Module 3: The Five C’s Of Credit and credit scoring
Recap of Previous Day
Questions or Concerns
Module Overview Day 3
In this module you will learn the Five C’s of Credit and begin to analyze the credit report and the data from the application. Understanding the Five C’s of Credit will allow you make an informed credit decision that will assed the risk and minimize the banks exposure in the consumer loan portfolio.
Terminal Performance objectives:
Upon completing this module you will be able to do the following
Describe the Five C’s of Credit
Evaluate the Credit Bureau utilizing Character
Identify Assets and liabilities
Calculate debt to income ratio
Evaluate Conditions that effect the lending decision
Criteria
Each participant will be measured by a module end progress test and by classroom discussion and participation to ensure the participant is able to comprehend the Five C’s and credit scoring.
Instructional Material discussion
The Five C’s Of Credit
Character
Often times the lender will have the opportunity to gather information during a face to face interview session with the applicants. This will give the lender an opportunity to review special considerations that might be taken for the lending decision However all information obtained for the loan application must be factual and not discriminatory. The most effective way to establish an applicant’s character is from the Credit Bureau. This will ensure that all regulations are being followed.
Examples
Reviewing the age of accounts, account utilization and the mix of accounts
(In class detailed discussion of examples)
Capacity
Capacity is simply the consumer’s ability to repay the loan. Can the customer handle their current credit obligations along with the new proposed debt? Looking at Debt to income is the best way to calculate to see if the consumer has disposable income for the new additional credit obligation
Debt to income Guidelines: Please note these guidelines are used for
training purposes only…. Please consult your specific financial institution for
their exact guidelines.
Looking at Debt to income guidelines
|
Gross annual income |
Gross Monthly
income |
Guideline ratio |
|
$40,000 and under |
$3,333 and under |
36% |
|
$40,001 to $50,000 |
$3,334 to $4,167 |
40% |
|
$50,000 and over |
$4,168 and over |
44% |
What is included in the total monthly obligations (debt)
New loan payment
Monthly payments on I/L - Review Credit Bureau
Revolving debt- Credit cards, calculate the outstanding
balance
Mortgage Payment- Taxes or Rent
Support payments – ( child support or
alimony)
Debt to Income Calculation
Debt to Income = Total Monthly
obligations / Total Recurring Gross Income
Example:
Total Monthly obligations $ 1400 Total Monthly income $3300
$1400/$3300 = 42%
Conditions:
Conditions are criteria that
reflect the applicants stability or often instability.
Example:
Time at current address? Why is this important?
Residence status can gauge various issues such as stability. However if a customer has lived someplace a short time find out why they moved... IE… Recent job transfer, new home purchase, etc. Keep in mind that short time residence does not always mean instability. As a lender you must look at the big picture.
Time on the Job? Has the applicant had the same job for over two years? If not have they been in the same career field? Evaluate this situation because in times of economic changes consumers are often forced to find new jobs.
Collateral
When briefly mentioned collateral in an earlier module that spoke about NADA and calculations. Collateral simply means the borrowers assets that WE the bank are lending them money against. By doing a new loan we are taking the customers word that they will pay the bank as agreed. However using the collateral minimizes the potential for total loss if the loan is not repaid…. COLLATERAL ONLY REDUCES RISK EXPOSURE THE BANK ALWAYS ACEPTS RISK WHEN LENDING MONEY.
Please note most banks are not collateral lenders. What does this mean? This means that the bank will not loan money based upon the collateral, the lenders decision should be based upon the applicant’s ability to pay… Income or savings account.
To calculate LTV determine the value of the collateral and the amount borrowed.
Example: NADA value of Used car is $15000 and the consumer wants to borrow $13000 The LTV is 86% this means there is 14% equity in the collateral
For specific guidelines consult your specific financial institution as they may vary.
Capital
Capital means Assets – Liabilities = Net Worth
Examples of Assets: Cash, CD’s, Stock and Real Estate just to name a few
Examples of Liabilities: Outstanding Auto loan
Secured and Unsecured Loans
Secured loans have collateral where unsecured do not have collateral. Unsecured loans leave greater risk exposure to the bank. As a lender you should work with customers to finds ways to secure the loan. This will not only allow the consumer a low rate but will also allow the bank to place a lien on the collateral leaving less risk exposure to the bank.
Example of Unsecured loan that could be secured
Customer wants $3,000 for vacation?
As lender you should talk to the customer about a Home Equity product that your financial institution has. This will allow the customer more advantages such as a lower rate and possibly allow the customer tax advantages… Have the customer consult with their tax advisor.
Progress test for
Module 3 Please use additional paper for answers
Wrap up Session
Today I
learned…….. Or I discovered ………..