FAQs About Consumer Lending

Consumer Lending FAQs

What is consumer lending?

Consumer lending involves providing credit to individuals primarily for personal, family, or household purposes. Examples include personal loans, auto loans, credit cards, home equity products, and certain residential mortgage loans.

What types of consumer loans do banks offer?

Common consumer lending products include:

• Personal loans
• Auto loans
• Credit cards
• Home equity loans
• Home equity lines of credit (HELOCs)
• Residential mortgage loans
• Secured and unsecured lines of credit

How does a bank evaluate a consumer loan application?

Banks generally evaluate factors such as income, employment, credit history, existing obligations, repayment capacity, collateral when applicable, and other information permitted under applicable laws and bank policies.

What is underwriting?

Underwriting is the process of evaluating a loan application to determine whether the applicant meets the bank's credit standards and whether the proposed loan presents an acceptable level of risk.

What is creditworthiness?

Creditworthiness refers to an applicant's ability and willingness to repay credit obligations. Banks may consider credit history, income, debt obligations, payment history, and other permitted factors.

What is a credit score?

A credit score is a numerical representation derived from information in a consumer's credit history. Banks may use credit scores as one factor in evaluating credit applications.

What is the debt-to-income ratio (DTI)?

DTI compares a borrower's recurring debt obligations with income. Banks may use DTI as one measure of repayment capacity, subject to the requirements and underwriting standards applicable to the particular loan.

What is collateral?

Collateral is property pledged to secure a loan. For example, an auto loan may be secured by the vehicle, while certain home equity products may be secured by a borrower's home.

What is an unsecured consumer loan?

An unsecured loan does not require specific collateral to secure the debt. Approval and pricing may therefore depend more heavily on the borrower's creditworthiness and repayment capacity.

What is a secured consumer loan?

A secured loan is backed by collateral. If the borrower defaults, the lender may have rights to the collateral under the loan agreement and applicable law.

What information can a bank request from a consumer loan applicant?

Depending on the product and applicable requirements, a bank may request information about identity, income, employment, assets, debts, credit history, housing expenses, and other information relevant to the credit decision.

What is the Equal Credit Opportunity Act (ECOA)?

ECOA prohibits discrimination in credit transactions based on specified prohibited characteristics and establishes requirements concerning credit applications and adverse actions.

What is fair lending?

Fair lending means that covered credit decisions and related practices are conducted consistently and without unlawful discrimination. Banks should maintain appropriate policies, controls, monitoring, and training to support fair lending compliance.

What is an adverse action notice?

An adverse action notice is a notice provided when a credit application or existing credit relationship receives an adverse decision under applicable requirements. The notice generally includes information about the decision and, when required, the reasons or information concerning the reasons.

What is the Truth in Lending Act (TILA)?

TILA establishes disclosure and other requirements for covered consumer credit transactions. It is designed to help consumers understand and compare the cost and terms of credit.

What is Regulation Z?

Regulation Z implements TILA and establishes requirements concerning disclosures, advertising, billing, and other aspects of covered consumer credit transactions.

What is the Fair Credit Reporting Act (FCRA)?

FCRA regulates the use and sharing of consumer report information and establishes requirements for entities that obtain, use, or furnish consumer information.

Can a bank deny a consumer loan application?

A bank may deny an application when the applicant does not meet applicable credit standards or for another legally permissible reason. Credit decisions must comply with applicable fair lending and consumer protection requirements.

Can a bank change the interest rate offered to a customer?

Interest rates may vary based on product terms, credit risk, market conditions, applicable pricing policies, and other permitted factors. Banks must comply with applicable disclosure and fair lending requirements.

What is loan servicing?

Loan servicing includes activities performed after a loan is originated, such as processing payments, maintaining account information, managing escrow when applicable, responding to borrower inquiries, and handling other ongoing account administration.

What happens when a borrower misses a payment?

The bank should follow its established servicing and delinquency procedures. Depending on the circumstances, the borrower may receive notices, incur permitted fees, or enter a collection or loss-mitigation process.

What is a loan modification?

A loan modification changes one or more terms of an existing loan, such as the interest rate, payment amount, maturity, or other contractual terms. Eligibility and requirements vary by product and circumstances.

What is a consumer loan workout?

A workout is an arrangement intended to address a borrower experiencing financial difficulty. Depending on the situation, it may involve modified payment terms, restructuring, or another solution permitted by the bank's policies and applicable requirements.

How should consumer complaints be handled?

Complaints should be documented, investigated, and resolved or escalated according to bank procedures. Complaints involving potential discrimination, regulatory violations, servicing errors, fraud, or other significant concerns should receive appropriate escalation.

What should employees do if they identify a potential lending compliance issue?

Employees should follow established escalation procedures and promptly notify the appropriate lending, compliance, legal, or risk personnel. Employees should not attempt to conceal or bypass a potential compliance issue.

Why is documentation important in consumer lending?

Accurate documentation supports consistent credit decisions, demonstrates compliance with applicable requirements, provides an audit trail, and helps the bank respond to customer inquiries, audits, examinations, and disputes.

What should employees do if they are unsure about a consumer lending requirement?

Employees should consult the applicable lending policy and contact Lending, Compliance, Legal, or another designated subject-matter expert before proceeding when necessary. They should not rely on assumptions when a regulatory or policy question remains unresolved.