1 - Principles of lending Flashcards
What are the principles?
- The person
-Amount and purpose
-Repayment
Viability
-Security -
Remuneration
-Services
How many years is short, medium and long term lending?
Short - up to 3 years
Medium - 3 - 10 years
Long - Over 10 years
Who set bank of England base rates?
Bank of England Monetary policy committee.
How is 3% over base rate written?
3/BR
What does LIBOR stand for?
London inter bank offered rate
What reasons are different loans charged at different rates?
- Market rates generally
-Supply and demand at the time the facility is agreed - Duration of borrowing
-Type of customer
-Whether there is security
-The amount being borrowed
-Risk
- Why are personal lending applications used?
- Verify identity of the customer as required by regulations
-No important info is missed - Set out in a standard format
-Shows that all relevant information has been taken into account
-Easy for others to read
-
In a lending application what is being assessed and taken into consideration?
- Risk and reward
-Is it viable - i.e is the customer able to make repayments.
-Have all factors been taken into account
When approached by an existing customer for lending what information can be used?
-Customers accounts
-Standing orders/direct debits
-Evidence of regular savings
-Do they use other areas in the organisation?
-Lending files
-Customer profile - personal info saved on them.
When you have built a profile on an existing customer using previously stored information what should you do?
Use the information to confirm with the customer what aspects of the information are still relevant and update the parts that are not.
Having made the decision to lend, what should you then think about?
- Security
- Reward
- Other services that we could offer.
What are the 3 c’s?
Character, capacity and commitment
What characeristics do you look for in a customer?
- respectable/ trustworthy
-Honest
-Dependable
-High integrity
What factors should you look at for a customers capacity?
- Age of customer
-Experience
-Reputation
What typical assets could a customer own?
- Property
-Stocks and shares - Government securities
-Life assurance policies
-Bank accounts
-Antiques, paintings, classic cars, boats.
What liabilities could a customer have?
-Outstanding mortgage
-Loans/credit cards
-Guarantees
How is a customers ‘net means’ figure calculated?
Customer assets - Customer total liabilities
What are the consequences if a customer does not borrow enough money?
Could complete half a extension on their home and not be able to complete. May struggle to get the additional funds.
Why do banks need to know the purpose of the loan?
-To ensure that the lending is consistent with the banks credit policy.
-The Bank of England also has rules restricting the amount that a bank can lend to one customer or industry.
-No suspicions of money laundering
What is loan to vaule?
The ratio of the size of the borrowing compared to the value of the asset.
What factors could effect a customers means to make repayments?
-If borrowing with a variable rate , interest rates increase meaning customer could struggle.
- Unstable employment/ income.
What 3 things should you look for in security?
- Simplicity of title
- Stability of value
- Realisability
Why is simplicity of title good in regards to security?
can be taken easily, quickly and cheaply
Why is stability of title good in regards to security?
The value of the security needs to remain the same and be easy to value.
What can you do to help with stability of title?
Ensure that the differences between the borrowing you grant and the value of the asset is sufficient to allow for depreciation in value.
What are the easiest types of security to value?
- cash deposits
- assignments of life policies
- quoted stocks, shares and gilts
- real property – land, houses, etc.
What are difficult types of securities to value?
- specialised or commercial property
- unquoted shares.
How do financial services make profit?
- Differences in interest rates
-arrangement fee’s
-Charges for services
-Commission
What can influence the margin a customer is charged on lending?
- Whether or not the borrowing is secured
- Whether the advance has been agreed before hand - i.e unauthorised overdraft.
Why was credit scoring introduced?
-To improve the trade off between writing new business and bad debt.
-For decision making to be faster and consistent.
What is a credit policy?
High level internal document stating a banks credit framework and objectives.
What are the reasons a credit policy is issued?
- Gives a consistent approach
- Improves customer service
- Lending managers understand clearly what the parameters of their lending authority is.
What is covered off in the credit policy?
- Objectives and scope of the policy
- Sanctioning authorities
- Credit approval process
- Product parameters
- Monitoring process
- Aggregation policy ( total exposure)
- Management of problem accounts
What is the credit policy structure?
- Board
- Credit risk Committee
- Divisional Risk Committee
- Business area risk committee
5.Business Areas
What do the divisional risk committee do?
-High level monitoring.
-Approve policy changes
-Sanction high credits that are outside credit policy guidelines.
What do ‘business area credit risk committee’ do?
- Refine policies
- Full portfolio monitoring
- Collections and write-offs
-Controlling credit policy breaches
What do ‘business areas’ do for the credit policy?
Develop policies and procedures for approval from committee’s. They must demonstrate compliance to credit policy guidelines.
When considering a person who is looking to borrow money, a bank will examine their:
A character, capacity and commitment
B character, capacity and capital
C character, capacity and conduct
D character, capacity and capability
A character, capacity and commitment
The restrictions laid down by a bank that limits their exposure to lending in certain sectors are
called:
A lending limits
B sanctioning authority
C sector limits
D portfolio limits
D portfolio limits
If a customer wishes to borrow £100,000 to help finance the purchase of a yacht costing £150,000,the loan to value is ?
67%
Many lenders maintain that the most important area for consideration when considering a lending request is?
Repayment
Which one of the following security items would be the most difficult to value:
A cash lodgement
B commercial property
C a life policy
D BP shares
B commercial property
The definition of “long term lending” is a loan period in excess of:
a) 5 years
b) 7 years
c) 10 years
d) 15 years
c) 10 years
The document that states a bank’s credit framework and objectives is called a:
a) lending limit
b) credit framework
c) lending guideline
d) credit policy
d) credit policy
Which of these security items would be the most difficult to value?
a) cash lodgements
b) unquoted shares
c) life policies
d) quoted shares
b) unquoted shares
If a customer is self employed, you could verify their ability to repay by looking at their:
a) P60
b) annual accounts
c) P45
d) past borrowing record
b) annual accounts
