CH6-Credit and Consumer Lending

Question 1

Basic Principles of Lending have remained relatively unchanged. What are the three primary considerations?

Answer 1

1) Entity applying for the the loan
2) Amount, purpose and term of the loan
3) Entities ability to repay the loan

Question 2

What are the four Cs of Credit?

Answer 2

Character - Composed of integrity, proof of identity and character (via credit history/score)
Capacity - Composed of age (ability to pay loan), employability and reputation/credit history.
Collateral - Property, assets, shares or personal/third-party guarantees.
Capital - Amount an individual/entity is committing to the purchase. Higher the commitment the lower the risk to the institution providing the loan.

Question 3

Common industry practise to use 4Cs or 5Cs, Character, Capacity, Collateral, Capital and Condition.
At NAB only 3Cs are used, which are they?

Answer 3

Character, Capacity, Collateral

Question 4

Common industry practise to use 4Cs or 5Cs, Character, Capacity, Collateral, Capital and Condition.
At NAB only 3Cs are used, which are they?

Answer 4

Character, Capacity, Collateral

Question 5

What are three essential qualities of good security for a loan?

Answer 5

1) Simplicity of Title (ownership) - Free of liabilities or encumbrances
2) Stability of Value -
3) Saleability or Realisation

Question 6

What are examples of residential security that are generally unacceptable?

Answer 6

1) Purchase of Crown Land
2) Purchase of large rural properties

Question 7

What are reasons a customer might select a variable rate loan over a fixed rate loan?

Answer 7

• Opportunity to take advantage of interest rate reductions (if any)
• Ability to make additional repayments without penalty
• Opportunity to use a redraw facility to access funds
• Ability to refinance without penalty

Question 8

What are examples of areas where banks offer loan products?

Answer 8

1) Mortgage/Home Lending
2) Consumer Lending
3) Business/Commercial Lending

Question 9

What is Lenders Mortgage Insurance (LMI)?

Answer 9

A once off payment that insurers the lender should the borrower not be able to repay the loan, lender will generally add this payment amount across the duration of the loan repayment lifespan. Borrowers get access to a higher borrowing limit.

Question 10

What is the National Credit Code (NCC)?

Answer 10

Created to provide a single consumer credit regime to protect consumers and ensure ethical and professional standards

Question 11

What legislation governs the NCC?

Answer 11

National Consumer Credit Protection (NCCP) Act 2009

Question 12

Who enforces the NCCP?

Answer 12

ASIC

Question 13

If a person wishes to engage in credit activities (lender, advisers, brokers, etc) what license must they have?

Answer 13

Australian Credit License or be an Authorised Credit Representative for an ACL licensee.

Question 14

Under the NCCP when does a loan fall under its regulation?

Answer 14

• Lender is in the business of providing credit
• Charge is made for providing credit
• Debtor is a person (not a company)
• Credit is provided for personal, domestic, residential property related.

Question 15

What are examples of loans not regulated under NCCP?

Answer 15

Loans in the name of a company
Loans between friends and family
Loans with no interest or charges applicable
Loans used predominantly to invest in commercial property, shares or a business
Low cost, short term credit less than 62 days
Insurance premiums paid by instalments
Credit provided without prior agreement
Staff loans

Question 16

Intent of the NCCP is to ensure the credit contracts are not provided to “unsuitable” candidates. If someone is deemed “unsuitable” what must NOT take place?

Answer 16

1) Suggesting a credit contract to consumer
2) Entering into a credit contract with consumer
3) Assist consumer to apply for a credit contract

Question 17

Interesting approach is taken where by responsibility is on the customer to prove the loan is ‘not unsuitable’. How can this be done?

Answer 17

1) Loan must meet the customer’s needs and objectives
2) Customer has the capacity to repay the loan without experiencing substantial hardship.

Question 18

It is the responsibility of the credit provider to make an honest and fair assessment of a loan to defend their decision by considering which two key obligations?

Answer 18

1) The obligation to act efficiently, honestly and fairly. Like recommending the consolidation of loans to reduce overall fees
2) Obligation to ensure the consumer is not disadvantaged by conflicts of interest

Question 19

As part of the NCCP Act 2009, responsible lending compliance involves which three key steps?

Answer 19

1) REQUIREMENTS- reasonable inquiries as to the customers financial situation and their needs and objectives.
2) VERIFY - Take reasonable steps to verify the customers financial situation
3) ASSESS - Make a preliminary assessment or final assessment about whether the credit contract or consumer lease is ‘not unsuitable’ for the customer.

Question 20

In verifying the customers financial situation what are three general principles?

Answer 20

1) Recency of documentation less than 30 days
2) Consistency of information’
3) Leverage experience across other customers to validate information.

Question 21

What are the four primary disclosure documents that must be provided to customers entering into a loan contract?

Answer 21

1) Credit guide - Provides information on the lender to the customer
2) Quote - Estimated cost to customer of using lender services must be signed and dated by the customer
3) Proposal document - Sets out the costs to the customer in using lender services at the same time that credit assistance is provided to the customer.
4) Written assessment - Demonstrates that the credit contract or customer lease is ‘not unsuitable’ for the consumer.

Question 22

What duration must a written assessment for a credit contract or customer lease be available to a customer upon request? What fee can be charged in this duration?

Answer 22

Seven years and free of charge

Question 23

In which three scenarios is a lender not required to provide a written assessment?

Answer 23

1) When no credit contract is entered into
2) Credit limit is not increase
3) No credit assistance provided

Question 24

What are some reasons why responsible lending was introduced?

Answer 24

• Consistence in process when assess customers
• Effective mechanisms for customer information verification
• Ensure no conflicts of interest
• Ensure customer are not approved for unsuitable loans

Question 25

APRA has set some additional requirements for lenders that aim to reduce investor driven loans. What are the main examples?

Answer 25

1) Limit new interest-only lending to 30% of residential mortgage lending with a strict limit of 80% LVR with strong scrutiny for LVR above 90%. Aim is to make sure investors contribute more security to limit them taking more loans.
2) Restrain growth in higher risk segments of the overall lending portfolio.

Question 26

What is credit scoring?

Answer 26

Automated technique to assist lenders in the analysis and assessment of loan applications allowing a large volume of applications to be processed in a consistent manner.

Uses statistical probabilities applied to historical information and comparing across a cohort of customers with similar characteristics.

Question 27

What is the purpose of credit scoring?

Answer 27

Allows a loan application to be:
- Approved subject to verification of information provided
- Declined
- Flagged for manual review

Question 28

What are the benefits of credit scoring?

Answer 28

1) Quicker response times
2) Improved productivity
3) Consistent and higher levels of customer service
4) Greater competition

Question 29

What are disadvantages of credit scoring?

Answer 29

• Reliant on historical information and sometimes raw data can be incorrect.
• Dehumanising
• Not effective for fringe cases

Question 30

What is behavioural scoring?

Answer 30

• Savings pattern of the customer
• Regularity of credit payments made
• Any unpaid items

Question 31

What is LVR?

Answer 31

Loan to Value (Asset) Ratio.

Question 32

Looking at loan terms what are the general time frames?

Answer 32

Short term up to 12 months
Medium term up to 5 years
Long term up to 30 years