1 - Principles of lending

Question 1

What are the principles?

Answer 1

• The person
  -Amount and purpose
  -Repayment
  Viability
  -Security -
  Remuneration
  -Services

Question 2

How many years is short, medium and long term lending?

Answer 2

Short - up to 3 years
Medium - 3 - 10 years
Long - Over 10 years

Question 3

Who set bank of England base rates?

Answer 3

Bank of England Monetary policy committee.

Question 4

How is 3% over base rate written?

Answer 4

3/BR

Question 5

What does LIBOR stand for?

Answer 5

London inter bank offered rate

Question 6

What reasons are different loans charged at different rates?

Answer 6

• Market rates generally
  -Supply and demand at the time the facility is agreed
• Duration of borrowing
  -Type of customer
  -Whether there is security
  -The amount being borrowed
  -Risk

Question 7

• Why are personal lending applications used?

Answer 7

• Verify identity of the customer as required by regulations
  -No important info is missed
• Set out in a standard format
  -Shows that all relevant information has been taken into account
  -Easy for others to read
  -

Question 8

In a lending application what is being assessed and taken into consideration?

Answer 8

• Risk and reward
  -Is it viable - i.e is the customer able to make repayments.
  -Have all factors been taken into account

Question 9

When approached by an existing customer for lending what information can be used?

Answer 9

-Customers accounts
-Standing orders/direct debits
-Evidence of regular savings
-Do they use other areas in the organisation?
-Lending files
-Customer profile - personal info saved on them.

Question 10

When you have built a profile on an existing customer using previously stored information what should you do?

Answer 10

Use the information to confirm with the customer what aspects of the information are still relevant and update the parts that are not.

Question 11

Having made the decision to lend, what should you then think about?

Answer 11

• Security
• Reward
• Other services that we could offer.

Question 12

What are the 3 c’s?

Answer 12

Character, capacity and commitment

Question 13

What characeristics do you look for in a customer?

Answer 13

• respectable/ trustworthy
  -Honest
  -Dependable
  -High integrity

Question 14

What factors should you look at for a customers capacity?

Answer 14

• Age of customer
  -Experience
  -Reputation

Question 15

What typical assets could a customer own?

Answer 15

• Property
  -Stocks and shares
• Government securities
  -Life assurance policies
  -Bank accounts
  -Antiques, paintings, classic cars, boats.

Question 16

What liabilities could a customer have?

Answer 16

-Outstanding mortgage
-Loans/credit cards
-Guarantees

Question 17

How is a customers ‘net means’ figure calculated?

Answer 17

Customer assets - Customer total liabilities

Question 18

What are the consequences if a customer does not borrow enough money?

Answer 18

Could complete half a extension on their home and not be able to complete. May struggle to get the additional funds.

Question 19

Why do banks need to know the purpose of the loan?

Answer 19

-To ensure that the lending is consistent with the banks credit policy.
-The Bank of England also has rules restricting the amount that a bank can lend to one customer or industry.
-No suspicions of money laundering

Question 20

What is loan to vaule?

Answer 20

The ratio of the size of the borrowing compared to the value of the asset.

Question 21

What factors could effect a customers means to make repayments?

Answer 21

-If borrowing with a variable rate , interest rates increase meaning customer could struggle.
- Unstable employment/ income.

Question 22

What 3 things should you look for in security?

Answer 22

• Simplicity of title
• Stability of value
• Realisability

Question 23

Why is simplicity of title good in regards to security?

Answer 23

can be taken easily, quickly and cheaply

Question 24

Why is stability of title good in regards to security?

Answer 24

The value of the security needs to remain the same and be easy to value.

Question 25

What can you do to help with stability of title?

Answer 25

Ensure that the differences between the borrowing you grant and the value of the asset is sufficient to allow for depreciation in value.

Question 26

What are the easiest types of security to value?

Answer 26

* cash deposits * assignments of life policies * quoted stocks, shares and gilts * real property – land, houses, etc.

Question 27

What are difficult types of securities to value?

Answer 27

* specialised or commercial property * unquoted shares.

Question 28

How do financial services make profit?

Answer 28

- Differences in interest rates -arrangement fee's -Charges for services -Commission

Question 29

What can influence the margin a customer is charged on lending?

Answer 29

- Whether or not the borrowing is secured - Whether the advance has been agreed before hand - i.e unauthorised overdraft.

Question 30

Why was credit scoring introduced?

Answer 30

-To improve the trade off between writing new business and bad debt. -For decision making to be faster and consistent.

Question 31

What is a credit policy?

Answer 31

High level internal document stating a banks credit framework and objectives.

Question 32

What are the reasons a credit policy is issued?

Answer 32

- Gives a consistent approach - Improves customer service - Lending managers understand clearly what the parameters of their lending authority is.

Question 33

What is covered off in the credit policy?

Answer 33

- Objectives and scope of the policy - Sanctioning authorities - Credit approval process - Product parameters - Monitoring process - Aggregation policy ( total exposure) - Management of problem accounts

Question 34

What is the credit policy structure?

Answer 34

1. Board 2. Credit risk Committee 3. Divisional Risk Committee 4. Business area risk committee 5.Business Areas

Question 35

What do the divisional risk committee do?

Answer 35

-High level monitoring. -Approve policy changes -Sanction high credits that are outside credit policy guidelines.

Question 36

What do 'business area credit risk committee' do?

Answer 36

- Refine policies - Full portfolio monitoring - Collections and write-offs -Controlling credit policy breaches

Question 37

What do 'business areas' do for the credit policy?

Answer 37

Develop policies and procedures for approval from committee's. They must demonstrate compliance to credit policy guidelines.

Question 38

When considering a person who is looking to borrow money, a bank will examine their: A character, capacity and commitment B character, capacity and capital C character, capacity and conduct D character, capacity and capability

Answer 38

A character, capacity and commitment

Question 39

The restrictions laid down by a bank that limits their exposure to lending in certain sectors are called: A lending limits B sanctioning authority C sector limits D portfolio limits

Answer 39

D portfolio limits

Question 40

If a customer wishes to borrow £100,000 to help finance the purchase of a yacht costing £150,000,the loan to value is ?

Answer 40

67%

Question 41

Many lenders maintain that the most important area for consideration when considering a lending request is?

Answer 41

Repayment

Question 42

Which one of the following security items would be the most difficult to value: A cash lodgement B commercial property C a life policy D BP shares

Answer 42

B commercial property

Question 43

The definition of “long term lending” is a loan period in excess of: a) 5 years b) 7 years c) 10 years d) 15 years

Answer 43

c) 10 years

Question 44

The document that states a bank’s credit framework and objectives is called a: a) lending limit b) credit framework c) lending guideline d) credit policy

Answer 44

d) credit policy

Question 45

Which of these security items would be the most difficult to value? a) cash lodgements b) unquoted shares c) life policies d) quoted shares

Answer 45

b) unquoted shares

Question 46

If a customer is self employed, you could verify their ability to repay by looking at their: a) P60 b) annual accounts c) P45 d) past borrowing record

Answer 46

b) annual accounts