MID TERM CREDIT COLLECTION Flashcards
is a procedure undertaken by a financial institution to vet a potential client’s ability to pay back a loan.
Credit investigation
(referred to as background investigations) - seek information about an applicant’s employment, criminal, and personal history to investigate behavioral reliability, integrity, and personal adjustment.
Background evaluations
is a tool used by banks or financial
institutions to gather relevant information to determine whether an applicant will qualify for a loan or not.
CI/BI
A ________can prevent loan
delinquency problems and ensure
profits.
thorough CI/BI
A ________ can lead to loss
of income due to non-collection of
loan installments, or suspension of loan
operations due to slow rotation of
loanable funds.
poorly done CI/BI
The Account officer interviews the applicant and helps fill out the Loan Application form.
Step 1: Loan Application
The account officer (AO) gathers information from references
to assess character or reputation using the following indicators:
1.) Stability
2.) Entrepreneurship
3.) Reputation
4.) Repayment Behavior
Step 2: Character/Risk Analysis
whether to recommend the applicant for a loan or NOT.
Account Officer should decide during the
loan application process
AO uses the ___________ to
determine the maximum loan
entitlement an applicant can afford to
pay.
Step 3: Cash Flow Preparation/Analysis
Step 4: Prepare/Finalize CI/BI Report
is the primary basis for evaluating loan applications and establishes whether the
applicant deserves a loan.
Character
establishes the maximum loan entitlement an applicant can afford to pay.
Repayment Capacity
is an asset pledged by a borrower to
a lender until a loan is paid
back.
Collateral
items are assets or liabilities that do not appear on a company’s balance sheet
(Investopedia).
Off- Balance sheet (OBS)
-collateral limits a lender’s losses by giving protection against the partial or total loss of resources.
Protection against risk
Collateral is also a screening device
(next to several other screening
devices built into a loan contract, for
example, the interest rate).
Screening
What happens to a collateral in case of default?
- The Lender can seize the colateral
- The Lender may sell the collateral
- Your credit score will be negativbely impacted
4.You may still owe money
In case of a borrower’s
default, the lender will typically send a notice of default and demand payment within a certain time frame.
Repossession
a matter of a certified transfer of the document testifying ownership.
A chattel mortgage
is personal property that is movable
between locations, as opposed to real
property, which has a fixed location.
Common examples include mobile homes,
furniture, and automobiles (Investopedia).
Chattel
can be easily pledged
under a chattel mortgage, but if they are
seized, then business activities could be
severely disrupted.
Tools and equipment
Some of the most obvious borrower criteria of preferability of different
types of collateral are:
transaction costs
impact on current household and enterprise affairs
social exposure
refers to real, or physical,
property, and can include
land, buildings, air rights
above the land, and
underground rights below
the land.
Real Estate
It refers to manufacturing plant &
machinery, trucks, drilling rigs, presses,
forklifts, and similar items— applicable to
long-term loans.
Plant and Equipment
This is another person
with adequate personal
wealth who agrees to pay
back the loan if the
business fails and defaults
on the loan repayments.
GUARANTOR
A collateral assignment of _________ is a conditional assignment appointing a lender as an assignee of a policy.
Essentially, the lender has a claim to some or all of the death
benefit until the loan is repaid. The death benefit is used as
collateral for a loan.
LIFE INSURANCE POLICIES
is a provision a lender puts in a business loan agreement
that requires owners to be personally responsible for
their company’s debt in case of default.
Personal Guarantee
Remember!!
Other items can be used as collateral,
including:
Investment documents (such as share
certificates and debenture certificates)
Antique furniture
Gold, silver, and other valuable jewelry
Rare and valuable works of art
Appliances
Types of financial collateral you can use to
secure a loan for your business
cce
inventory
equioments
real estate
personal property
IP
is responsible for reviewing and
evaluating loan applications to ensure
that they meet the lending criteria of the
financial institution.
is usually composed of
experienced professionals who have a
good understanding of lending practices
and risk management.
responsible for assessing
the risks associated with the loan and
recommending appropriate loan terms
and conditions.
is the final decision-making
authority on loan approvals, and its
decisions are binding.
The loan committee:
The committee is usually chaired by a
___________ who has the authority
to approve loans on behalf of the
institution.
senior executive
The committee members are selected
based on their :
expertise in lending
practices, risk management, and
financial analysis.
The loan committee can help financial
institutions manage their risks better by
ensuring that all loan applications are
thoroughly reviewed and assessed for risk.
Improved risk management
The loan committee can help ensure that
loan decisions are consistent and based on
objective criteria rather than subjective
factors.
Consistent decision-making
The loan committee can help ensure that loan approvals are
made in accordance with regulatory requirements and internal
policies and procedures.
Enhanced accountability
The loan committee can help ensure that loan applicants receive
prompt and professional service and that their loan applications are
processed efficiently.
Better customer service
some institutions may choose to delegate loan approval authority to individual loan officers or credit analysts. This
approach can be more efficient but may also result in inconsistent decision-making and increased risk. Another alternative
is to use automated loan approval systems that use algorithms and data analysis to assess loan applications. This approach
can be faster and more objective, but it may also lack the human judgment and expertise that a loan committee can
provide
Alternatives to a Loan Committee
is a numerical representation of
your creditworthiness based on the borrower’s credit
history. It is calculated based on various factors such
as payment history, credit utilization, length of credit
history, and types of credit accounts.
Credit score
indicates that you are a high-
risk borrower and may have difficulty repaying your loans.
A poor credit score
indicates that you are a
responsible borrower and are likely to repay your
loans on time. It can help you to qualify for loans
with better interest rates and favorable terms.
A good credit score
One of the most important factors that loan committees consider when evaluating loan
applications is
the debt-to-income ratio (DTI).
can be a red flag for lenders, indicating
that the borrower may have difficulty making
payments on the loan.
A high DTI
is a financial metric that compares a borrower’s monthly
debt payments to their monthly income. Lenders use this ratio to evaluate a
borrower’s ability to repay a loan.
Debt-to-income ratio
What are the alternatives to the Debt-to-Income Ratio?
lenders may look at your credit
score, employment history, or assets
when evaluating your loan application.
is a crucial step in the loan
approval process. It involves assessing the value of the
assets that a borrower pledges as security for the loan.
Collateral and asset evaluation
which helps them decide whether to approve or
reject the loan application.
The loan committee evaluates the collateral to determine its worth,
is essential because it
provides a lender with security in case
a borrower defaults on their loan.
Importance of Collateral evaluation
Can take many forms,
including real estate, vehicles,
equipment, stocks, and
bonds. The type of collateral
required depends on the type
of loan and the lender’s
policy.
Types of Collateral
There are various methods of
valuing collateral, including
appraisals, market value, and
book value.
Valuation Method
is the ratio of the
loan amount to the value of the collateral.
Loan to Valuation ratio
signifies that the borrower has
pledged assets that are worth less than the
loan amount.
high LTV ratio
indicates that the borrower has
pledged assets that are worth more than the loan amount. Lenders prefer a __________ as
it reduces their risk in case of default.
low LTV ratio
