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

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

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.

Noninstallment Loans Short-Term Loans By Individuals for Immediate Cash Needs and Repayable in One Lump Sum When the Borrower’s Note Matures

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.

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.

Characteristics of Consumer Loans Most Costly and Most Risky to Make Per Dollar Cyclically Sensitive Interest Inelastic

Evaluating a Consumer Loan Application Character and Purpose Income Levels Deposit Balances Employment and Residential Stability Pyramiding of Debt

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

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

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

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

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

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

Cost-Plus Model of Pricing Loans

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

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

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

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

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.

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.

Variable Rate Consumer Loan

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

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