Here are the steps to calculate the debt burden ratio: 1. Monthly income before tax: 1500 JD 2. Estimated tax: 20% of 1500 = 300 JD 3. Monthly net income: 1500 - 300 = 1200 JD 4. Monthly debt payments: - Credit card 1: 50 JD - Credit card 2: 75 JD - Car loan: 150 JD - Total monthly debt payments: 50 + 75 + 150 = 275 JD 5. Debt burden ratio = Total monthly debt payments / Monthly net income = 275 / 1200 = 23% Therefore, the debt burden ratio for this applicant is 23%.

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Introduction to Consumer Lending
By SalimSawalha

2. +
Consumer Lending
Course Objective
 Consumer Lending Term Definitions
 Gain an Understanding of How Banks Make Consumer
Lending Decisions Based on the Five (5) C’s of Credit
 Learn about Credit Investigation and Scoring
 Understand the Consumer Lending Process
 Learn about Consumer Loan Products: Credit Card, Personal,
Housing, & Auto
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Consumer Lending
Definition
Consumer lending (also called retail lending) refers to making a
wide range of loans to individuals for consumable items such as
a car, house, or furniture.
It is different than loans awarded to a business which is generally
referred to as commercial lending.
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Consumer Lending
Definition
Consumer loans include:
Home loans
Auto loans
Personal loans
Credit Cards
Other niche consumer-targeted loan products
Many consumer-loan products are not secured by property or
assets.
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Consumer Lending
Consumer vs. Corporate
The credit facilities extended to the corporate sector in Jordan
formed the bulk of the total credit facilities extended reaching
81.7% at the end of the first half of 2010 compared to 78.4% at
the end of 2009.
5
1200
1800
2500
3300
3100
3500
2700
2800
0
2000
4000
6000
8000
10000
12000
14000
16000
2003 2004 2005 2006 2007 2008 2009 May-06
Consumer Lending Corporate Lending
JD in Millions

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Consumer Lending
Type of loans
There are primarily two types of loans:
Termloans: A loan which is repaid through regular periodic
payments (monthly, quarterly, semi annually or annually), over a
period of one to 30 years.
Revolving: Arrangement which allows for the loan amount to
be withdrawn, repaid, and redrawn again in any manner and
any number of times, until the arrangement expires. Credit
card loans and overdrafts are revolving loans.
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Consumer Lending
Type of loans
There are primarily two types of loans:
Secured Loans: A loan which is a loan in which the borrower
pledges some asset (e.g. a car or property) as collateral for the
loan, which then becomes a secured debt owed to the creditor
who gives the loan.
Unsecured Loan: is a loan that is not backed by collateral to
ensure repayment
Can you think of an example for an unsecured loan?
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Consumer Lending
Interest Rate Definition
An interest rate is the price a borrower pays for the use of money
they borrow from a lender. It is typically noted on an annual
basis.
When the borrower is a low risk party, they will usually be
charged a low interest rate; if the borrower is considered high
risk, the interest rate that they are charged will be higher.
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Consumer Lending
Types of Interest Rates
There are primarily two types of interest rates when it comes to
auto loans:
Reducing Rate: an interest rate paid on the balance of the
loan.
Flat Rate: an interest rate calculated on the basis of the stated
initial principal amount of the loan irrespective of the payment
plan or the balance of the loan. This rate is often used with auto
loans.
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Credit Scoring
5 Cs of Lending
Most lenders use these five factors when considering a loan:
① Character: stability, credit history
② Capacity: ability to repay the loan, debt ratio, income
③ Capital: financial position; assets, liabilities, net worth and equity.
④ Collateral: The security offered to the lender in case of default or failure
to repay the loan
⑤ Conditions: changes in economy, competition, changes in bank’s goals
and objectives
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Consumer Lending
Goals for the bank
The bank’s consumer loan application process has four primary
objectives:
1. Generate a flow of consumer applications to meet the bank’s
consumer loan objectives.
2. Obtain enough information to allow the bank to make the
best possible loan decision.
3. Ensure compliance with regulations.
4. Ensure a timely response to the consumer’s request.
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Consumer Lending
Loan Process
12
Step 1
Complete Loan Application
Step 4
Closing/Funding
Step 2
Processing
Step 3
Underwriting

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Consumer Lending
Loan Process
13
Step 2
Processing
Gather, verify
information
Order/Check
Appraisal
Order/check
Credit Report
Blacklist

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Credit Investigation
Credit Report Central
14
The Central Bank of Jordan requires that each bank provides it
with a list of customers with credit facilities of 20K and above.
This information is compiled from all banks and then shared
electronically amongst them so that a bank can assess risk
and make sound credit decisions taking into account the
aggregate exposure of the customer.
The information can be accessed at any time through
designated users in the bank.

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Credit Investigation
CPV
Contact Point Verification is the process of verifying the
authenticity of the client’s information mentioned in the loan
application such as business address, employer, or salary by
carrying out physical inspection or through telephone call.
CPV is usually done by an admin from the credit department. It is
comparable to the “site visit” in commercial lending.
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Credit Investigation
Loan Process
16
There are five basic steps in the credit investigation process:
1. Receive application and review it for information that might
warrant immediate rejection
2. Check the bank’s credit files to determine if the application
has current or closed account with the bank, review
account history
3. Obtain a report from a credit-reporting agency:
blacklist, central report
4. Contact employers and other creditors for references
directly
5. Verify collateral value of the item(s) securing the loan

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Consumer Lending
Loan Process
17
Step 3
Underwriting
Make a Credit
Decision
Assign
Conditions
Analyze
Credit
Conditional
Approval
DeclineApprove

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Consumer Lending
Loan Process
18
Step 4
Closing/Funding
Order Loan
Docs/
Contract
Docs Signed
& Verified
Final
Conditions Met
Loan Funded
Title
Recorded

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Credit Scoring
Definition
A credit score is a numerical expression based on a statistical
analysis of a person's credit files, to represent the
creditworthiness of that person. A credit score is primarily based
on credit report information typically sourced from credit bureaus.
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Credit Scoring
Why do banks use it?
Lenders, such as banks, use credit scores to evaluate the
potential risk posed by lending money to consumers and to
mitigate losses due to bad debt.
Lenders use credit scores to determine who qualifies for a
loan, at what interest rate, and what credit limits. Lenders also
use credit scores to determine which customers are likely to
bring in the most revenue.
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Credit Scoring
in the US
Although there are several scoring methods, most US lenders
use the FICO method from Fair Isaac Corporation. Each of the
three major credit bureaus (Experian, Equifax and TransUnion)
worked with Fair Isaac in the early 1980s to come up with the
scoring method.
The exact formula for calculating the score is proprietary
information and owned by Fair Isaac.
21
300 850720+
Very Good

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Credit Scoring
Factors affecting credit score
Below are the most important factors affecting credit score:
 Payment history
 Outstanding debt (debt-to-credit-limit ratio)
 Length of credit history
 New credit inquiries
 Type of credit you have (revolving, installment loans)
 Demographic information; age, marital status, number of dependants
This information is compared to the credit performance of other
consumers with similar histories and profiles.
Some lenders also have their own scoring methods, which may
include information such as income or length of employment.
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Credit Cards
A credit card is a small plastic card issued to users as a system
of payment. It allows its holder to buy goods and services based
on the holder’s promise to pay for these goods and services.
A credit card allows the consumers a continuing balance of
debt, subject to interest being charged.
Most credit cards are issued by banks.
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Credit Cards
History
It was first used in the 1920s, in the United States, specifically to
sell fuel to a growing number of automobile owners. Western
Union had begun issuing charge cards to its frequent customers
in 1921. Some charge cards were printed on paper card
stock, but were easily counterfeited.
In September 1958, Bank of America launched the
BankAmericard. BankAmericard became the first successful
recognizably modern credit card, and with its overseas
affiliates, eventually evolved into the Visa system in 1976.
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Credit Cards
How they work
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Credit Cards
How they work
1. A cardholder selects his or her goods and presents his or her card for payment.
2. The merchant submits the purchase details to its financial institution for
approval.
3. The merchant’s financial institution sends the purchase details to the
cardholder’s financial institution.
4. The merchant receives a “payment guarantee,” and the cardholder receives
the goods.
5. The cardholder’s financial institution remits to the merchant’s financial
institution the retail price less the interchange rate.
6. The merchant’s financial institution remits to the merchant the retail price less
the Merchant Discount or Merchant Service fee, which may include
interchange, the cost of transaction processing, terminal rental and customer
service, and the merchant financial institution’s or processor’s margin, among
other costs.
7. This charge is negotiated directly between the merchant’s financial institution
and the merchant.
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Credit Cards
How they work
Electronic verification systems allow merchants to verify in a
few seconds at the time of purchase that the card is valid and the
credit card customer has sufficient credit to cover the purchase.
The verification is performed using a point of sale (POS) system
with a communications link to the merchant's acquiring bank.
Data from the card is obtained from a magnetic stripe or chip on
the card.
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Credit Cards
Payment
A credit card statement is sent monthly indicating the purchases
made on the card, any outstanding fees, and the total amount
owed. The cardholder must pay a defined minimum proportion of
the bill by a due date or a higher amount up to the entire amount
owed.
The bank charges interest on the amount owed if the balance is
not paid in full. If the card holder fails to make at least the
minimum payment by the due date, the bank may impose a ”late
fee" and/or other penalties.
Some banks arrange for automatic payments to be deducted
from the user's bank account to avoid such penalties.
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Credit Cards
Interest
The general calculation formula most financial institutions use to
determine the amount of interest to be charged is:
APR/100 x ADB/365 x number of days revolved.
APR: Annual Percentage Rate
ADB: Average Daily Balance
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Credit Cards
Benefits to Customers
The main benefit is convenience as it eliminates the need to
carry any cash for most purposes. It is also considered a quick
loan that can be financed for a short term.
Many credit cards offer rewards and benefits packages;
enhanced product warranties at no cost, free loss/damage
coverage on new purchases, and points which may be
redeemed for cash, products, or airline tickets.
Can you think of any other benefits?
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Credit Cards
Benefits to Merchants
For merchants, a credit card transaction is often more secure
than other forms of payment, such as checks, because the
issuing bank commits to pay the merchant the moment the
transaction is authorized, regardless of whether the consumer
defaults on the credit card payment.
In most cases, cards are even more secure than cash, because
they discourage theft by the merchant's employees and reduce
the amount of cash on the premises.
Can you think of any other benefits?
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Credit Cards
Cost to Merchants
Merchants are charged several fees for the privilege of accepting
credit cards. The merchant is usually charged a commission of
around 1 to 3 per-cent of the value of each transaction paid for
by credit card. The merchant may also pay a variable
charge, called an interchange rate, for each transaction.
Merchants with very low average transaction prices or very high
average transaction prices are more averse to accepting credit
cards.
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Credit Cards
Cost to Banks
Credit card issuers (banks) have several types of costs:
Interest expenses
Operating costs
Charge offs
Rewards
Fraud
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Credit Cards
Cost to Banks
Interest expenses:
Banks generally borrow the money they then lend to their
customers. If the card issuer charges 15% on money lent to
users, and it costs 5% to borrow the money to lend, and the
balance sits with the cardholder for a year, the issuer earns 10%
on the loan. This 10% difference is the "net interest spread"
and the 5% is the "interest expense".
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Credit Cards
Cost to Banks
Operating Costs:
This is the cost of running the credit card portfolio including
everything from paying the executives who run the company to
printing the plastics, to mailing the statements, to running the
computers that keep track of every cardholder's balance, to
taking the many phone calls which cardholders place to their
issuer, to protecting the customers from fraud rings.
Marketing and promotional programs are also a significant
portion of expenses.
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Credit Cards
Cost to Banks
Charge Offs:
When a consumer becomes severely delinquent on a debt, the
creditor may declare the debt to be a charge-off. A charge-off is
considered to be "written off as uncollectable." To banks, bad
debts and even fraud are simply part of the cost of doing
business.
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Credit Cards
Cost to Banks
Rewards:
Many credit card customers receive rewards, such as frequent
flyer points, gift certificates, or cash back as an incentive to use
the card. Depending on the type of card, rewards will generally
cost the issuer between 0.25% and 2.0% of the spread.
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Credit Cards
Cost to Banks
Fraud:
When a card is stolen, or an unauthorized duplicate made, most
card issuers will refund some or all of the charges that the
customer has received for things they did not buy. Credit card
fraud continues to be a major problem.
Visa Jordan experienced a major fraud case in April 2011. All
banks in Jordan stopped the credit card for their customers and
issued them a replacement in order to avoid potential losses.
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Credit Cards
Revenue to Banks
The major income generators are:
 Interchange Fee (fees are typically from 1 to 6% of each sale)
 Interest on outstanding balance
 Other fees charged to the customer:
 Late payments or overdue payments
 Exceeding the credit limit on the card called over-limit fees
 Cash advances (often 3% of the amount)
 Transactions in a foreign currency (as much as 3% of the
amount).
 Membership fees (annual or monthly)
 Exchange rate loading fees (sometimes these might not be
reported on the customer's statement, even when applied).
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Credit Cards
Visa World
Visa Inc. is the world’s largest retail electronic payments
network, with US$5.2 trillion transacted as of December
31, 2010.
15,700 Financial institution customers
1.85 billion Visa cards (As of September 30, 2010)
$5.2 trillion Total volume**
1.8 million ATMs*** (As of September 30, 2010)
71 billion Total transactions****
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Credit Cards
Interest Rate
Interest rate for credit cards is usually the highest compared to
other consumer lending products. It ranges from 1.75% to 2.5%
monthly.
Many issuers have moved to variable-rate pricing that ties
movements in their interest rates to a specified index such as the
prime rate. Interest rate can also change depending on credit
risk, consumer usage patterns and behavior.
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Debt Burden Ratio
Debt Burden
Your debt burden is simply the sum of all periodic debt payments
you must make. The monthly debt burden would be the amount
of money you must pay to your creditors every month.
This may include monthly minimum credit card payments, home
loan payments, car payments and other recurring bills from
creditors.
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Debt Burden Ratio
Debt Burden Ratio (DBR)
The debt burden ratio is defined as your debt burden divided by
your net income.
If the total monthly debt payments are 250 JOD and your take-
home, after-tax pay is 500 JOD per month, your debt burden
ratio, expressed in percentage terms, is 50 percent. The higher
the debt burden ratio, the less of your income is "disposable," or
available to spend as you wish.
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Debt Burden Ratio
Exercise
Calculate the DBR for the following applicant:
Monthly income before tax: 1500 JDs
Monthly deductions and tax: 300 JDs
Rent: 300 JDs
Car Loan: 200 JDs
Water Bill: 30 JD
Electricity Bill: 80 JDs
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Certified Companies
A certified company is a company that has been pre-approved
by the bank as having a sound business practice and strong
financial position. The bank does the certification exercise
through studying and analyzing the financial statements and
business activity of the company.
As a result of the above, it is usually less risky to extend credit
facilities to a certified company.
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Prime Rate
Prime rate or prime lending rate is a term applied in many
countries to reference the rate of interest at which banks lend to
favored customers, i.e., those with high credibility (usually the
most prominent and stable business customers).
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Prime Rate
The rate is almost always the same amongst major banks.
Adjustments to the prime rate are made by banks at the same
time; although, the prime rate does not adjust on any regular
basis.
The Prime Rate is usually adjusted in correlation to the
adjustments of the Central Bank of Jordan key lending rates
(discount rate, deposit window). If banks must pay more to
borrow, they raise the prime rate. If their cost drops, they drop
the prime rate.
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Social Security Statement
Social Security Statement is issued by the Social Security
department and it shows the salary the individual has earned
over the years that has been subject to social security
deductions.
Many banks use the social security statement to verify the
income of the loan applicant.
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Early Payment
Most banks charge the customer a penalty called prepayment
penalty or early payment penalty when the loan is either paid off
completely or in part before its maturity.
The penalty is usually based on percentage of the remaining
mortgage balance or a certain number of months worth
of interest.
Why do lenders charge a prepayment penalty?
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Early Payment
The prepayment penalty ranges from 2% to 8% across banks.
Things to keep in mind regarding the prepayment penalty:
1. It is usually lower if the customer pays off the loan or part of
it from his own funds compared to a buy-out.
2. Most banks won’t allow for a partial prepayment amount less
than one monthly loan payment.
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Loan to Value
Loan to Value (LTV) refers to the ratio of the amount you owe on
a loan compared to the home's value.
Thus, if your loan is for 80,000 JDs on a 100,000 JD home, your
loan to value would be 80%. That also means that you have 20%
equity in your home.
When you apply for a loan, LTV will be taken into account and
will be used to determine several things such as interest pricing.
The logic is that the higher loan-to-value, the more risky the
loan is for the lender.
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Salary Transfer
The process of transferring an employee’s monthly salary to a
certain party, usually the bank. This is done with a commitment
letter from the employer to the bank.
However, the commitment does not constitute a guarantee of the
loan by the employer.
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Guarantor
A guarantee, in finance, is a promise by one party (the
guarantor) to assume responsibility for the debt obligation of a
borrower if that borrower defaults.
The person or company that provides this promise, is also known
as a surety or guarantor.
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Cash Margins
Cash margin loans are the least risky as they are guaranteed
by the customer’s cash collateral. Banks require 110% or 120%
of the loan amount for cash collateral loans.
Such loans are executed with quick turnaround from application
(24 hours) and require minimal approval levels.
Example: A customer applies for a personal loan of 5,000 JDs.
He has a term deposit with the bank for 20,000 JDs. What is the
amount of his deposit that will be set aside as collateral at
110%?
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Loan Agreement
A contract is a legally enforceable agreement between two or
more parties with mutual obligations
A loan agreement is a contract entered into between which
regulates the terms of a loan.
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Loan Agreement
Contents of a Loan Agreement
Characteristically a professionally drafted loan agreement will
incorporate the following terms:
① Parties to contracts with their addresses
② Definitions or interpretation provisions
③ Type of loan and purpose
④ Payment provisions
⑤ Repayment term provisions
⑥ Prepayment and cancellation provisions
⑦ Interest and interest periods
⑧ Events of late payment, default and their remedies
⑨ Provisions for fees of the lenders
⑩ Amendments and waivers provisions
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Loan Agreement
Contents of a Loan Agreement
Exercise
Read the attached loan agreement. Do you believe the contract
left out anything important? If so, list the items the contract failed
to cover.
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Credit Cards
Credit Policy
The below is an example of a credit policy for a bank in regards
to credit cards:
Minimum age of customer: 21
Maximum age of customer: 60
Target market: salaried employees as follows:
400JDs minimum for transferred salary
500JDs min for non-transferred salary
Employment term: 3 months for certified companies
Credit limit: 6 times monthly salary for certified companies, 3
times for other
DBR: 60% for transferred salary, 50% for non-transferred salary
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Personal Loan
Definition
A loan that is granted for personal use; usually unsecured and based
on the borrower's integrity and ability to pay. It is usually made for the
purpose of debt consolidation, vacation or the purchase of durable
goods.
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Personal Loan
Loan Term & Interest Rate
The term ranges from 3 to 8 years. The interest rate ranges from 9%
to 13%.
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Housing Loans
Definition
A housing loan is a very common type of debt instrument, used by
many individuals to purchase housing. In this arrangement, the bank
lends money to the borrower to purchase the property.
In return, the bank is given security — a lien on the title to the house
— until the loan is paid off in full. If the borrower defaults on the
loan, the bank would have the legal right to repossess the house and
sell it, to recover sums owing to it.
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Housing Loans
Banking Law
The Banking Law has prohibited any bank operating within the
Kingdom from granting loans for the construction or purchase of real
estate in excess of 20% of the bank’s total JD deposit.
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Housing Loans
Loan Term
The duration of the loan period is considerably longer compared to
other consumer lending products — often corresponding to the useful
life of the property and the relatively higher loan amount. The term
usually ranges from 10 to 30 years.
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Housing Loans
Interest Rate
Interest rate on home loans range from 7% to 10%.
Most banks charge an annual fee on top of 0.5% to 1% whether for
the first year only or for the life of the loan.
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Auto Loan
Definition
An auto loan (sometimes referred to as car loan) is a personal loan
used to purchase an automobile whether new or old.
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Auto Loan
Interest Rate
The interest rate on car loans are usually flat. It ranges from 5% to
7%. For reducing interest rates, the range is between 9% to 11%.
New cars are usually financed with lower interest rates and higher
LTV compared to used cars.
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Auto Loan
Loan Term
The duration of the loan period is shorter compared to housing loan—
often corresponding to the useful life of the auto. The term usually
ranges from 3 to 7 years.
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Auto Loan
Loan Requirement
Most banks require that the following to extend the loan:
A lien on the title of the car
Full insurance coverage
Full car inspection from a certified mechanic for used cars
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Consumer Lending
Classification of Credit Facilities
Credit facilities can be classified into 4 types:
Low risk facilities: government loans, 100% cash margin loans
Acceptable risk facilities: adequate cash flow, acceptable
collateral, competent financial management of the customer, timely
payments
Watch-list facilities: past dues over 60 days but less than 90 days
Non-performing loans:
69
Sub-standard 90-179 Days
Doubtful 180-359 Days
Loss 360 Days and Over

70. +
Consumer Lending
Loan Loss Provisions
Loss provisions are a non-cash expense for banks to account
for future losses on loan defaults. Banks assume that a certain
percentage of loans will default or become slow-paying. Banks
enter a percentage as an expense when calculating their pre-tax
incomes. It appears under the owners’ equity section of the
balance sheet as a separate item.
This guarantees a bank's solvency and capitalization if and when
the defaults occur.
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Consumer Lending
Loss Provisions According to Type
Acceptable risk facilities: 1% of the total direct credit facilities
Watch-list facilities: 3% of the total direct credit facilities
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Consumer Lending
Non-Performing Loss Provisions
Credit facilities not covered by eligible Collateral
72
Sub-standard 25%
Doubtful 50%
Loss 100%
Credit facilities fully covered by eligible Collateral
The impairment loss provision should be gradually created over a 5 year
period to reach 100% coverage by the end of the fifth year (i.e. 20% per
annum)

73. +
Consumer Lending
Non-performing Loans to Total Loans Ratio
The quality of banks' assets in Jordan witnessed a major
improvement during the years 2003-2008, when the ratio of
nonperforming loans to total loans dropped from 15.5% at the
end of 2003 to 4.2% at the end of 2008.
During the first half of 2010, the ratio increased once
again, reaching 7.9%. This increase came as a natural result
of the repercussions of the global financial crisis.
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Consumer Lending
Non-performing Loans to Total Loans Ratio
74
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
2003 2004 2005 2006 2007 2008 2009 May-06
Non-Performing Loans to Total Loans Ratio, %