 |  Money and Capital Markets: Financial Institutions and Instruments in a Global Marketplace, 8/e Peter Rose,
Texas A & M University
Consumer Lending and Borrowing
Chapter SummaryOne of the most remarkable developments in the financial system over the past century is
the awakening of the consumer as a borrower and lender of funds within the global financial
system.
- Households—individuals and families—have become the principal sources of loanable
funds in the money and capital markets. They are also among the leading borrowing sectors
in the financial system.
- Due to intense competition in the financial-services sector new consumer-oriented financial
services have appeared in profusion in recent years in an effort to attract and
hold consumer accounts. Examples include NOWs, money market deposits, share accounts
in money market mutual funds, universal life insurance policies, consumer cash
management services, and home equity loans.
- While consumers are among the leading borrowing groups in the economy, overall their
holdings of financial assets far exceed their indebtedness and the proportion of their financial-
asset holdings relative to their total debt is growing, on average.
- Lenders to the household sector consider multiple factors in deciding whether or not to
grant a loan, including the size and stability of a consumer’s income, length of residence
in current location, amount of installment debt outstanding, and any holdings of valuable
assets (including stocks, bonds, and other assets of readily marketable value).
- Important federal laws have been passed in the United States over the past four decades
to accomplish two major objectives: (a) disclose the terms of loans and other financial
services so the household customer can make an informed financial decision; and (b)
prevent discrimination in gaining access to financial services (especially access to
credit). Among the key pieces of federal legislation protecting consumers are the Truth
in Lending Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal
Credit Opportunity Act, the Community Reinvestment Act, and the Truth in Savings
Act. The Truth in Lending, Fair Credit Billing, Fair Credit Reporting, and Truth in Savings
acts promote greater disclosure of the terms attached to loans, savings deposits, and
other financial services, while the Equal Credit Opportunity Act and the Community
Reinvestment Act focus mainly on preventing discrimination against consumers seeking
access to financial services.
- U.S. bankruptcy laws have been a center of controversy between consumers and lenders
since the 1970s when a somewhat more liberal United States bankruptcy code was enacted
and the numbers of household bankruptcies began to climb significantly. After
1995 more than a million bankruptcies a year occurred among U.S. individuals and families.
Fears that debt relief rules for households might have become unbalanced in favor
of the consumer, Congress debated a powerful new bankruptcy bill in the late 1990s and
as the twenty-first century began. The proposed new law would raise the cost of consumer
bankruptcies and demand that households seeking bankruptcy relief from their
creditors receive training in the hope of avoiding future financial problems.
- The household has become one of the key actors in the financial system, providing the
majority of savings so that borrowers and investors can find the funds they need for
growth and also representing one of the largest borrowing sectors, utilizing credit to
supplement current income. Innovations in financial services have brought ever growing
numbers of households into the financial system as active participants. Lower-quality
borrowers, in particular, have entered in much greater numbers in recent years due to
increasing “democratization” of the credit-granting process. The result is growing concern
about the debt burden carried by millions of families today.
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2003 McGraw-Hill Higher Education