Exam 3 Study Guide

Know what type of loan someone is using when given an example.

**listed below

Know the elements that are used in FICO credit scoring system.

-Borrower's pmt history -Amount of money owed -Length of prospective borrower's credit history -Nature of new credit being requested -Types of credit borrow has already used

What are the most common sources that lenders look to for repayment of business loans?

-Business borrower's profits or cash flow -Business assets pledged as collateral behind loan -A strong balance sheet w/ ample amounts of marketable assets & net worth -Guarantees given by business, such as drawing on owners' personal property to backstop loan

What was the CRA act designed to do?

Community Reinvestment Act 1977 designed to prevent lender from arbitrarily marking out certain neighborhoods deemed undesirable & refusing to lend to people whose addresses place them in excluded area

What does the CRA act require bankers to do

Community Reinvestment Act 1977 requires bankers to make "affirmative effort" to meet credit needs of individuals & businesses in their trade territories so that no areas of local community are discriminated against in seeking access to credit

What is an advantage of a credit card?

Convenience Flexible Revolving line fo credit

Know what are important factors that are used in credit scoring?

Customer's occupation or line of work Housing status Credit rating Length of time in current job Length of time at current address

What law prohibits a bank from asking what race you belong to?

Equal Credit Opportunity Act

What law prevents individuals from being denied credit because of race, sex, religion, age or public assistance called?

Equal Credit Opportunity Act 1974

What federal law permits consumers to dispute billing errors?

Fair Credit Billing Act of 1974

What act gave customers the right to access the information from their credit files?

Fair Credit Reporting Act

What are term loans normally secured by?

Fixed assets owned by borrower

What are term loans usually secured by?

Fixed assets owned by borrower

What type of ratio would a bank examine to determine whether a borrower can raise cash in a timely fashion to pay bills?

Liquidity Ratio

Are personal loans deserving of a better rate than an automobile loan?

No, personal loans can be unsecured - making them more risky thus a higher interest rate; whereas, automobile loans are secured - making them less risky thus a lower interest rate

What category do loans to finance one-to-four family homes fall under?

Real Estate

What is the largest category of loans extended by US Banks? (Hint: by dollar volume)

Real Estate Loans

What is the fastest growing consumer loan category in the last few decades?

Real Estate loans

How do lenders in the consumer loan field prefer to measure a borrowers income?

Size & Stability

A bank that loans primarily to individuals, families, and small businesses is categorized a ____? (what type)

Small commercial banks

What kind of credit is extended to help you purchase raw materials and cover seasonal peak need for cash. (Hint: usually up to one year)

Working Capital Loan

Do customers have the right to receive written notice if they are denied credit?

Yes, through the ECO Act

What is an installment loan?

credit that is repayable in 2 or more consecutive pmts, usually on monthly/qtrly basis

Financial Institution Loans

credit to banks, insurance comps, finance comps, etc

Loans to Individuals

credit to finance purchase autos, mobile homes, appliances, & other retail goods, to repair & modernize homes, & to cover cost of medical care & other personal exp, and are either extended directly to individuals or indirectly thru retail dealers

What is happening to small business lending by banks?

declining in proportion of all loans

LT - Loans to support acquisitions of other business firms

def

LT - Term Loans to support purchase fo equipment, rolling stock, & structures

def

Agricultural Loans

extended to farms & ranches to assist in planting & harvesting crops and supporting feeding & care of livestock

LT - Project Loans

finance construction of fixed assets

ST - Self-liquidating Inventory Loans

finance purchase of inv (raw materials/finished goods to sell)

Commercial & Industrial loans

granted to businesses to cover purchase of inv, pay taxes, & meet payroll

What is the principal reason that banks are chartered?

issue charter of incorporation by state & local gov so they can make loans to customers

ST - Working Capital Loans

last few days to 1 yr, secured by accts rec or pledges of inv

ST - Syndicated Loans

loan package extended to corp by group of lenders

Define a "blind spot"

may be built into repmt schedule of term loan wherein no installment will be due bc of shortage of cash w/ borrower

Know what aspect of evaluating a customer loan application that a bank is evaluating when given an example.

-Character & Purpose - keen sense of moral responsibility to repay loan on time -Income levels - size & stability of individual's income -Deposit balances - indirect measure of income size & stability (Daily Avg Deposit Balance) -Employment & Residential Stability - duration of employment & length of residence -Pyramiding of debt - individual draws credit at one lending institution to pay another

What factors go into determining the mix of loans that a bank has?

-Characteristics of market area -Lender size (wholesale vs retail) -Experience & expertise of mangt -Loan policy -Expected yield of each type of loan -Regulation

What are some things that a bank must do when analyzing a commercial loan request?

-Check qualifications of borrowing firm's mangt -Evaluate potential expenses incurred to service loan -Check whether adequate insurance coverage will be secured -Consider trends in market demand

What are some challenges in making a consumer loan?

-Easy for individuals to conceal pertinent info bearing on payout of loan -Default rate on consumer loans is usually several times higher

What does the Equal Credit Opportunity Act allow for?

-prohibits lenders from asking certain questions of customer needs such as age or race -allows for denied applicants to get reasons for denial, which credit bureau report was used, & where credit report is located

What percent are banks limited to when it comes to an unsecured loan to a single borrower?

15% -unsecured loan to single customer normally cannot exceed 15% of single national bank's unimpaired capital & surplus account (Legal Lending Limit)

What does the letter A stand for in the Camels rating system?

Asset quality

An increasing portion of loans that are short term has consisted of what?

Business or Commercial & Industrial

What does the letter C stand for in the Camels rating system?

Capital adequacy

What is a lender's secondary source of repayment in case of a default?

Collateral

What is happening to small business lending by banks?

Declining in proportion to all loans

What companies can provide information about industries that a banks customers are in?

Dun & Bradstreet Industry Norm & Key Business Ratios

What type of loan has grown in popularity as a result of the Tax Reform Act of 1986?

Home Equity Loan

What are loans that are used to purchase "big ticket items" classified as?

Installment loans - ST to MidTerm loans, repayable in 2 or more consecutive pmts

What is short term lending for construction of homes, apartments, office buildings called?

Interim Construction Financing

What type of loan would be used to purchase a new bulldozer?

Term loan

What does a rating of 5 in the Camels rating system mean for a bank?

Unsatisfactory Performance

What does a "coverage ratio" measure?

adequacy of earnings, ability to meet financial obligations -protection of afforded creditors based on amount of business customer's earnings

What qualities should good collateral possess?

age, condition, degree of specialization

Miscellaneous Loans

all loans not listed above

What is the "right of offset"?

allows bank to call loan that is in default & seize any checking/saving deposits the customer may hold w/ bank in order to recover its funds

LT - Revolving Credit Financing

allows customers to borrow up to pre-specified limit, repay all or portion of borrowing, & reborrow as necessary

Does the amount of lending rise or decline during expansion?

amount of lending rises during expansion

What is a loan workout?

process of recovering funds from problem loan situation

ST - Security Dealer Financing

purchase new securities & carry existing portfolios of securities until they are sold to customers

What disclosure requires that borrowers be quoted the "true cost" of a loan?

reflected in Annual Percentage Rate

ST - Asset-based Loans

secured by ST assets of firm that are expected to roll over into cash in future

Real Estate Loans

secured by real property & include ST loans for construction & land development and LT loans to finance purchase of farmland, homes, apts, commercial structures, & foreign properties

ST - Interim Construction Financing

secured, used to support construction of homes, apts, office buildings, shopping centers, & other permanent structures

What does Retail Credit in banking refer to as far as loans are concerned?

smaller-denomination personal cash loans & home mortgage loans extended to individuals & families as well as sm business loans

ST - Retailer & Equipment Financing

support installment purchases of autos, home appliances, durable goods by financing receivables that dealers selling these goods take on when they write installment contracts to cover customer purchases

Lease Financing Receivables

where lender buys equip or vehicles & leases them to its customers