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BANK LOANSBANK LOANS
6.16.1 Consumer Loans6.26.2 Granting and Analyzing Credit6.36.3 Cost of Credit6.46.4 Credit and the Law
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Lesson 6.1
CONSUMER LOANSLesson 6.1
CONSUMER LOANS
Define major terms associated with consumer lendingExplain the difference between installment loans and open-end loans
GOALSGOALS
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INSTALLMENT LOANSINSTALLMENT LOANSINSTALLMENT LOANSINSTALLMENT LOANS
Personal loansAutomobile loansHome equity loansEducation loans
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SECURED AND UNSECURED LOANSSECURED AND UNSECURED LOANSSECURED AND UNSECURED LOANSSECURED 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.
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LENDING TERMINOLOGYLENDING TERMINOLOGYLENDING TERMINOLOGYLENDING TERMINOLOGY
Principal is the amount borrowed.Interest is the amount you pay to use the principal.Fees are other charges for the loan.The finance charge is the total dollar amount to be
paid for the loan.Total payments is the total amount a consumer must
repay.Payment is the amount the borrower repays each
specified period.
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OPEN-END LOANSOPEN-END LOANSOPEN-END LOANSOPEN-END LOANS
Credit cardsLines of credit
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Lesson 6.2
GRANTING AND ANALYZING CREDIT
Lesson 6.2
GRANTING AND ANALYZING CREDIT
List steps in the credit-approval processIdentify major criteria in a person’s credit rating
GOALSGOALS
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RISK MANAGEMENTRISK MANAGEMENTRISK MANAGEMENTRISK 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.
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CREDIT-APPROVAL PROCESSCREDIT-APPROVAL PROCESSCREDIT-APPROVAL PROCESSCREDIT-APPROVAL PROCESS
ApplicationDocumentationProcessingUnderwriting
CollateralCapacityCredit reputation
ClosingFunding
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ANALYZING CREDITANALYZING CREDITANALYZING CREDITANALYZING CREDIT
Consumer reporting agenciesCredit-scoring systems
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CONSUMER REPORTING AGENCIESCONSUMER REPORTING AGENCIESCONSUMER REPORTING AGENCIESCONSUMER 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 CRAsEquifaxExperian (formerly TRW)TransUnion
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CREDIT REPORTS INCLUDECREDIT REPORTS INCLUDECREDIT REPORTS INCLUDECREDIT REPORTS INCLUDE
Personal dataAccounts historyDelinquent accountsPublic recordsInquiries
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CREDIT-SCORING SYSTEMSCREDIT-SCORING SYSTEMSCREDIT-SCORING SYSTEMSCREDIT-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.
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FICOFICOFICOFICO
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.
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FICO CRITERIAFICO CRITERIAFICO CRITERIAFICO 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)
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Lesson 6.3
COST OF CREDITLesson 6.3
COST OF CREDIT
Identify key factors in the cost of creditExplain the impact of negative credit ratings on consumers
GOALSGOALS
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WHAT CREDIT COSTSWHAT CREDIT COSTSWHAT CREDIT COSTSWHAT CREDIT COSTS
Annual percentage rateMinimum paymentsTerm
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REVIEWING APR AND FINANCE CHARGEREVIEWING APR AND FINANCE CHARGEREVIEWING APR AND FINANCE CHARGEREVIEWING APR AND FINANCE CHARGE
The APR is a key aspect of comparing credit costs.Sum-of-digits methodPrevious balance methodAdjusted balance methodAverage daily balance method
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MINIMUM PAYMENTSMINIMUM PAYMENTSMINIMUM PAYMENTSMINIMUM 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.
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TREND TOWARD LOWER MINIMUM PAYMENTSTREND TOWARD LOWER MINIMUM PAYMENTSTREND TOWARD LOWER MINIMUM PAYMENTSTREND TOWARD LOWER MINIMUM PAYMENTS
Increases bank profitsContributes to greater consumer debt
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TERMTERMTERMTERM
For installment loans, length of term also affects the total finance charge.
Repaying the loan over a longer periodreduces the monthly paymentincreases the total payment for the loan
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COMPARING LOANS COMPARING LOANS COMPARING LOANS COMPARING LOANS
Loan amount: $6,000
Creditor ACreditor A Creditor B Creditor B Creditor CCreditor 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
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THE IMPACT OF CREDITTHE IMPACT OF CREDITTHE IMPACT OF CREDITTHE IMPACT OF CREDIT
OverextensionThe role of banksCredit counseling
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Lesson 6.4
CREDIT AND THE LAWLesson 6.4
CREDIT AND THE LAW
Explain the purpose of consumer protection laws in lendingIdentify important laws associated with consumer loans
GOALSGOALS
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TRUTH IN LENDINGTRUTH IN LENDINGTRUTH IN LENDINGTRUTH 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 priceAmount financedAnnual percentage rateVariable rate informationTotal payments
Schedule of paymentsPrepayment policiesLate payment policiesSecurity interest
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EQUAL CREDIT OPPORTUNITY ACTEQUAL CREDIT OPPORTUNITY ACTEQUAL CREDIT OPPORTUNITY ACTEQUAL 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.
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FAIR CREDIT REPORTING ACTFAIR CREDIT REPORTING ACTFAIR CREDIT REPORTING ACTFAIR 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.
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FAIR DEBT COLLECTION PRACTICES ACTFAIR DEBT COLLECTION PRACTICES ACTFAIR DEBT COLLECTION PRACTICES ACTFAIR DEBT COLLECTION PRACTICES ACT
The Fair Debt Collection Practices Act (FDCPA) protects consumers form unfair collection techniques.
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FAIR CREDIT BILLING ACTFAIR CREDIT BILLING ACTFAIR CREDIT BILLING ACTFAIR CREDIT BILLING ACT
Is an amendment of TILASpecifies fair procedures for resolving billing
disputesPrevents creditors from taking adverse action
until the dispute is resolved
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FAIR CREDIT AND CHARGE CARD DISCLOSURE ACTFAIR CREDIT AND CHARGE CARD DISCLOSURE ACTFAIR CREDIT AND CHARGE CARD DISCLOSURE ACTFAIR CREDIT AND CHARGE CARD DISCLOSURE ACT
Is an amendment of TILARequires credit and charge card issuers to
provide information about open-end credit in direct mail or telephone solicitations
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HOME EQUITY LOAN CONSUMER PROTECTION ACTHOME EQUITY LOAN CONSUMER PROTECTION ACTHOME EQUITY LOAN CONSUMER PROTECTION ACTHOME EQUITY LOAN CONSUMER PROTECTION ACT
Is an amendment of TILARequires lenders to make appropriate
disclosures about open-end loans that are secured by homes
Places limitations on such plans
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CREDIT REPAIR ORGANIZATION ACTCREDIT REPAIR ORGANIZATION ACTCREDIT REPAIR ORGANIZATION ACTCREDIT REPAIR ORGANIZATION ACT
Prohibits credit repair companies from misleading consumers about their services and costs
Requires agreements to be in writing
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GRAMM-LEACH-BLILEY ACTGRAMM-LEACH-BLILEY ACTGRAMM-LEACH-BLILEY ACTGRAMM-LEACH-BLILEY ACT
Compels banks and other financial institutions to protect the privacy of consumers
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COMPLIANCECOMPLIANCECOMPLIANCECOMPLIANCE
Authority for enforcing consumer protection acts varies with the individual laws and the government agency associated with it.
Federal statutes are enforced byFederal ReserveFederal Deposit Insurance Corporation (FDIC) Federal Trade Commission (FTC)Courts
Examiners conduct audits to test compliance.