AQ Flashcards
3.2 LOANS
A bank’s loan policy should address a minimum of what 17 areas?
- Collection procedures
- Normal trade area and conditions under which the bank may extend credit out of trade area
- General fields of lending in which the bank will engage & the types of loans within each general field
- Guidelines:
- for granting unsecured loans
- for interest rates and repayment terms for secured and unsecured loans
- for obtaining and reviewing RE appraisals, and ordering reappraisals
- goals for portfolio mix and risk diversification, and plans for monitoring and taking appropriate action on any concentrations that may exit
- loan review and grading system (Watch List)
- ALLL review
- safeguards to minimize potential environmental liability
- Lending authority of:
- each officer
- loan or executive committee
- Limitations
- for maximum loan volume relative to total assets
- on the extension of credit through overdrafts
- Complete/current credit files
- Board responsibility for reviewing, ratifying, or approving loans
3.2 LOANS
What are some benefits of participation loans?
- Lending limits
- Diversify risk
- Improve liquidity
3.2 LOANS
Who has the legal responsibility to formulate lending policies and to supervise their implementation?
Board of Directors
3.2 LOANS
An effective loan review system is generally designed to address to what areas? (7)
- Adequacy and adherence to, loan policies/ procedures, and monitor compliance with relevant laws and regulations
- Evaluate activities of lending personnel
- Identify relevant trends affecting collectability of portfolio and isolate potential problem areas
- Provide:
- essential information for determining adequacy of the ALLL
- senior management and Board objective assessment of portfolio quality
- management with information related to credit quality that can be used for financial and regulatory purpose
- Promptly identify loans with well-defined credit weaknesses ensuring timely action can be taken to minimize credit loss
3.2 LOANS
A loan review system should, at a minimum, include what? (4)
- Formal credit grading system that can be reconciled with framework used by regulatory agencies;
- Identification of loans or loan pools that warrant special attention;
- Mechanism for reporting identified loans, and any corrective action taken, to senior management and the board;
- Documentation of the bank’s credit loss experience for various components of the loan and lease portfolio.
3.2 LOANS
An effective loan review policy should be established, what items must be addressed? (QIFS DRW)
- Qualifications of loan review personnel;
- Independence of loan review personnel;
- Frequency of reviews;
- Scope of reviews;
- Depth of reviews;
- Review of findings and follow-up;
- Workpaper and report distribution
3.2 LOANS
An adequate ALLL should be no less than the sum of:
- For loans and leases classified Substandard or Doubtful, whether analyzed and provided for individually or as part of pools, all estimated credit losses over the remaining effective lives of these loans.
- For loans and leases that are not classified, all estimated credit losses over the upcoming 12 months.
- Amounts for estimated losses from transfer risk on international loans.
3.2 LOANS
Estimated credit losses should reflect consideration of all significant factors that affect the portfolio’s collectability as of the evaluation date, including; (Q Factors)
- Changes in lending policies and procedures,
- Changes in local and national economic conditions;
- Changes in the volume or type of credit;
- Changes in management or lending staff;
- Changes in the volume/severity of PD, NA, TDRs, or classified loans;
- Changes in the quality of an bank’s loan review system;
- Existence of concentrations of credit;
- Changes in value of underlying collateral for collateral- dependent loans;
- Effect of external factors such as competition, legal, and regulatory
3.2 LOANS
Examiners will generally accept management’s estimates of credit losses in their assessment of the overall adequacy of the ALLL when management has:
- Maintained effective systems and controls for identifying, monitoring and addressing asset quality problems in a timely manner;
- Analyzed all significant factors that affect the collectability of the portfolio;
- Established an acceptable ALLL evaluation process that meets the objectives for an adequate ALLL.
3.2 LOANS
An institution’s ALLL methodology should: (11)
- Be:
- applied consistently, and when appropriate, be modified for new factors affecting collectability;
- based on current and reliable data;
- written and well-documented;
- Contain a detailed analysis of the loan portfolio analysis, performed regularly;
- Consider:
- all loans;
- all known relevant internal and external factors that may affect loan collectability;
- particular risks inherent in various types of lending;
- current collateral values;
- Identify loans to be evaluated for impairment on an individual basis under FAS 114; and segment the remainder of the portfolio into groups of loans with similar risk characteristics for evaluation and analysis under FAS 5;
- Include a systematic and logical method to consolidate the loss estimates and ensure the ALLL balance is recorded in accordance with GAAP;
- Require that analyses, estimates, reviews and other ALLL methodology functions be performed by competent and well-trained personnel
3.1 ASSET QUALITY
What is the primary factor affecting overall asset quality?
The quality of the loan portfolio and the credit administration program.
3.1 ASSET QUALITY
What are some of the factors that influence an examiners assessment of asset quality? (LAVA LOSED)
- Level, severity and trend of problem assets;
- Adequacy of:
- ALLL;
- internal controls and MIS exceptions;
- underwriting & credit administration;
- Volume and nature of credit documentation;
- Ability of management to properly administer its assets, including the timely identification and collection of problem assets;
- Loan and investment policies and procedures;
- Off balance sheet transactions;
- Securities underwriting and exposure to counter-parties in trading activities;
- Existence of asset concentrations;
- Diversification and quality of the loan
3.1 ASSET QUALITY
What is a 1 AQ rating?
- Strong asset quality and credit administration practices;
- Identified weaknesses are minor in nature, and risk exposure is modest in relation to capital protection and management’s abilities;
- Asset quality is of minimal supervisory concern.
3.1 ASSET QUALITY
What is a 2 AQ rating?
- Satisfactory asset quality and credit administration practices;
- Level and severity of classifications and other weaknesses warrant a limited level of supervisory attention;
- Risk exposure is commensurate with capital protection and management’s abilities.
3.1 ASSET QUALITY
What is a 3 AQ rating?
- Asset quality or credit administration practices are less than satisfactory;
- Trends may be stable or indicate deterioration in asset quality or an increase in risk exposure;
- Level and severity of classified assets, other weaknesses, and risks require an elevated level of supervisory concern;
- Generally, credit administration and risk management practices need improvement.
3.1 ASSET QUALITY
What is a 4 AQ rating?
- Deficient asset quality or credit administration practices;
- Levels of risk and problem assets are significant, inadequately controlled, and subject the financial institution to potential losses that, if left unchecked, may threaten its viability.
3.1 ASSET QUALITY
What is a 5 AQ rating?
Critically deficient asset quality or credit administration practices that present an imminent threat to the institution’s viability.
3.2 LOANS
What is leveraged financing?
- A transaction is considered leveraged when the obligors post-financing leverage as measured by debt-to-assets, debt-to-equity, cash flow-to-total debt, or other such standards unique to particular industries exceed industry norms for leverage;
- Examples of leveraged financing include business recapitalization, equity buyouts, business/product line build-outs and expansion, and syndicated bank loans;
- Mezzanine financing is a type of leveraged financing and is neither equity nor senior debt
3.2 LOANS
With regard to Accounts Receivable Financing, what are the two basic methods to make A/R advances?
- Blanket assignment
- Ledgering
3.2 LOANS
How do you initially assess the credit worthiness of an Oil/Gas Loan?
Analysis of the engineering function
3.2 LOANS
What three critical factors does the engineering report cover?
- Pricing
- Discount factors
- Timing
3.2 LOANS
If classification of oil and/or gas reserve based loans are warranted, and repayment is completely dependent upon the sale of the collateral, what are the classification guidelines?
- Substandard if 65% of discounted PWFNI
- Doubtful if the balance but not more than 100% of discounted PWFNI of PDP reserves
- Any remaining deficiency balance is Loss
3.2 LOANS
What are the situations that create carryover lending?
- Unforeseen circumstances (weather, commodity prices, production costs)
- Existing term debt that needs to be rescheduled because of cash flow problems
3.2 LOANS
What are the types of plans available for construction lending?
- Standard - Pre-established schedule of fixed payments at the end of each construction phase
- Progressive - Monthly disbursements totaling 90% of value with 10% held back
3.2 LOANS
What are the added risks associated with floor plan (wholesale) lending?
- Floor plan loans involve advances made against a specific piece of collateral
- The bank is unable to exercise control over the floored items
- Most dealers have minimal capital bases relative to debt thereby increasing risk, which makes frequent inspections and curtailments necessary.
3.2 LOANS
In agricultural lending, grain, feeder livestock, and breeder livestock loans can usually be withheld from adverse classification due to the fact they are highly marketable and provide good protection agains credit loss. Under what circumstances would you classify these type of loans assuming cash flow is poor?
- Feeder and Grain Collateral - inspections have not been performed for more than 90 days prior to the examination start date
- Breeder Collateral - Inspections have not been performed more than six months prior to the examination start date (Copies of invoices or bills of sale are acceptable substitutes for inspection reports.)
- Loans secured by grain warehouse receipts are generally excluded from adverse classification, up to the market value of the grain represented by receipts
- Value given for livestock or grain collateral should be based on the daily, published, market value as of the examination start date, less marketing and transportation costs, feed and veterinary expenses (to the extent determinable) and if material, the accrued interest associated with the loan(s).
- Current market values for breeder stock may be derived from local or regional newspapers, area auction barns, or other sources considered reliable
- If such valuations for breeding livestock cannot be obtained, the animals’ slaughter values may be used
- The bank must have satisfactory practices for controlling sales proceeds when the borrower sells livestock and feed and grain
- The bank must have a properly perfected and enforceable security interest in the assets in question.
3.2 LOANS
What are the terms commonly encountered with direct leasing?
- Net Lease - bank is not directly or indirectly obligated to assume the expenses of maintaining the equipment
- Full Payout Lease - bank expects to realize both the return of its full investment and the cost of financing the property over the term of the lease
- Leveraged Lease - bank as lessor, purchases and becomes the equipment owner by providing a small percentage (20-40%) of the capital needed
- Creditworthiness of the lessee is paramount, and as a general rule, the bank should not enter into this type of lease transaction with any borrower it would not extend unsecured credit
- Rentals - include only those payments reasonably anticipated by the bank at the time the lease is executed.
3.2 LOANS
What are the three ways that a bank can be involved in a credit card plan?
- Agent Bank - receives credit applications from customers, sales drafts from merchants, and forwards documents to sub-licensee and licensee banks
- Sublicensee Bank
- Maintains accountability for credit card loans and merchant accounts;
- May maintain its own processing center for payments and drafts
- May maintain facilities for embossing credit cards
- Licensee Banks - Same as sub-licensee
- May perform transaction processing and credit card embossing services for sub-licensee banks,
- Acts as a regional or national clearinghouse for sub-licensee banks.
3.2 LOANS
An account that is eligible for re-aging should exhibit what?
- Borrower should show a renewed willingness and ability to repay the loan;
- Account should exist for at least 9 months before allowing a re-aging, extension, renewal, referral, or rewrite
- Borrower should make at least 3 minimum consecutive monthly payments or the equivalent lump sum payment before an account is re-aged
- Funds may not be advanced for this purpose
- No loan should be re-aged, extended, deferred, renewed, or rewritten more than once within any twelve-month period; that is, at least twelve months must have elapsed since a prior re-aging.
- Further, no loan should be re-aged, extended, deferred, renewed, or rewritten more than two times within any five-year period.
- For open-end credit, an over limit account may be re-aged at its outstanding balance (including the over limit balance, interest, and fees)
- No new credit may be extended to the borrower until the balance falls below the designated predelinquency credit limit.
