Consumer Credit in the American Thesis

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Closing the loan is also known as firm commitment, and involves the completion of all key paperwork within a designated time. A closing date is set, and the closing costs are established. When the client pays the costs and completes the paperwork, the loan is closed.

The next step is to service the loan. Servicing refers to the management of the payments. The loan creates an obligation on the part of the borrower to make payments as specified in the agreement. The role of the bank is to ensure that those payments are received. Servicing may be contracted out to a secondary party. In the U.S. that might be Fannie Mae or Freddie Mac, who provide a secondary market for mortgages. In a servicing arrangement, the bank would collect the payments and remit most of this money to the secondary market investor. The bank would keep a portion of the payment for itself. Occasionally the bank may keep and service the mortgage itself (AustinHomeLoan.com, 2009). The servicing function involves the management of the incoming payments, except in the instance of default or arrears. At that point, the firm responsible for servicing the loan must act in order to protect the investment.

The entire lending process is a risk-management activity. The interest paid should reflect the risk level of the debt obligation. Therefore, banks and other lenders pay specific attention to the risk evaluation process. The prospective borrower is investigated intently, according to the principles of the 5 C's. The bank evaluates a variety of factors. These include the credit score and current income level. The prospective borrower's ability to make a down payment is taken into consideration as well.

The character portion of the evaluation is critical.

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Having sufficient funds to make payment is important, but more important is the will of the borrower to make payment. The character component therefore not only includes the credit score but an interview as well. The lender sits down with the borrower(s) and attempts to determine the degree to which they are committed to the loan. Of special importance are the views that the borrower has with respect to the concept of credit.

Banks have long been the dominant players in the consumer credit business. As they face increasing competition from a variety of other financial intermediaries, it is more important than ever before that banks understand their role and the best practices with regards to consumer lending. Banks are strictly bound in terms of their lending practices by the FDIC. However, they are still able to offer a wide range of products. Bank staff needs to be sufficiently knowledge about each product in order to properly market their solutions. The credit policy of each bank is impossible to gauge as it is always changing. Indeed, there are instances where bank credit policy does not reflect ration decision-making on the part of bank managers.

That said, there is still a process by which banks determine the creditworthiness of the borrower. This affects not only the decision to give a loan but the amount of credit to be extended and what the price (interest rate) should be for that credit. The process involves checking income, credit scores and other quantitative data. There are also qualitative data that can be used, especially the interview process, which is heavily focused on the creditworthiness of the customer rather than the needs of the firm.

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