im17 - Chapter 17 Evaluating Consumer Loans Chapter...

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Chapter 17 Evaluating Consumer Loans Chapter Objectives 1. Describe the characteristics of different consumer loans. 2. Evaluate the competitive environment in the credit card business. 3. Explain why subprime loans are popular at many lending institutions. 4. Discuss various consumer credit regulations and their impact. 5. Introduce fundamental issues when analyzing a consumer loan request. 6. Describe the standard features of credit scoring models. Explain why credit scoring is becoming increasingly popular and, on occasion, abused. 7. Describe the features of indirect consumer lending. Key Concepts 1. Consumer loans are generally classified as either installment loans, credit card/revolving credit lines, or non-installment loans. Installment loans have fixed maturities and require periodic principal and interest payments. Credit cards and revolving credit lines are commitments to consumers for any expenditure, and require monthly payments with no fixed maturity. Non-installment loans are used for virtually any purpose and are typically repaid in a single payment. 2. Credit card lending has been extremely profitable for banks with large portfolios. Card issuers get revenue from annual fees, charges against merchants who accept the cards, and interest paid on outstanding consumer credit card balances. Since the early 1990s, charge-off rates on credit card loans have been far higher than charge- off rates on other types of loans. Similarly, personal bankruptcy filings have generally increased. These latter trends appeared in spite of the sustained economic growth in the U.S. economy during the 1990s and with the economic slowdown in 2000 – 2001. 3. Many lenders have increased their exposure to “subprime” borrowers. As the label suggests, these borrowers are high risk compared to traditional bank borrowers. Often, the loans are labeled “B,” “C,” and “D” paper. Not surprisingly, lenders charge high interest rates and high fees on such loans because the borrowers have limited alternatives. Many subprime lenders experienced high defaults and ultimately closed operations. 4. The federal government has authorized a broad range of regulations to protect individuals when obtaining or requesting credit. These include: a. Equal Credit Opportunity Act: prohibits discrimination and requires proper reporting. b. Truth in Lending: requires lenders to disclose finance charges on loans in a standardized format so borrowers can compare credit terms across lenders. c. Fair Credit Reporting: enables individuals to examine credit reports filed on themselves. d. Community Reinvestment Act: prohibits lenders from selectively not extending credit within specific geographic markets. 5. Credit scoring models use information supplied by prospective borrowers to quantitatively determine whether
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This note was uploaded on 04/14/2010 for the course BANK 2312 taught by Professor William during the Spring '09 term at 東京大学.

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im17 - Chapter 17 Evaluating Consumer Loans Chapter...

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