7/8/2015. Entering The World Of Consumer Lending. Welcome TTS 1. Entering The World Of Consumer Lending Part 1. Presented For: TTS 2

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1 Entering The World Of Consumer Lending Welcome TTS 1 Entering The World Of Consumer Lending Part 1 Presented For: TTS 2 1

2 Entering The World Of Consumer Lending Part 1 Presented By: John Baptista Jr. TTS 3 Entering The World Of Consumer Lending This is part 1 of a 3 part series. TTS 4 2

3 My Background Over Three Decades Associated With The Financial Industry And Presenting Seminars Former Bank Operations Officer, Branch Manager, Business Development Officer, Commercial and Consumer Lending Officer, Corporate Trainer, and Current Business Owner TTS 5 Our Journey It is your program not mine. Please feel free to ask questions! TTS 6 3

4 Don't Be Afraid To Ask Questions "He who asks a question may remain a fool for five minutes. He who does not ask remains a fool forever. Unknown TTS 7 Teaching Style There are two types of knowledge: The Text Book And The Real World TTS 8 4

5 Teaching Style I will focus on the real world! TTS 9 Housekeeping Remember to turn off your cell phone and fight off any distractions. TTS 10 5

6 Format This is an interactive program. During the sessions, participants will be presented with various examples and given time to do various calculations. TTS 11 Your first lesson. When speaking with customers, KEEP IT SIMPLE! Do not use a $25.00 word, when a.25 word will work. TTS 12 6

7 Example Do you know what this means? ABC Bank offers a consumer loan sans fees. TTS 13 Example How about this? ABC Bank offers a consumer loan without fees. TTS 14 7

8 See the difference! Not everyone understands the word sans, but everyone understands the word without! TTS 15 If You Have Questions.. Contact me at: TTS 16 8

9 More Than Nuts & Bolts Whatever the product or service, there is more than the nuts and bolts. This program also covers the importance of how to apply this knowledge. TTS 17 Having A Tool Vs. Using A Tool Being given a tool and not knowing how to use it does no good. It is important to apply the information that will be covered to become a qualified lender. TTS 18 9

10 As for being PC, political correct What is popular is not always right, and what is right is not always popular. Unknown I will continue to defy the PC police Dr. Ben Carson TTS 19 Offend - Sensitive of fend /әˈfend/verb verb: offend; 3rd person present: offends; past tense: offended; past participle: offended; gerund or present participle: offending 1. cause to feel upset, annoyed, or resentful. TTS 20 10

11 Your Buttons No one can offend me without my consent. TTS 21 Your Buttons Explaining to a customer that their loan request has been declined, can stir up emotions. One cannot control or change someone else, they can only control themselves. TTS 22 11

12 The information provided in this program is general in nature. It is one individual s opinions, research and experiences. It is not designed or intended to be used as procedures or policies for an organizations manual/s. The intent is to educate individuals and to get them thinking regarding a particular subject. No legal advice is provided nor is any interpretation of the law intended. This material does not override any existing policies and/or procedures for an organization. All organizations need to refer to their own legal counsel for specifics for their organization as this material relates to both the participant and the organization. Participants agree to hold harmless the organization and presenter of this program. TTS 23 Action Plan Your action plan! Participants only retain 10% to 20% of what is covered. Page 2 Is For Your 10% - 20% TTS 24 12

13 Entering The World Of Consumer Lending Part 1 Topics The Philosophy Of Consumer Lending Why A Bank Offers Consumer Loans The Role Of Regulations On Consumer Lending The Effect Of Compliance On The Consumer Lending Market The Terminology Of Consumer Lending The Lending Mathematics In Making A Solid Loan Decision Ethics And The Role It Plays In Lending Understanding The Different Types Of Consumer Loan Products Risk Based Lending And How Loan Products Are Priced Customers Preference Usually Differs From That Of The Bank Page 3 of your handouts TTS 25 IBCO 25 My Objectives At the end of this program participants will have a solid foundation on consumer lending and working with customers in the consumer loan process. TTS 26 13

14 To Get You Thinking! "There is no conversation more boring than the one where everybody agrees." Michael de Montaigne TTS 27 Thinkers TTS 28 14

15 To Get Us Going TTS 29 To Get Us Going Using 4 continuous straight lines and without lifting your pen or pencil off the paper, connect all 9 dots. TTS 30 15

16 To Get Us Going Think outside the box! TTS 31 To Get Us Going TTS 32 16

17 To Get Us Going TTS 33 To Get Us Going TTS 34 17

18 To Get Us Going TTS 35 To Get Us Going TTS 36 18

19 Another Thinker Using 1 line make this a 6. IX TTS 37 Another Thinker The Answer TTS 38 19

20 SIX TTS 39 Like Consumer Lending As with the thinkers, consumer lending at times, requires one to think outside the box. At other times the answer is right in front of us. TTS 40 20

21 The Goal Some lenders look to determine how to decline a loan request. A better option, is to look for ways to make the loan. TTS 41 Benefits Of Consumer Credit What Are The benefits of consumer credit? They are: TTS 42 21

22 Benefits Of Consumer Credit They are: Buy Large Ticket Items Smaller Payment Helps The Economy Helps With Employment Income Source For The Bank TTS 43 Why Does A Bank Offer Consumer Loans? There is one primary reason a bank offers loans in general. It is to make money! TTS 44 22

23 Money And Credit Why do we need money? Transaction Motive Precautionary Motive Speculative Motive TTS 45 Demand For Money What influences the supply of money? Demand For Money Cost of Money TTS 46 23

24 Demand For Money What influences the supply of money? Demand For Money Cost of Money TTS 47 Pricing Loans With lending, the greater the risk, the higher the cost. Which way would the graph go? Risk Cost Loan Rate TTS 48 24

25 The graph would go Pricing Loans Risk Cost Loan Rate TTS 49 How Financial Institutions Create Money In some ways it is like magic. In others, it is seen as a negative. Either way one looks at it, the process is the same. Let s look at an example. Financial intermediaries are institutions which meet the specialized financial needs of both savers and borrowers. Saving Deficit Units Borrowers Financial Intermediaries Units Savings Surplus Units Lenders TTS 50 25

26 Regulations Of Lending Regulations focus on three areas: Regulations Against Discrimination Regulations Requiring Disclosure Of Information Regulations Prohibiting Unfair Practices TTS 51 Regulations Of Lending Truth In Lending Act Reg Z Requires disclosure of credit terms, including finance charges, service charges, and payment schedules, and sets procedures for resolving billing errors. TTS 52 26

27 APR Calculation TTS 53 Fair Credit Reporting Act Regulations Of Lending A 1971 law that gives an individual the right to examine his or her file at a credit-reporting agency and establishes procedures for resolution of any errors in that file. The Fair Credit Reporting Act (FCRA) is designed to promote accuracy and ensure the privacy of the information used in consumer reports. TTS 54 27

28 Regulations Of Lending Fair Credit Reporting Act - FACT Act An amendment to the 1971 law that gives an individual the right to examine his or her file at a credit-reporting agency and establishes procedures for resolution of any errors in that file. The act allows consumers to request and obtain a free credit report once every twelve months from each of the three nationwide consumer credit reporting companies (Equifax, Experian and TransUnion). TTS 55 Regulations Of Lending Fair Credit Reporting Act - FACT Act Risk Based Lending - Effective January 1, 2011 Under the new section 615(h) of FCRA, a risk-based pricing notice must be provided when a consumer report is used in connection with providing credit with materially less favorable terms than the most favorable terms available to a substantial proportion of customers. In a transaction involving more than one consumer, a riskbased pricing notice must be provided to each consumer. TTS 56 28

29 Regulations Of Lending Here are a couple of great reference sources. TTS 57 Compliance In the year 2015, with the recent legislation affecting compliance issues, most bankers will tell you it has handcuffed them. TTS 58 29

30 Key Concepts And Terminology There are multiple concepts and terms associated with consumer lending. Some of them are: TTS 59 Terminology Is It A Need vs. Is It A Want Debt Ratio Spendable Income Living Within One s Means A Key Rule! TTS 60 30

31 Need vs. Want Need Want TTS 61 TTS 62 31

32 TTS 63 Debt Ratio & Spendable Income TTS 64 32

33 Debt Ratio Outgo Income Outgo Divided By Income TTS 65 Debt Ratio Outgo/Income Debt-to-income ratio - A measure of creditworthiness computed by dividing the dollar amount of debts by total income. TTS 66 33

34 Debt Ratio - Example Income $3,500 Rent $800 Car Payment $250 Visa $50 Macy s $40 What is the debt ratio? TTS 67 Income $3,500 Rent $800 Car Payment $250 Visa $50 Macy s $40 Total Payments $1,140 TTS 68 34

35 Total $1,140/$3,500 = 33% The debt ratio is 33%. TTS 69 Debt Ratio The magic number 40% TTS 70 35

36 The second calculation that must be done is called a spendable income calculation. TTS 71 Spendable Income Income Fixed Expenses = Spendable Income TTS 72 36

37 Spendable Income Equals $3,500 - $1,140 = $2,360 TTS 73 Spendable Income Equals $3,500 - $1,140 = $2,360 What a lender must now do is determine if the borrower/s can live off the spendable income amount. TTS 74 37

38 Question Can you do only one of the calculations? TTS 75 Another Example Income $35,000 Rent $8,000 Car Payment $2,500 Visa $500 Macy s $400 Total Payments $11,400 TTS 76 38

39 What Is The Debt Ratio? Income $35,000 Rent $8,000 Car Payment $2,500 Visa $500 Macy s $400 Total Payments $11,400 TTS 77 Total $11,400/$35,000 = 33% The debt ratio is the same! This is why both calculations must be done. One cannot just do a debt ratio calculation. TTS 78 39

40 Question Can you do only one of the calculations? NO! TTS 79 Let s Do Some Examples In the following examples calculate the Debt Ratio and Spendable income. TTS 80 40

41 Example 1 Monthly Gross Income: $2, Rent/Mortgage $ Sears $30.00 Balance $ Capital 1 $50.00 Balance $ Other Loan $ Balance $5, TTS 81 Example 1 Monthly Gross Income: $2, Rent/Mortgage $ Sears $30.00 Capital 1 $50.00 Other Loan $ $ TTS 82 41

42 Example 1 Debt Ratio $980.00/$2, = 45% Spendable Income = $2, $ = $1, TTS 83 Example 2 Monthly Gross Income: $3, Rent/Mortgage $ Capital 1 Visa $30.00 Balance $ Kohl s $20.00 Balance $ TTS 84 42

43 Example 2 Monthly Gross Income: $3, Rent/Mortgage $ Capital 1 Visa $30.00 Kohl s $20.00 $ TTS 85 Example 2 Debt Ratio $950.00/$3, = 32% Spendable Income = $3, $ = $2, TTS 86 43

44 Example 3 Monthly Gross Income $1, Monthly Gross Income $3, Rent/Mortgage $1, Car Loan $30.00 Balance $5, Macy s $20.00 Balance $ Chase $ Balance $6, Target $10.00 Balance $ Personal Loan $ Balance 10, TTS 87 Example 3 Monthly Gross Income $1, Monthly Gross Income $3, Rent/Mortgage $1, $4, Car Loan $30.00 Macy s $20.00 Chase $ Target $10.00 Personal Loan $ $1, TTS 88 44

45 Example 3 Debt Ratio $1,560.00/$4, = 33% Spendable Income = $4, $1,560 = $3, TTS 89 What else must be considered? In our calculations, what have we not considered? TTS 90 45

46 What else must be considered? We must include the proposed loan payment! That will increase the debt ratio and reduce spendable Income. TTS 91 A Key Question What amount do we use when figuring the payment on a credit card? TTS 92 46

47 A Key Question Do You Use, The Payment Listed On The Application? The Minimum Payment On The Full Credit Limit The Minimum Payment On The Outstanding Balance? TTS 93 A Key Question - Example Capital 1 Visa $30.00 Balance $ Limit $2,000 Kohl s $20.00 Balance $ For Capital 1 would we use $30.00, $24.00 (4% of the balance), or $80.00 (4% of the limit). TTS 94 47

48 A Key Question - Example Capital 1 Visa $30.00 Balance $ Limit $2,000 Kohl s $20.00 Balance $ For Capital 1 would we use $30.00, $24.00, 4% of the balance, or $80.00, 4% of the limit. The same would apply for the Kohl s credit card. TTS 95 A Key Question - Example Capital 1 Visa $30.00 Balance $ Limit $2,000 Kohl s $20.00 Balance $ For Capital 1 would we use $30.00, $24.00 (4% of the balance), or $80.00 (4% of the limit). The same would apply for the Kohl s credit card. Which would be most conservative? TTS 96 48

49 A Key Question - Example Capital 1 Visa $30.00 Balance $ Limit $2,000 Kohl s $20.00 Balance $ For Capital 1 would we use $30.00, $24.00 (4% of the balance), or $80.00 (4% of the limit). The same would apply for the Kohl s credit card. Which would be most conservative? Using the minimum on the limit of the account. TTS 97 Forget The Joneses The Joneses Who says the Joneses are correct? TTS 98 49

50 Forget The Joneses The Joneses Who says the Joneses are correct? It is important individuals live within their means. TTS 99 Guidelines Debt Ratio = 40% Rent Mortgage 25% to 33% Equity = 20% of the asset TTS

51 One Key Rule The one key rule for financial success! TTS 101 One Key Rule Over estimate expenses under estimate income. You will never go wrong. TTS

52 TTS 103 Note Rate TTS

53 Lending Mathematics Annual Percentage Rate (APR) Simple Interest Rate Fixed Rate Variable Rate TTS 105 Lending Mathematics Annual Percentage Rate (APR) A calculation that includes any fees, and annualizes the effect rate. TTS

54 Lending Mathematics Simple Interest Rate It simply charges a customer for the time they borrow the money. It uses a daily factor. Amount x Rate / 365 = Daily Factor $1,000 x.10 / 365 =.27 per day TTS 107 Lending Mathematics Fixed Rate The rate does not change over the term of the loan. TTS

55 Lending Mathematics Variable Rate The rate can change over the term of the loan. TTS 109 Variable Rate Questions to be prepared to answer include: What Is The Ceiling? What Is The Floor? How Frequently Can The Rate Change? What Amount Can The Rate Change By? TTS

56 Understanding Basic Real Estate Loan Mathematics TTS 111 Basic Real Estate Loan Mathematics LTV = Loan To Value 80% historical key $100,000 * 80% = $80,000 Upside Down Refers To Owing More Than The Value Owe $80,000 Value $70,000 TTS

57 Lending Ethics TTS 113 Lending Ethics If we surveyed 100 people, what would they say is the most important thing in whether or not they were to borrow money? TTS

58 Loan Payment Variables There are three variables in determining loan payments. RATE AMOUNT TIME TTS 115 Ethics And The Role It Plays In Lending Rate Amount Time Payment TTS

59 Ethics And The Role It Plays In Lending Rate Amount Time Payment COST TTS 117 Loan Products Loan products can be classified into two primary categories. They are: Closed-end Loans Open-end Loans TTS

60 Closed End Loans Characteristics of closed end loans include: Predetermined Maturity Predetermined Monthly Payment Specific Purpose Specific Collateral If Secured TTS 119 Open End Loans Characteristics of closed end loans include: No Maturity No Set Payment No Specific Purpose No Specific Collateral Unless Secured TTS

61 Other Lending Products Two other lending related products are: Credit Life Insurance Disability Insurance TTS 121 Lending Mathematics Risk Based Lending Is charging an interest rate based upon the borrower's credit history. TTS

62 Risk Based Lending Rewards borrowers for paying their bills! TTS 123 Pricing Loans With risk based lending, the greater the risk the higher the cost. Risk Cost Loan Rate TTS

63 Customer s Preference Customer s preferences usually differs from that of the bank. Let s take a look at the preferences of both the customer and bank, and how to handle the commonly-asked questions. Open-end vs. Closed-end Fixed vs. Variable Payment vs. Cost Secured vs. Unsecured TTS 125 Customer s Preference Circle the factors most important to the customer and put a box around what is most important to the bank. Open-end vs. Closed-end Fixed vs. Variable Payment vs. Cost Secured vs. Unsecured TTS

64 Customer s Preference Customer s preferences usually differs from that of the bank. Let s take a look at the preferences of both the customer and bank, and how to handle the commonly-asked questions. Open-end vs. Closed-end Fixed vs. Variable Payment vs. Cost Secured vs. Unsecured TTS 127 Bank s Preference The bank s preferences are the opposite of the customer s. What is the reason that the preferences differ between that of the customer and the bank? Open-end vs. Closed-end Fixed vs. Variable Payment vs. Cost Secured vs. Unsecured TTS

65 If You Have Questions.. Contact me at: TTS 129 Kyle Bennett TTS Upcoming Webinars July 15 th - Outsourced Third Party Risk Management Vendor Management July 16 th - Lending to Municipalities July 16 th - 10 Steps to Pass Your Next Compliance & Fair Lending Exam July 21st - Entering the World of Consumer Lending Part 2 July 22 nd - Audit Report Writing July 23 rd - Handling Checks After the Death of the Account Holder July 23 rd Compliance Perspectives: A Monthly Update July 24 th BSA Series: Money Laundering the New Way Virtual Currency, Prepaid, Marijuana TTS