BNFN 404 CREDIT ANALYSIS AND LENDING

1
BNFN 404CREDIT ANALYSIS AND LENDING

• WEEK 14
• ROSE (1999), CHP. 19
• CONSUMER AND REAL ESTATE LENDING

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The Objective of Chapter 19

• This chapter aim to teach many different types of
  loans banks 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.

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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 ( automobiles, furniture, home
  appliances) or Consolidate Existing Debt.

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Noninstallment Loans

• Short-term Loans (less than six months) by
  Individuals for Immediate Cash Needs and
  Repayable in One Lump Sum. Non-installment loans
  are frequently used to cover the costs of
  vacations, medical and hospital care, the
  purchase of home appliances, and auto and home
  repairs

7
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.
• Bank credit cards offer convenience and a
  revolving line of credit that the customer can
  access whenever the need arises. However,
  careful management and control of their credit
  card programs is vital due to the growing
  proportion of delinquent borrowers and the large
  number of cards that have been stolen and used
  fraudulently.

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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 LoanApplication

• Character and Purpose
• Income Levels
• Deposit Balances
• Employment and Residential Stability
• Pyramiding of Debt

10
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.
• Among the most important 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

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Advantages of Credit Scoring

• Credit scoring systems have the advantage of
  being able to handle a large volume of credit
  applications quickly 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.

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Disadvantages of Credit Scoring

• It may not fully consider the special
  circumstances of some applicants.
• There is a danger of being sued by a customer
  under federal antidiscrimination laws (such as
  the Equal Credit Opportunity Act)
• Credit scoring is an inflexible credit evaluation
  system, their inability to adjust quickly to
  changes in the economy and in family lifestyles
  is the biggest potential weakness

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Laws and Regulations Applying to Consumer Loans

• Truth in Lending Act ( This act requires full
  disclosure of credit terms and costs)
• Fair Credit Reporting Act (This act authorizes
  individuals and families to review their credit
  files for accuracy and to demand an investigation
  and correction of any apparent inaccuracies)
• Fair Credit Billing Act (Permits consumers to
  dispute billing errors in consumers credit
  files)

14
Laws and Regulations Applying to Consumer Loans

• Fair Debt Collection Practices Act (This act
  limits how far a creditor or credit collection
  agency can go in pressing that customer to pay
  up)
• Equal Credit Opportunity Act (Prohibits lenders
  from asking certain questions of a customer, such
  as the borrowers age, sex or race)

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Laws and Regulations Applying to Consumer Loans

• Community Reinvestment Act (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.)

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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.

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Real Estate Loans

• Among the Riskiest Loans Banks 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 EvaluatingReal Estate Loans

• Amount 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 for Maintaining Property
• Outlook for Real Estate Market in Local Area
• Outlook for Interest Rates If Variable Rate Loan

19
Home Equity Lending

• Home Owners Can Use the Difference in Homes
  Estimated Value and Remaining Mortgage as a
  Borrowing Base
• Two TypesClosed-End Credit and Lines of Credit
• Can be Used for Any Legitimate Purpose
• The 1986 Tax Reform Act Has Helped This Type of
  Loan Grow in Popularity