company that
      compiles and keeps records on consumer payment
      habits and sells these reports to banks and other
      companies to use for evaluation creditworthiness.
     Consumer reporting agencies are sometimes called
      credit bureaus.
     The three largest CRAs
            Equifax
            Experian (formerly TRW)
            TransUnion

Slide 15                               Copyright South-Western, a division of Thomson, Inc.
CREDIT REPORTS INCLUDE

    Personal data
    Accounts history
    Delinquent accounts
    Public records
    Inquiries




Slide 16                   Copyright South-Western, a division of Thomson, Inc.
CREDIT-SCORING SYSTEMS

    A credit-scoring system can provide an efficient
     and unbiased method of evaluating credit.
    These scores place a numerical value on the
     performance or status of an applicant in various
     categories.




Slide 17                            Copyright South-Western, a division of Thomson, Inc.
FICO

    The FICO credit-scoring system developed by
     Fair, Isaac and Company, Inc. has become the
     dominant credit-scoring system.
    The FICO score is a three-digit number that
     credit granters can use in making a loan
     approval decision.




Slide 18                         Copyright South-Western, a division of Thomson, Inc.
FICO CRITERIA

    Payment history (approximately 35 percent)
    Amounts owed (approximately 30 percent)
    Length of credit history (approximately 15 percent)
    New credit (approximately 10 percent)
    Types of credit (approximately 10 percent)




Slide 19                            Copyright South-Western, a division of Thomson, Inc.
           Lesson 6.3
           COST OF CREDIT
  GOALS
           Identify key factors in the cost of credit
           Explain the impact of negative credit
           ratings on consumers




Slide 20                            Copyright South-Western, a division of Thomson, Inc.
WHAT CREDIT COSTS

    Annual percentage rate
           Amount of interest charged on loan—yearly figure
           Figured many different ways
    Minimum payments
    Term




Slide 21                                  Copyright South-Western, a division of Thomson, Inc.
REVIEWING APR AND FINANCE CHARGE

    The APR is a key aspect of comparing credit costs.
    Sum-of-digits method
           Takes total finance charge, divides it by number of
            payments in the term then applies higher ratio of
            interest to early payments
           Typical with mortgages
           example: 12 month loan. Adding digits 1 -12 will
            total 78. First month 12/78 of interest is figured into
            payment, second month, 11/78 of interest figured

Slide 22                                      Copyright South-Western, a division of Thomson, Inc.
REVIEWING APR AND FINANCE CHARGE

    Previous balance method
           Lenders take the amount owed at the beginning of
            the billing cycle and calculate interest on that figure
           Regardless of payments or charges
    Adjusted balance method
           When payments made during billing cycle are
            subtracted, and new purchases do not count



Slide 23                                      Copyright South-Western, a division of Thomson, Inc.
REVIEWING APR AND FINANCE CHARGE

    Average daily balance method
           Most common method
           Balances for each day of the billing cycle are added
            together then divided by the number of days in the
            cycle




Slide 24                                    Copyright South-Western, a division of Thomson, Inc.
MINIMUM PAYMENTS

    Most credit cards require a minimum payment
     every month.
    Minimum payments are usually 2 to 5 percent of
     the unpaid balance.
    Paying the minimum payment keeps the account
     in good standing, but it does not reduce the
     principal much.


Slide 25                          Copyright South-Western, a division of Thomson, Inc.
TREND TOWARD LOWER MINIMUM PAYMENTS


    Increases bank profits
    Contributes to greater consumer debt




Slide 26                          Copyright South-Western, a division of Thomson, Inc.
TERM

    For installment loans, length of term also affects
     the total finance charge.
    Repaying the loan over a longer period
           reduces the monthly payment
           Increases interest rate
           increases the total payment for the loan




Slide 27                                    Copyright South-Western, a division of Thomson, Inc.
COMPARING LOANS

Loan amount: $6,000
                       Creditor A   Creditor B                 Creditor C
APR                         14%               14%                           15%
Length of Loan            3 years       4 years                       4 years
Monthly Payment          $205.07      $163.96                       $166.98
Total Finance Charge   $1,382.52    $1,870.08                    $2,015.04
Total Payments         $7,382.52    $7,870.08                    $8,015.04


Slide 28                             Copyright South-Western, a division of Thomson, Inc.
THE IMPACT OF CREDIT

    Overextension
           Consumers take on more debt than they can
            manage
           Consequence: Poor or ruined credit rating
           Documentation stays on file for at least 7 years
    The role of banks
    Credit counseling


Slide 29                                    Copyright South-Western, a division of Thomson, Inc.
           Lesson 6.4
           CREDIT AND THE LAW
  GOALS
           Explain the purpose of consumer
           protection laws in lending
           Identify important laws associated with
           consumer loans



Slide 30                          Copyright South-Western, a division of Thomson, Inc.
TRUTH IN LENDING

    The Truth in Lending Act (TILA), Title I of the
     Consumer Credit Protection Act of 1968
     guarantees that all information about costs of a
     loan is provided in writing to consumers.
    Items that must be disclosed include the following:
           Total sales price           Schedule of payments
           Amount financed             Prepayment policies
           Annual percentage rate      Late payment policies
           Variable rate information   Security interest
           Total payments
Slide 31                                  Copyright South-Western, a division of Thomson, Inc.
EQUAL CREDIT OPPORTUNITY ACT

    The Equal Credit Opportunity Act (ECOA) prohibits
    the use of race, color, religion, national origin,
    marital status, age, receipt of public assistance, or
    exercise of any consumer right against a lender as
    a factor in determining creditworthiness.

    Reason for denial must be supplied upon request.


Slide 32                              Copyright South-Western, a division of Thomson, Inc.
FAIR CREDIT REPORTING ACT

    The Fair Credit Reporting Act (FCRA) aims to
    protect the information that credit bureaus, medical
    information companies, and tenant screening
    services may collect.




Slide 33                             Copyright South-Western, a division of Thomson, Inc.
FAIR CREDIT REPORTING ACT

    Consumers must be told what is in their file
    If information has been used against them
    Consumers can dispute inaccuracies—agency
     MUST investigate disputes within 30 days
    CRAs cannot report information older than 7
     years (10 in the case of bankruptcy)
    Limits access to consumer files


Slide 34                          Copyright South-Western, a division of Thomson, Inc.
FAIR CREDIT REPORTING ACT

    Consumers must authorize release of credit
     report to employers or any report that includes
     medical information
    Consumers can exclude themselves from credit-
     bureau lists that are sold for unsolicited offers
    Consumers can seek damages for violations of
     the law


Slide 35                            Copyright South-Western, a division of Thomson, Inc.
FAIR DEBT COLLECTION PRACTICES ACT

    The Fair Debt Collection Practices Act (FDCPA)
    protects consumers from unfair collection
    techniques.
    Collectors cannot:
           Use deceptive or abusive techniques
           Cannot call at odd hours
           Harass, threaten you with legal action (unless it is
            actually going to happen)
           Reveal debt or collection actions to others such as
            employers
Slide 36                                     Copyright South-Western, a division of Thomson, Inc.
FAIR CREDIT BILLING ACT

    Is an amendment of TILA
    Specifies fair procedures for resolving billing
     disputes
    Prevents creditors from taking adverse action
     until the dispute is resolved




Slide 37                            Copyright South-Western, a division of Thomson, Inc.
FAIR CREDIT AND CHARGE CARD DISCLOSURE ACT


    Is an amendment of TILA
    Requires credit and charge card issuers to
     provide information about open-end credit in
     direct mail or telephone solicitations




Slide 38                           Copyright South-Western, a division of Thomson, Inc.
HOME EQUITY LOAN CONSUMER PROTECTION ACT


    Is an amendment of TILA
    Requires lenders to make appropriate
     disclosures about open-end loans that are
     secured by homes
    Places limitations on such plans




Slide 39                          Copyright South-Western, a division of Thomson, Inc.
CREDIT REPAIR ORGANIZATION ACT

    Prohibits credit repair companies from misleading
     consumers about their services and costs
    Requires agreements to be in writing




Slide 40                           Copyright South-Western, a division of Thomson, Inc.
GRAMM-LEACH-BLILEY ACT

    Compels banks and other financial institutions to
    protect the privacy of consumers

    Institutions MUST have written policies and allow
    consumers to ―opt out‖ if they choose




Slide 41                             Copyright South-Western, a division of Thomson, Inc.
COMPLIANCE

    Authority for enforcing consumer protection acts
     varies with the individual law and the
     government agency associated with it.
    Federal statutes are enforced by
           Federal Reserve
           Federal Deposit Insurance Corporation (FDIC)
           Federal Trade Commission (FTC)
           Courts
    Examiners conduct audits to test compliance.
Slide 42                                  Copyright South-Western, a division of Thomson, Inc.
Assignment

    Page 165: Checkpoint (be able to explain each)
    Page 166: Checkpoint (be able to explain each)
    Page 167: Think Critically 1 – 4




Slide 43                          Copyright South-Western, a division of Thomson, Inc.
           Lesson 6.5
           BANK LOANS
           AND POLICY
  GOALS
           Explain how loans affect a bank’s income
           Describe the purpose of a bank’s loan
           policy committee




Slide 44                         Copyright South-Western, a division of Thomson, Inc.
LOANS AND INCOME

    Loans have a direct impact on a bank’s income,
     because the interest charged is its major income
     source.
    Approving questionable loans could lead to
     default, or failure to repay a loan, and, in turn, to
     lower income.
    A bank’s income depends on how well it
     manages its loans.

Slide 45                              Copyright South-Western, a division of Thomson, Inc.
LOANS AND LIQUIDITY

    Liquidity means having the funds to meet a
     bank’s obligations when required.
           Loan term
           Interest rate
           Loan type
           Collateral
    Liquidity risk refers to the risk that a bank will
     have to sell its assets at a loss to meet its cash
     demands.
Slide 46                             Copyright South-Western, a division of Thomson, Inc.
CREDIT AND MARKET RISK

    Credit Risk—the bank’s estimate of the
     probability that the borrower can and will repay a
     loan with interest as scheduled.
    Market Risk—the risk that an investment will
     decrease in price as market conditions change.




Slide 47                            Copyright South-Western, a division of Thomson, Inc.
LOAN DECISIONS AND TRADE-OFFS

    Knowing how to analyze the loan term, interest
     rate, as well as other factors, helps determine
     the profit a bank can make from its loans.




Slide 48                           Copyright South-Western, a division of Thomson, Inc.
LOAN POLICY COMMITTEE

    All banks must have a lending policy, a written
     statement of the guidelines and standards to
     follow in making credit decisions.
    A bank’s board of directors through membership
     on its loan policy committee sets its lending
     policy.




Slide 49                           Copyright South-Western, a division of Thomson, Inc.
EXAMPLES OF LENDING POLICY

    Minimum credit standards for new loans
    Process used to check applicants’ credit history
    Documents required as part of the application
    Interest rate for various loan types and risk
    Bank’s loan mix
    Treatment of past-due and delinquent loans



Slide 50                            Copyright South-Western, a division of Thomson, Inc.
COMMUNITY REINVESTMENT ACT (CRA)

    The Community Reinvestment Act (CRA) is the
     federal law requiring banks to meet the credit
     needs of the entire communities they serve.




Slide 51                          Copyright South-Western, a division of Thomson, Inc.

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:4
posted:11/22/2011
language:English
pages:51