SIC 6141 Personal Credit Institutions

SIC 6141

This category covers establishments primarily engaged in providing loans to individuals. Also included in this industry are establishments primarily engaged in financing retail sales made on the installment plan and financing automobile loans for individuals.

NAICS CODE(S)

522210

Credit Card Issuing

522220

Sales Financing

522291

Consumer Lending

INDUSTRY SNAPSHOT

"Credit" is derived from the Latin word "credo," which means "I believe." It typically refers to a purchase or the power to make a purchase of goods for enjoyment in the present while deferring payment to a future date. Thus, the transaction consists of a transfer and delivery of goods in the present in exchange for a promise of future payment.

The granting of credit depends upon three factors: character, capacity, and capital. Each of these factors introduces some risk into the transaction. The risk of lending on character is called "moral risk." The risk of lending on capacity is called "business risk." The risk of lending on capital is called "property risk." An ideal borrower will meet a minimum of requirements set for evaluating each of these three risks.

Because it is impossible for most companies to determine how their credit applicants are ranked in each of these categories, they must obtain their information from centralized sources. These sources are credit-reporting agencies. Credit reporting agencies keep files of information on all consumers who have made credit transactions at some point in their lives. Credit granting institutions may purchase these files to evaluate the "credit worthiness" of individual applicants. Since misuse or abuse of these files can be financially detrimental to the consumer, the credit reporting industry is heavily regulated. Adverse information must be removed within seven years—except bankruptcy, which remains in a credit file for 10 years. Disputed information that cannot be verified must be removed, and access to the file must be granted for the individual concerned. Finally, the information may only be given to authorized users.

The personal credit industry encompasses many diverse organizations. These participants range from General Motors Acceptance Corp. (GMAC), with 2004 sales of $20.3 billion and 33,700 employees, to tiny one-office credit firms with a handful of staff and assets under $1 million.

The U.S. economic recession in the early 2000s helped fuel consumer debt levels, as well as personal bankruptcies, to record highs. However, a new, tougher bankruptcy law became effective October 17, 2005, which will make filing Chapter 7 bankruptcy more difficult. Chapter 7 provides a "clean slate" for consumers who retain all exempt property and can walk away virtually debt free. The effect of the new law will force more consumers to file under the guidelines of Chapter 13, which provides for a five-year repayment plan.

Although the economy had stabilized by the mid-2000s, consumer debt continued to grow. In April, 2005, consumer credit totaled $2.13 trillion. However, delinquent accounts were at historic lows and revolving credit (e.g., bank and store credit cards) declined slightly, while nonrevolving credit (e.g., auto loans, student loans, etc.) increased. The slow-down in credit card use was likely caused by slowly increasing interest rates, leading to a fall off in consumer confidence, as well as a growing preference for home equity lines of credit and increased use of debit cards.

ORGANIZATION AND STRUCTURE

Personal credit transactions are regulated by the Uniform Commercial Code (UCC) and the Uniform Consumer Credit Code (UCCC). Additionally, a number of pieces of legislation are designed to protect the consumer, including the Fair Credit Reporting Act. Each of the various entities that constitute this category has varying organizations and structures.

Automobile Loans

Because automobiles are too expensive for most individuals to purchase with cash, most new car purchases are made with the assistance of automobile loans; these types of loans are typically made by banks and finance companies. This type of consumer lending typically matures between 12 and 72 months.

Automobile loans may be either direct or indirect. Direct automobile loans are made to the consumer to purchase an automobile and are secured by a chattel interest in the auto. Indirect automobile loans are made by the auto dealer. Under this arrangement the dealer collects the required information from the consumer and furnishes it to the bank. The bank then either accepts or rejects the applicant. Usually the dealer packages the loans in bundles and sells them to banks; these loans tend to have higher delinquency rates than direct loans.

The automobile loan is the most common type of consumer loan, accounting for more than 40 percent of all consumer credit. The basic rule of thumb is that consumers should consider automobile purchases that are no more than 20 percent of their annual income. Banks, however, make less than 40 percent of all automobile loans. The remainder of the loans are made by auto manufacturers' financing divisions. These financing entities offer below-market rates, as well as more flexible financing options to stimulate the sales of their products.

Banks also offer "floorplan" financing to support dealers' leasing programs. "Floorplan" financing, or trust receipt financing, is a form of inventory financing under which the bank holds title to the automobile inventory. The automobile dealer is considered the borrower in these transactions and is loaned funds to buy the inventory from suppliers. The dealer holds the inventory in trust for the bank and then sells inventory to consumers. Subsequently, these proceeds are paid to the bank, but the dealer keeps the mark-up of the retail price over the payments due the bank. When the sale is made on a credit basis, the dealer often sells the obligation to the bank.

Consumer Finance Companies

Consumer finance companies are small loan companies that specialize in personal loans under the small loan laws of the various states. These establishments are often called personal finance companies.

Financing of Automobiles, Furniture, Appliances, Personal Airplanes, etc , Not Engaged in Deposit Banking

The financing of personal property is included under the general title of consumer credit. Consumer credit is the short- and medium-term debt owed by individuals to financial institutions, retailers, and other distributors for financing consumer purchases of goods and services, but not including real estate mortgages and insurance policy loans.

Due to the disparate positions of the creditor and consumer in negotiating credit terms, the government regulates this industry very heavily. The Consumer Credit Protection Act of 1968 assures that every consumer with a need for credit is given meaningful information with respect to the cost of that credit. This means that the dollar amount of the finance charge, as well as the annual percentage rate computed on the unpaid balance, must be disclosed. Other information must also be disclosed to allow the consumer the opportunity to compare readily the various credit terms offered by different sources.

The Consumer Credit Protection Act and other related regulations apply to banks, savings and loan associations, department stores, credit card issuers, credit unions, automobile dealers, consumer finance companies, hospitals, and any...

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