• Loans and otheLoans and other financial r financial services sold services sold to households to households have increasinglhave increasingly been shaped y been shaped byby federal and state laws and regulations designed to promote
federal and state laws and regulations designed to promote (a)(a)fuller disclosure of con-fuller disclosure of con-tract terms and
tract terms and(b)(b)greater fairness in the marketplace, outlawing discriminatiogreater fairness in the marketplace, outlawing discrimination on n on thethe basis of race, sex, religion, and other irrelevant factors. These rules serve to promote basis of race, sex, religion, and other irrelevant factors. These rules serve to promote competition, encourage households to shop for credit, and, hopefully, lead to more competition, encourage households to shop for credit, and, hopefully, lead to more informed household decision making.
informed household decision making.
•
• Real estaReal estate loans are moste loans are most often directt often directed at householed at households seeking plads seeking places to live. Reaces to live. Reall estate credit provides the financial resources to support the construction of homes, estate credit provides the financial resources to support the construction of homes, con-dominiums, apartments, shopping centers, office buildings, and other forms of real dominiums, apartments, shopping centers, office buildings, and other forms of real property
property. Banks and . Banks and many of their competitors make many of their competitors make both short-term mortgage creditboth short-term mortgage credit (usually in the form of construction loans) and long-term mortgages available to (usually in the form of construction loans) and long-term mortgages available to busi-nesses and households. Officers and staff of real estate lending institutions must have nesses and households. Officers and staff of real estate lending institutions must have multiple skills in assessing property values, real estate law, and the extensive regulations multiple skills in assessing property values, real estate law, and the extensive regulations that surround this field. More than any other type
that surround this field. More than any other type of loan, real-estate lending dependsof loan, real-estate lending depends heavily on judging the value and
heavily on judging the value and outlook for a loan’s collateral.outlook for a loan’s collateral.
•
• PricinPricing consumer and reag consumer and real estate loanl estate loans is challengs is challenging as several diing as several differenfferent techniquet techniquess have emerged. With so many different methods available for
have emerged. With so many different methods available for calculating loan interestcalculating loan interest rates and other credit terms, confusion abounded for lenders and customers until the rates and other credit terms, confusion abounded for lenders and customers until the T
Truth in Lending ruth in Lending Act was passed in Act was passed in the United States, requiring lenders to the United States, requiring lenders to disclose thedisclose the APR
APR (annual percentage rate) that applies to a customer’s loan, yielding a common(annual percentage rate) that applies to a customer’s loan, yielding a common standard to compare one proposed loan against another.
standard to compare one proposed loan against another.
•
• AA tretrend is nd is unfunfoldolding ting today oday towtoward mard moreoremarket-sensitive loan ratesmarket-sensitive loan rates in order to reducein order to reduce interest rate risk on the part of consumer and real estate lenders, particularly in the interest rate risk on the part of consumer and real estate lenders, particularly in the home mortgage field where fixed-rate and adjustable-rate loans compete against each home mortgage field where fixed-rate and adjustable-rate loans compete against each other for the customer’s allegiance. In the case of adjustable-rate credit, loan officers other for the customer’s allegiance. In the case of adjustable-rate credit, loan officers must be especially careful in deciding whether a borrowing customer has sufficient must be especially careful in deciding whether a borrowing customer has sufficient budgetary flexibility to be able to adjust to
budgetary flexibility to be able to adjust to variable loan payments, especially if interestvariable loan payments, especially if interest rates are expected to rise during the life of a loan.
rates are expected to rise during the life of a loan.
Key Terms
Key Terms
residential mortgageresidential mortgage loans,Problems Problems and Projects and Projects
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1.
1. The Childress fThe Childress family has applied family has applied for a $5,000 loan for homor a $5,000 loan for home improvements, ee improvements, especiallyspecially to install a new roof and
to install a new roof and add new carpeting. Bob Childress is a welder at Ford add new carpeting. Bob Childress is a welder at Ford MotorMotor Co., the first year he
Co., the first year he has held that job, and has held that job, and his wife sells clothing at Wal-Mart. Theyhis wife sells clothing at Wal-Mart. They have three children. The Childresses own their home, which they purchased six have three children. The Childresses own their home, which they purchased six months ago, and have an
months ago, and have an averageaverage credit rating, with some late bill payments. Theycredit rating, with some late bill payments. They have a telephone, but hold only a checking account with a bank and a few savings have a telephone, but hold only a checking account with a bank and a few savings bonds. Mr. Childre
bonds. Mr. Childress has a ss has a $35,000 life insurance policy with a cash surrender value $35,000 life insurance policy with a cash surrender value of of
$1,100. Suppose the lender uses the credit scoring system presented in this chapter
$1,100. Suppose the lender uses the credit scoring system presented in this chapter and denies all credit applications scoring fewer than 360
and denies all credit applications scoring fewer than 360 points. Is the Childress fam-points. Is the Childress fam-ily likely to get their loan?
ily likely to get their loan?
2.
2. Mr. Mr. and Mrs. Napper are iand Mrs. Napper are interested in funding their children’nterested in funding their children’s college education bys college education by taking out a home equity loan in the amount of $24,000. Eldridge National Bank is taking out a home equity loan in the amount of $24,000. Eldridge National Bank is willing to extend a loan, using the Nappers’ home as collateral. Their home has been willing to extend a loan, using the Nappers’ home as collateral. Their home has been appraised at $110,000, and Eldridge permits a customer to use no more than 70 appraised at $110,000, and Eldridge permits a customer to use no more than 70 per-cent of the appraised value of a home as a borrowing base. The Nappers still owe cent of the appraised value of a home as a borrowing base. The Nappers still owe
$60,000 on the first mortgage against their home. Is there enough residual value left
$60,000 on the first mortgage against their home. Is there enough residual value left in the Nappers’ home to support their loan
in the Nappers’ home to support their loan request? How could the lender help themrequest? How could the lender help them meet their credit needs?
meet their credit needs?
3.
3. Justin James has jJustin James has just been informed by a fiust been informed by a finance company that he can accenance company that he can access a line of ss a line of credit of no more than $28,000 based upon the equity value in his home. James still credit of no more than $28,000 based upon the equity value in his home. James still owes $105,000 on a first mortgage against his home and $25,000 on a second mortgage owes $105,000 on a first mortgage against his home and $25,000 on a second mortgage against the home, which was incurred last year to
against the home, which was incurred last year to repair the roof and driveway. If therepair the roof and driveway. If the appraised value of James’s residence is $197,500, what percentage of
appraised value of James’s residence is $197,500, what percentage of the home’s esti-the home’s esti-mated market value is the
mated market value is the lender using to determine James’s maximum available linelender using to determine James’s maximum available line of credit?
of credit?
4.
4. WWhahatt termterm in the consumer lending field does each of the following statementsin the consumer lending field does each of the following statements describe?
describe?
a.
a. Plastic card usePlastic card used to pay for goods d to pay for goods and services wiand services without borrowing mthout borrowing moneyoney.. b.
b. Loan to purchaLoan to purchase an automse an automobile and pay obile and pay it off it off monthlymonthly.. c.
c. If you faiIf you fail to pay the lenl to pay the lender seider seizes your dezes your depositposit.. d.
d. Numerical Numerical rating desrating describing licribing likelihood of kelihood of loan repaymloan repayment.ent.
e.
e. Loans exteLoans extended to low-crnded to low-credit-edit-rated borrated borrowerowers.rs.
f.
f. Loan based on Loan based on spread between spread between a home’a home’s market s market value and itvalue and its mortgage s mortgage balance.balance.
g.
g. Method for calculatMethod for calculating rebate borrowing rebate borrower receives frer receives from retiring a om retiring a loan earlyloan early.. h.
h. Lender requires Lender requires excessive insexcessive insurance fees urance fees on a new on a new loan.loan.
i.
i. Loan ratLoan rate lendere lenders must quos must quote under thte under the Te Truth in Lenruth in Lending Acding Act.t.
j.
j. UpfrUpfront paymont payment reqent required as a conuired as a conditiodition for gettn for getting a home loing a home loan.an.
5.
5. Which federal Which federal law or laws law or laws apply to each of apply to each of the situations the situations described below?described below?
a.
a. A loan offA loan officer asks icer asks an individual an individual requesting a requesting a loan about loan about her race.her race.
b.
b. A bill collector A bill collector called Jim Jones tcalled Jim Jones three times yesterhree times yesterday at his work numbeday at his work number withoutr without first asking permission.
first asking permission.
c.
c. Sixton National BSixton National Bank has developed a speciank has developed a special form to tell ital form to tell its customers the fs customers the financeinance charges they must pay to secure a loan.
charges they must pay to secure a loan.
d.
d. Consumer SavingConsumer Savings Bank has just reces Bank has just received an outstanding rived an outstanding rating from federating from federal exam-al exam-iners for its efforts to serve all
iners for its efforts to serve all segments of its communitysegments of its community.. e.
e. Presage StPresage State Bank must diate Bank must disclose oncsclose once a year the areas in the locae a year the areas in the local communil communityty where it has made home
where it has made home mortgage and home improvement loans.mortgage and home improvement loans.
f.
f. ReliaReliance Credince Credit Card Comt Card Company is contpany is contacted by one of iacted by one of its customts customers in a dispuers in a disputete over the amount of charges
over the amount of charges the customer made at a the customer made at a local department store.local department store.
w
Chapter 18 Consumer Loans, Credit Cards, and Real Estate Lending Consumer Loans, Credit Cards, and Real Estate Lending 615615
g.
g. Amy Imed, Amy Imed, after requestiafter requesting a copy of ng a copy of her credit reher credit report, discovers port, discovers several errorseveral errors ands and demands a correction.
demands a correction.
6.
6. James SmitJames Smithern has asked for a $3,500 loan from Beahern has asked for a $3,500 loan from Beard Center Natird Center National Bank toonal Bank to repay some personal expenses. The bank uses a credit-scoring system to evaluate such repay some personal expenses. The bank uses a credit-scoring system to evaluate such requests, which contains the following discriminating factors along with their requests, which contains the following discriminating factors along with their associ-ated point weights in parentheses:
ated point weights in parentheses:
Credit Rating (excellent, 3; average, 2; poor or no
Credit Rating (excellent, 3; average, 2; poor or no record, 0)record, 0) Time in Current Job (five years or more, 6; one to five years, 3) Time in Current Job (five years or more, 6; one to five years, 3)
Time at Current Residence (more than 2 years, 4; one to two years, 2; less than one Time at Current Residence (more than 2 years, 4; one to two years, 2; less than one year, 1)
year, 1)
Telephone in Residence (yes, 1; no, 0) Telephone in Residence (yes, 1; no, 0) Holds Account at Bank (yes, 2; no, 0).
Holds Account at Bank (yes, 2; no, 0).
The bank generally grants a loan
The bank generally grants a loan if a customer scores 9 or if a customer scores 9 or more points. Mr. Smith-more points. Mr. Smith-ern has an average credit rating, has been in his current job for three years and at his ern has an average credit rating, has been in his current job for three years and at his current residence for two years, has a telephone, but has no account at the bank. Is current residence for two years, has a telephone, but has no account at the bank. Is James Smithern
James Smithern likely to recelikely to receive the loan he has ive the loan he has requested?requested?
7.
7. Jamestown Savings Bank, Jamestown Savings Bank, in reviewing its in reviewing its credit card customers, credit card customers, finds that of finds that of thosethose customers who scored 40 points or less on its credit-scoring system, 35 percent (or a customers who scored 40 points or less on its credit-scoring system, 35 percent (or a total of 10,615 credit customers) turned out to
total of 10,615 credit customers) turned out to be delinquent credits, resulting in totalbe delinquent credits, resulting in total loss. This group of bad credit card loans averaged $2,700 in
loss. This group of bad credit card loans averaged $2,700 in size per customer account.size per customer account.
Examining its successful credit accounts Jamestown finds that 12 percent of its good Examining its successful credit accounts Jamestown finds that 12 percent of its good customers (or a total of 3,640
customers (or a total of 3,640 customers) scored 40 points or less on customers) scored 40 points or less on the bank’s scoringthe bank’s scoring system. These low-scoring but good accounts generated about $1,700 in revenues system. These low-scoring but good accounts generated about $1,700 in revenues each. If Jamestown’s credit card division follows the decision rule of granting credit each. If Jamestown’s credit card division follows the decision rule of granting credit cards only to those customers scoring more than
cards only to those customers scoring more than 40 points and future credit accounts40 points and future credit accounts generate about the same average revenues and losses, about how much can the bank generate about the same average revenues and losses, about how much can the bank expect to save in net losses?
expect to save in net losses?
8.
8. The Lathrop family The Lathrop family needs some extra funds tneeds some extra funds to put their two childro put their two children through collegeen through college starting this coming fall and to buy a new computer system for a part-time home starting this coming fall and to buy a new computer system for a part-time home busi-ness. They are not sure of
ness. They are not sure of the current market value of their home, though comparablethe current market value of their home, though comparable four-bedroom homes are selling for about $410,000 in the neighborhood. The Van four-bedroom homes are selling for about $410,000 in the neighborhood. The Van Nuys Federal
Nuys Federal and Merchants and Merchants Savings Association Savings Association will loan will loan 80 percent 80 percent of the of the prop- prop-erty’s appraised value, but the Lathrops still owe $242,000 on their home mortgage erty’s appraised value, but the Lathrops still owe $242,000 on their home mortgage and a home improvement loan combined. What maximum amount of
and a home improvement loan combined. What maximum amount of credit is avail-credit is avail-able to this family should it
able to this family should it elect to seek a home elect to seek a home equity credit line?equity credit line?
9.
9. San Carlos Bank and TSan Carlos Bank and Trust Company uses a rust Company uses a credit-scoring system to evaluate credit-scoring system to evaluate mostmost consumer loans that amount to more than $2,500. The
consumer loans that amount to more than $2,500. The key factors used in its scoringkey factors used in its scoring system are as follows:
system are as follows:
Borrower’
Borrower’s length of s length of employment in his/heremployment in his/her present job:
Borrower’s length of s length of time at time at current address:current address:
M
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The Mulvaney family has two wage earners who have held their present jobs for The Mulvaney family has two wage earners who have held their present jobs for 18 months. They have lived at their current street address for one year, where they 18 months. They have lived at their current street address for one year, where they rent on a six-month lease. Their credit report is excellent but shows only
rent on a six-month lease. Their credit report is excellent but shows only one previousone previous charge. However, they are actively using two credit cards right now to help with charge. However, they are actively using two credit cards right now to help with household expenses. Yesterday
household expenses. Yesterday, they opened , they opened an account at San account at San Carlos and depositedan Carlos and deposited
$250. The Mulvaneys have asked for a $4,500 loan to purchase a used car and some
$250. The Mulvaneys have asked for a $4,500 loan to purchase a used car and some furniture. The bank has a cutoff score in its scoring system of 30 points. Would you furniture. The bank has a cutoff score in its scoring system of 30 points. Would you make this loan for two
make this loan for two years, as they have requested? Are there factors not years, as they have requested? Are there factors not included inincluded in the scoring system that you would like
the scoring system that you would like to know more about? Please explain.to know more about? Please explain.
10.
10. Ray VRay Volkers wants to start his own businesolkers wants to start his own business. He has asked his bank for a $25,000 new-s. He has asked his bank for a $25,000 new-venture loan. The bank has a
venture loan. The bank has a policy of makingpolicy of makingdiscount-ratediscount-rateloans in these cases if theloans in these cases if the
venture loan. The bank has a policy of makingpolicy of makingdiscount-ratediscount-rateloans in these cases if theloans in these cases if the