1.

Residential loans are credit to finance the purchase of a home or fund improvements on a private
residence. Nonresidential loans to individuals and families include installment loans and non-
installment loans. Short-term to medium-term loans, repayable in two or more consecutive payments
(usually monthly or quarterly), are known as installment loans. Installment loans are paid off gradually
over time whereas short-term loans individuals and families draw upon for immediate cash needs that
are repayable in a lump sum at the end of the loan are known as non-installment loans.

Installment loans usually finance large-ticket purchases, such as automobiles or household furniture,
whereas non-installment loans usually are directed at current living expenses. Installment loans help
the bank recover funds that can be re-loaned more quickly but they generally require a more intensive
credit investigation by the bank. Bank credit cards offer convenience and a revolving line of credit
that the customer can access whenever the need arises.

2. Interest rates on consumer loans are typically higher than on most other kinds of loans since they are
among the most costly and most risky to make per dollar of loanable funds. Consumer loans also
tend to be cyclically sensitive. Moreover, consumers tend to be relatively unresponsive to changes in
interest rates when they go out and borrow money.

3. A loan officer should examine character and purpose, income levels, employment and residential
stability, and pyramiding of debt when evaluating a consumer loan application

4. Credit-scoring systems use statistical techniques (usually multiple discriminant analysis) to classify
borrowers based on selected characteristics of each borrower as to whether they are likely or unlikely
to repay the loan they have requested. Credit-scoring systems are usually based on discriminant
models or related techniques, such as logit or probit analysis or neural networks, in which several
variables are used jointly to establish a numerical score for each credit applicant. If the applicants
score exceeds a critical cutoff level, he or she is likely to be approved for credit in the absence of
other damaging information. If the applicants score falls below the cutoff level, credit is likely to be
denied in the absence of mitigating factors.

5. The credit scoring method has the advantage of being objective, requiring less loan officer judgment,
possibly lowering loan losses, and lowering operating costs when a large volume of consumer loans
is processed.

6. Credit scoring systems do not take into account motivational factors or individual differences and may
become outdated unless frequently retested for statistical accuracy

7. The Equal Credit Opportunity Act outlaws discrimination in lending based on race, age, sex, religious
preference, receipt of public assistance, and similar factors. The Community Reinvestment Act
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. Predatory
lending is an abusive practice among some lenders that consists of making loans to weak borrowers
and then charging them excessive fees and interest rates, thereby increasing the risk of default. In
1994 Congress passed the Home Ownership and Equity Protection Act which was aimed to protect
home owners from loan agreements they could not afford. Loans whose annual percentage rates
(APR) is 10 percentage points or more above the yield on comparable maturity U.S. Treasury
securities and closing fees above 8 percent of the loan amount are defined as abusive and
consumers have 6 days in which to decide whether to proceed with the loan. Credit granting
institutions must fully disclose all fees and risks. If these are not disclosed, then the borrower has up
to 3 years to rescind the transaction and lenders might be liable for all damages that occur.

8. 1) What is the borrower's monthly income and monthly debt repayments? The bank must be assured
there is adequate cushion to comfortably absorb the home loan repayments.

2) Does the borrower have good prospects for continued employment? Because the loan is long term
the bank must have reasonable assurance the borrower can service a long-term loan.

3) Is the current market value of the home to be purchased sufficiently larger than the amount of the
loan to give the bank adequate cushion if local real estate values decline

9. Home-equity loans use the residual market value of a home (over and above the amount of any
outstanding liens against the home) as a borrowing base. Financial institutions often lend a fraction of
this residual value, which subjects them to the risk that the market value of a home will fall,
significantly eroding the cushion of protection for a loan of this type. If the customer fails to make any
promised loan payments, the bank or other lender could foreclose and take over the home to sell it
and recover at least a portion of loaned funds.