The Handbook of Credit Risk Management, 2nd Edition

CHAPTER 8Consumer Finance

Part Two of this book is dedicated to the assessment of individual credit transactions, as opposed to the management of a portfolio of individual transactions, which is covered in Part Three, and mitigation techniques that will be described in Part Four. However, as the vast majority of this book deals primarily with corporate debt rather than with consumer debt, we will discuss all major aspects of consumer finance in this chapter. This includes financial instruments generating credit exposures on individuals, portfolio management principles, some mitigation techniques, and a brief overview of the regulatory environment in the United States.

As we describe in Chapter 1, many companies, primarily financial institutions, take credit risk on individuals, as we may need to finance our durable goods and our fundamental household investments such as buying a house. In the largest economies of the world, debt owed by individuals can be as large as corporate debt! However, when we present household debt we exclude mortgages (see Chapter 1), since the vast majority of these are secured by the GSEs and therefore present little to no credit risk to the investor who has funded the mortgage. Including this debt would make the United States household debt about the same size as corporate debt.

For small transaction amounts and regular shopping, credit cards are gradually replacing cash and personal checks, so credit card companies are generating very large and ...