1. Laws and regulations applying to consumer loans
1.1. Disclosure rules
1.1.1. Truth in Lending Act
1.1.1.1. lenders must provide their customers with information on all loan charges and associated risks in a disclosure statement
1.1.2. Fair Credit Reporting Act, 1974
1.1.2.1. gives individuals easier access to their credit-bureau records, the right to challenge information contained therein, and to insist on the prompt correction of errors
1.1.3. Fair Credit Billing Act
1.1.3.1. gives consumers the right to dispute billing errors and have those errors corrected
1.1.4. Fair Debt Collection Practices Act
1.1.4.1. limits how far a creditor or credit collection agency can go in pressing that customer to pay up
1.2. Antidiscrimination rules
1.2.1. The Equal Credit Opportunity Act
1.2.1.1. outlaws discrimination in lending based on race, age, sex, religious preference, receipt of public assistance, or any other irrelevant factors
1.2.2. The Community Reinvestment Act
1.2.2.1. requires banks and other lending institutions to make an affirmative effort to serve all segments of their designated market areas without discriminating against certain neighborhoods.
1.2.3. Home Ownership and Equity Protection Act
1.2.3.1. aimed to protect home owners from loan agreements they could not afford.
1.2.3.2. Loans with annual percentage rates (APR) of 10 percentage points or more above the yield on comparable maturity U.S. Treasury securities and closing fees above 8 percentof the loan amount are defined as “abusive.” Consumers have 6 days in which to decide whether or not to proceed with the loan
2. Credit Scoring Consumer Loan Application
2.1. based on sophisticated statistical models in which several variables are joined to establish a numerical score to separate good loans from bad loans.
2.1.1. FICO: developed by Fair Isaac Corporation. Quick and easy access to objective and impartial credit scores makes it very useful tool for lending institutions
2.1.2. presence of a FICO score simulator allows individuals to estimate what would happen to their FICO score if certain changes were made in their personal financial profile has made the score popular.
2.2. advantage of being objective, requiring less loan officer judgment, possibly reducing loan losses, reducing operating costs, and quicker evaluation of applications when a large volume of consumer loans is being processed
2.2.1. assumes that the same factors that separated good from bad loans in the past will, with an acceptable risk of error, separate good from bad loans in the future. Clearly, this underlying assumption can be wrong if the economy or other factors change abruptly. Also, from a lending institution’s perspective, it runs the risk of alienating those customers who feel the lending institution has not fully considered their financial situation and the special circumstances that may have given rise to their loan request. There is also the danger of being sued by a customer under antidiscrimination laws if race, gender, marital status, or other discriminating factors prohibited by statute or court rulings are used in a scoring system
3. Real estate loans
3.1. Among the riskiest loans banks can make
3.2. Average size is larger than the average size of other loans
3.3. Tend to have longer maturities than other loans, typically between 15 to 30 years
3.4. Factors to be considered in evaluating a real estate loan application
3.4.1. The amount of down payment planned by the borrower as a percentage of the purchaseprice of the property
3.4.2. Potential future business that can be gained as a result of providing a mortgage loan
3.4.3. Amount and stability of the borrower’s income
3.4.4. The outlook for real estate sales in the local market area
3.4.5. The outlook for interest rates in the economy
3.5. Home equity lending
3.5.1. Loans involving a borrowing base of the residual market value of a home being drawn upon as collateral
3.5.1.1. Borrowers can secure home equity loans for second mortgage, college tuition, or any other financial needs that they may have. Usually these loans carry a lower rate of interest than consumer loans
3.5.2. Advantage: these loans are secured against the equity value of the property
3.5.3. Disadvantages: these loans are made on the premise that housing prices will not fall significantly. This may not always be a correct assumption. If the housing market slows down and property prices decline, the borrower may default. The banks will likely be forced to foreclose in such situations.It may also face difficulty in selling the property in an already depressed market. Also, there is always a risk of the bank’s reputation being harmed in the event of foreclosures. Moreover, regulations prohibit the lending institutions from arbitrarily cancelling any home equity loans