AQ Flashcards
(74 cards)
1
Q
3.2 LOANS
A bank’s loan policy should address a minimum of what 17 areas?
A
- Collection procedures
- Normal trade area and conditions under which the bank may extend credit out of trade area
- General fields of lending in which the bank will engage & the types of loans within each general field
- Guidelines:
- for granting unsecured loans
- for interest rates and repayment terms for secured and unsecured loans
- for obtaining and reviewing RE appraisals, and ordering reappraisals
- goals for portfolio mix and risk diversification, and plans for monitoring and taking appropriate action on any concentrations that may exit
- loan review and grading system (Watch List)
- ALLL review
- safeguards to minimize potential environmental liability
- Lending authority of:
- each officer
- loan or executive committee
- Limitations
- for maximum loan volume relative to total assets
- on the extension of credit through overdrafts
- Complete/current credit files
- Board responsibility for reviewing, ratifying, or approving loans
2
Q
3.2 LOANS
What are some benefits of participation loans?
A
- Lending limits
- Diversify risk
- Improve liquidity
3
Q
3.2 LOANS
Who has the legal responsibility to formulate lending policies and to supervise their implementation?
A
Board of Directors
4
Q
3.2 LOANS
An effective loan review system is generally designed to address to what areas? (7)
A
- Adequacy and adherence to, loan policies/ procedures, and monitor compliance with relevant laws and regulations
- Evaluate activities of lending personnel
- Identify relevant trends affecting collectability of portfolio and isolate potential problem areas
- Provide:
- essential information for determining adequacy of the ALLL
- senior management and Board objective assessment of portfolio quality
- management with information related to credit quality that can be used for financial and regulatory purpose
- Promptly identify loans with well-defined credit weaknesses ensuring timely action can be taken to minimize credit loss
5
Q
3.2 LOANS
A loan review system should, at a minimum, include what? (4)
A
- Formal credit grading system that can be reconciled with framework used by regulatory agencies;
- Identification of loans or loan pools that warrant special attention;
- Mechanism for reporting identified loans, and any corrective action taken, to senior management and the board;
- Documentation of the bank’s credit loss experience for various components of the loan and lease portfolio.
6
Q
3.2 LOANS
An effective loan review policy should be established, what items must be addressed? (QIFS DRW)
A
- Qualifications of loan review personnel;
- Independence of loan review personnel;
- Frequency of reviews;
- Scope of reviews;
- Depth of reviews;
- Review of findings and follow-up;
- Workpaper and report distribution
7
Q
3.2 LOANS
An adequate ALLL should be no less than the sum of:
A
- For loans and leases classified Substandard or Doubtful, whether analyzed and provided for individually or as part of pools, all estimated credit losses over the remaining effective lives of these loans.
- For loans and leases that are not classified, all estimated credit losses over the upcoming 12 months.
- Amounts for estimated losses from transfer risk on international loans.
8
Q
3.2 LOANS
Estimated credit losses should reflect consideration of all significant factors that affect the portfolio’s collectability as of the evaluation date, including; (Q Factors)
A
- Changes in lending policies and procedures,
- Changes in local and national economic conditions;
- Changes in the volume or type of credit;
- Changes in management or lending staff;
- Changes in the volume/severity of PD, NA, TDRs, or classified loans;
- Changes in the quality of an bank’s loan review system;
- Existence of concentrations of credit;
- Changes in value of underlying collateral for collateral- dependent loans;
- Effect of external factors such as competition, legal, and regulatory
9
Q
3.2 LOANS
Examiners will generally accept management’s estimates of credit losses in their assessment of the overall adequacy of the ALLL when management has:
A
- Maintained effective systems and controls for identifying, monitoring and addressing asset quality problems in a timely manner;
- Analyzed all significant factors that affect the collectability of the portfolio;
- Established an acceptable ALLL evaluation process that meets the objectives for an adequate ALLL.
10
Q
3.2 LOANS
An institution’s ALLL methodology should: (11)
A
- Be:
- applied consistently, and when appropriate, be modified for new factors affecting collectability;
- based on current and reliable data;
- written and well-documented;
- Contain a detailed analysis of the loan portfolio analysis, performed regularly;
- Consider:
- all loans;
- all known relevant internal and external factors that may affect loan collectability;
- particular risks inherent in various types of lending;
- current collateral values;
- Identify loans to be evaluated for impairment on an individual basis under FAS 114; and segment the remainder of the portfolio into groups of loans with similar risk characteristics for evaluation and analysis under FAS 5;
- Include a systematic and logical method to consolidate the loss estimates and ensure the ALLL balance is recorded in accordance with GAAP;
- Require that analyses, estimates, reviews and other ALLL methodology functions be performed by competent and well-trained personnel
11
Q
3.1 ASSET QUALITY
What is the primary factor affecting overall asset quality?
A
The quality of the loan portfolio and the credit administration program.
12
Q
3.1 ASSET QUALITY
What are some of the factors that influence an examiners assessment of asset quality? (LAVA LOSED)
A
- Level, severity and trend of problem assets;
- Adequacy of:
- ALLL;
- internal controls and MIS exceptions;
- underwriting & credit administration;
- Volume and nature of credit documentation;
- Ability of management to properly administer its assets, including the timely identification and collection of problem assets;
- Loan and investment policies and procedures;
- Off balance sheet transactions;
- Securities underwriting and exposure to counter-parties in trading activities;
- Existence of asset concentrations;
- Diversification and quality of the loan
13
Q
3.1 ASSET QUALITY
What is a 1 AQ rating?
A
- Strong asset quality and credit administration practices;
- Identified weaknesses are minor in nature, and risk exposure is modest in relation to capital protection and management’s abilities;
- Asset quality is of minimal supervisory concern.
14
Q
3.1 ASSET QUALITY
What is a 2 AQ rating?
A
- Satisfactory asset quality and credit administration practices;
- Level and severity of classifications and other weaknesses warrant a limited level of supervisory attention;
- Risk exposure is commensurate with capital protection and management’s abilities.
15
Q
3.1 ASSET QUALITY
What is a 3 AQ rating?
A
- Asset quality or credit administration practices are less than satisfactory;
- Trends may be stable or indicate deterioration in asset quality or an increase in risk exposure;
- Level and severity of classified assets, other weaknesses, and risks require an elevated level of supervisory concern;
- Generally, credit administration and risk management practices need improvement.
16
Q
3.1 ASSET QUALITY
What is a 4 AQ rating?
A
- Deficient asset quality or credit administration practices;
- Levels of risk and problem assets are significant, inadequately controlled, and subject the financial institution to potential losses that, if left unchecked, may threaten its viability.
17
Q
3.1 ASSET QUALITY
What is a 5 AQ rating?
A
Critically deficient asset quality or credit administration practices that present an imminent threat to the institution’s viability.
18
Q
3.2 LOANS
What is leveraged financing?
A
- A transaction is considered leveraged when the obligors post-financing leverage as measured by debt-to-assets, debt-to-equity, cash flow-to-total debt, or other such standards unique to particular industries exceed industry norms for leverage;
- Examples of leveraged financing include business recapitalization, equity buyouts, business/product line build-outs and expansion, and syndicated bank loans;
- Mezzanine financing is a type of leveraged financing and is neither equity nor senior debt
19
Q
3.2 LOANS
With regard to Accounts Receivable Financing, what are the two basic methods to make A/R advances?
A
- Blanket assignment
- Ledgering
20
Q
3.2 LOANS
How do you initially assess the credit worthiness of an Oil/Gas Loan?
A
Analysis of the engineering function
21
Q
3.2 LOANS
What three critical factors does the engineering report cover?
A
- Pricing
- Discount factors
- Timing
22
Q
3.2 LOANS
If classification of oil and/or gas reserve based loans are warranted, and repayment is completely dependent upon the sale of the collateral, what are the classification guidelines?
A
- Substandard if 65% of discounted PWFNI
- Doubtful if the balance but not more than 100% of discounted PWFNI of PDP reserves
- Any remaining deficiency balance is Loss
23
Q
3.2 LOANS
What are the situations that create carryover lending?
A
- Unforeseen circumstances (weather, commodity prices, production costs)
- Existing term debt that needs to be rescheduled because of cash flow problems
24
Q
3.2 LOANS
What are the types of plans available for construction lending?
A
- Standard - Pre-established schedule of fixed payments at the end of each construction phase
- Progressive - Monthly disbursements totaling 90% of value with 10% held back
25
3.2 LOANS
What are the added risks associated with floor plan (wholesale) lending?
* Floor plan loans involve advances made against a specific piece of collateral
* The bank is unable to exercise control over the floored items
* Most dealers have minimal capital bases relative to debt thereby increasing risk, which makes frequent inspections and curtailments necessary.
26
3.2 LOANS
In agricultural lending, grain, feeder livestock, and breeder livestock loans can usually be withheld from adverse classification due to the fact they are highly marketable and provide good protection agains credit loss. Under what circumstances would you classify these type of loans assuming cash flow is poor?
* Feeder and Grain Collateral - inspections have not been performed for more than 90 days prior to the examination start date
* Breeder Collateral - Inspections have not been performed more than six months prior to the examination start date (Copies of invoices or bills of sale are acceptable substitutes for inspection reports.)
* Loans secured by grain warehouse receipts are generally excluded from adverse classification, up to the market value of the grain represented by receipts
* Value given for livestock or grain collateral should be based on the daily, published, market value as of the examination start date, less marketing and transportation costs, feed and veterinary expenses (to the extent determinable) and if material, the accrued interest associated with the loan(s).
* Current market values for breeder stock may be derived from local or regional newspapers, area auction barns, or other sources considered reliable
* If such valuations for breeding livestock cannot be obtained, the animals' slaughter values may be used
* The bank must have satisfactory practices for controlling sales proceeds when the borrower sells livestock and feed and grain
* The bank must have a properly perfected and enforceable security interest in the assets in question.
27
3.2 LOANS
What are the terms commonly encountered with direct leasing?
* Net Lease - bank is not directly or indirectly obligated to assume the expenses of maintaining the equipment
* Full Payout Lease - bank expects to realize both the return of its full investment and the cost of financing the property over the term of the lease
* Leveraged Lease - bank as lessor, purchases and becomes the equipment owner by providing a small percentage (20-40%) of the capital needed
* Creditworthiness of the lessee is paramount, and as a general rule, the bank should not enter into this type of lease transaction with any borrower it would not extend unsecured credit
* Rentals - include only those payments reasonably anticipated by the bank at the time the lease is executed.
28
3.2 LOANS
What are the three ways that a bank can be involved in a credit card plan?
* Agent Bank - receives credit applications from customers, sales drafts from merchants, and forwards documents to sub-licensee and licensee banks
* Sublicensee Bank
* Maintains accountability for credit card loans and merchant accounts;
* May maintain its own processing center for payments and drafts
* May maintain facilities for embossing credit cards
* Licensee Banks - Same as sub-licensee
* May perform transaction processing and credit card embossing services for sub-licensee banks,
* Acts as a regional or national clearinghouse for sub-licensee banks.
29
3.2 LOANS
An account that is eligible for re-aging should exhibit what?
* Borrower should show a renewed willingness and ability to repay the loan;
* Account should exist for at least 9 months before allowing a re-aging, extension, renewal, referral, or rewrite
* Borrower should make at least 3 minimum consecutive monthly payments or the equivalent lump sum payment before an account is re-aged
* Funds may not be advanced for this purpose
* No loan should be re-aged, extended, deferred, renewed, or rewritten more than once within any twelve-month period; that is, at least twelve months must have elapsed since a prior re-aging.
* Further, no loan should be re-aged, extended, deferred, renewed, or rewritten more than two times within any five-year period.
* For open-end credit, an over limit account may be re-aged at its outstanding balance (including the over limit balance, interest, and fees)
* No new credit may be extended to the borrower until the balance falls below the designated predelinquency credit limit.
30
3.2 LOANS
What are the standards for safe and sound merchant credit card activities?
* A clearing institution should _scrutinize prospective merchants_ with the same care and diligence used in evaluating perspective borrowers
* Banks engaging in credit card clearing operations _must closely monitor their merchants_
* Establish an account administration program that incorporates _periodic reviews of the merchants financial statements and business activities_
* Establish an _internal periodic reporting system_ of merchant account activities regardless of the amount or number of transactions cleared
* Clearing institutions should _follow the guidelines established_ by the card issuing networks.
31
3.2 LOANS
What are the three basic valuation approaches that are used by professional appraisers in estimating the market value of real property?
* Cost
* Market Data or Direct Sales Comparison
* Income
32
3.2 LOANS
Explain what the cost approach is in estimating the market value of real property?
* Appraiser estimates the reproduction cost of the building and improvements, deducts estimated depreciation, and adds the value of the land
* Cost approach is particularly h_elpful when reviewing draws on construction loans_
* Cost approach is usually inappropriate in a troubled real estate market because construction costs for a new facility normally exceed the market value of existing comparable properties.
33
3.2 LOANS
Explain what the market data or direct sales comparison approach is in estimating the market value of real property?
* Approach examines the price of similar properties that have sold recently in the local market, estimating the value of the subject property based on the comparable properties' selling prices
* Very important that the characteristics of the observed transactions be similar in terms of market location, financing terms, property condition and use, timing, and transaction costs
* Market approach generally is used in valuing owner-occupied residential property because comparable sales data is typically available.
34
3.2 LOANS
Explain what the income approach is in estimating the market value of real property?
* Economic value of an income-producing property is the discounted value of the future net operating income stream, including any "reversion" value of property when sold
* If competitive markets are working perfectly, the observed sales price should be equal to this value
* The income approach is usually the appropriate method for valuing the property
* Income approach converts all expected future net operating income into present value terms
* When market conditions are stable and no unusual patterns of future rents and occupancy rates are expected, the direct capitalization method is often used to estimate the present value of future income streams
* For troubled properties, however, the more explicit discounted cash flow (net present value) method is more typically utilized for analytical purposes.
35
3.2 LOANS
List the real estate-related transactions that exempt from requiring a real estate appraisal, by definition of "federally related transactions": (12)
* Transaction value is $250,00 or less;
* Lien on RE has been taken as collateral in an abundance of caution;
* The transaction is not secured by real estate;
* Lien on real estate has been taken for purposes other than the RE value;
* Transaction is a business loan that:
* has a transaction value of $1MM or less; and
* is not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment;
* RE lease is entered into, unless the lease is the economic equivalent of a purchase or sale of the leased RE;
* Transaction involves an existing extension of credit at the lending institution, provided that:
* there has been no obvious and material change in the market conditions or physical aspects of the property that threatens the adequacy of the RE collateral protection after the transaction, even with the advancement of new monies; or
* there is no advancement of new monies, other than funds necessary to cover reasonable closing costs;
* Transaction involves the purchase, sale, investment in, exchange of, or extension of credit secured by, a loan or interest in a loan, pooled loans, or interests in real property, including MBS, and each loan or interest in a loan, pooled loan, or real property interest met FDIC regulatory requirements for appraisals at the time of origination;
* Transaction is wholly or partially insured or guaranteed by a United States government agency or United States government sponsored agency;
* Transaction either:
* Qualifies for sale to a United States government agency or United States government sponsored agency; or
* Involves a residential RE transaction in which the appraisal conforms to the FNMA or FHLMC appraisal standards applicable to that category of RE;R
* The regulated bank is acting in a fiduciary capacity and is not required to obtain an appraisal under other law; or
* FDIC determines that the services of an appraiser are not necessary in order to protect Federal financial and public policy interests in RE-related financial transaction or to protect the safety and soundness of the institution.
36
3.2 LOANS
What are the minimum standards for all appraisals in connection with federally related transactions as established by Section 323.4?
* State licensed or certified appraisers
* Conform to USPAP Standards
* Preamble – Ethics and competency;
* Standard 1 – Appraisal Techniques;
* Standard 2 – Report Content;
* Standard 3 – Review Procedures
* Market Value – Be based on the definition of market value
* Written and contain sufficient information to support the institutions decision
* Appropriate deductions and discounts – analyze and review for proposed improvements, non-market terms
37
3.2 LOANS
Loan participations are accounted for as sales provided the sales criteria in FAS 140 are met. What is the criteria?
* The purchaser's interest in the loan must be isolated from the seller, meaning that the purchaser's interest in the loan is presumptively beyond the reach of the seller and its creditors, even in bankruptcy or other receivership;
* Each purchaser has the right to pledge or exchange its interest in the loan, and there are no conditions that both constrain the purchaser from taking advantage of that right and provide more than a trivial benefit to the seller; and
* The agreement does not both entitle and obligate the seller to repurchase or redeem the purchaser's interest in the loan prior to the loan's maturity, and it does not provide the seller with the ability to unilaterally cause the purchaser to return its interest in the loan to the seller (other than through a cleanup call).
38
3.2 LOANS
How should the participation be accounted for if the loan participation agreement contains a provision that gives the seller a contractual right to repurchase the participated interest in the loan at any time?
The participation should be accounted for as a secured borrowing.
39
3.2 LOANS
What are the 10 common loan problems? (COSTIFLLOP)
* Competition
* Over-emphasis on Income
* Self-dealing
* Technical Incompetence
* Incomplete credit information
* Failure to establish and implement liquidation plans
* Lack of attention to changing economic conditions
* Lack of supervision
* Overlending
* Poor selection of risks
40
3.2 LOANS
When should an express determination letter be issued?
* An "express determination" letter should be issued to a bank only if:
* The examination indicates that the bank maintains and applies loan loss classification standard that are consistent with the FDIC's standards regarding the identification and charge-off of such loans; and
* There are no material deviations from the FDIC's standards.
* An "express determination" letter should not be issued if:
* Bank's loan review process relating to charge-offs is subject to significant criticism;
* Loan charge-offs are reported in the Report of Condition and Income (Call Reports) are consistently overstated or understated; or
* There is a pattern of loan charge-offs not being recognized in the appropriate year.
41
3.2 LOANS
The definition of nonaccrual applies to any asset that demonstrates any of what three items?
* Cash basis interest payments due to the financial deterioration of the borrower
* Full P&I not expected
* P&I has been in default for a period of 90 days or more **unless** the asset is both well secured **AND** is in the process of collection
42
3.2 LOANS
When can an asset that is currently on nonaccrual be placed back on accrual status?
* None of P&I are due and unpaid, and the remaining principal and interest amounts contractually due are reasonably assured of repayment within a reasonable period
* Sustained Performance
* There is a sustained period of repayment performance (generally a minimum of 6 months) by the borrower in accordance with the contractual terms.
43
3.2 LOANS
Retail credit should be classified based on what criteria? (6)
* _Open-end_ and _closed-end_ retail loans past due _90_ cumulative days from the contractual due date should be classified _Substandard_
* _Closed-end_ retail loans that become past due _120_ cumulative days and _open-end_ retail loans that become past due _180_ cumulative days from the contractual due date should be _charged-off_
* Charge-off should be taken by the end of the month in which the 120-or 180-day time period elapses
* Bankruptcy
* Unless the institution can clearly demonstrate and document that repayment on accounts in bankruptcy is likely to occur, accounts in bankruptcy should be _charged off within 60 days of receipt_ of notification of filing from the bankruptcy court or within the delinquency time frames specified in this classification policy, whichever is shorter
* Charge-off should be taken by the end of the month in which the applicable time period elapses
* Any loan balance not charged-off should be classified Substandard until the borrower re-establishes the ability and willingness to repay (with demonstrated payment performance for six months at a minimum) or there is a receipt of proceeds from liquidation of collateral
* _Fraudulent loans_ should be charged off within _90 days of discovery_ or within the delinquency time frames specified in this classification policy, whichever is shorter
* The charge-off should be taken by the end of the month in which the applicable time period elapses
* Loans of _deceased persons_ should be charged off when the loss is determined or within the delinquency time frames adopted in this classification policy, whichever is shorter
* The charge-off should be taken by the end of the month in which the applicable time period elapses
* _1-4 family residential real estate_ loans and home equity loans that are delinquent _90 days or more_ with _loan-to-value ratios greater than 60 percent_, should be classified _Substandard._
44
3.2 LOANS
What is definition of re-aging?
* Re-aging is the practice of bringing a delinquent account current after the borrower has demonstrated a renewed willingness and ability to repay the loan by making some, but not all, past due payments
* A permissive policy on re-agings, extensions, deferrals, renewals or rewrites can cloud the true performance and delinquency status of the portfolio
* However, prudent use of a policy is acceptable when it is based on recent, satisfactory performance and the true improvement in a borrower's other credit factors, and when it is structured in accordance with internal policies.
45
3.2 LOANS
What should an account that is eligible for re-aging, extension, deferral, renewal, or rewrite exhibit?
* Borrower should show a renewed willingness and ability to repay the loan
* Account should exist for at least 9 months before allowing a re-aging, extension, renewal, referral, or rewrite
* Borrower should make at least 3 minimum consecutive monthly payments or the equivalent lump sum payment before an account is re-aged
* Funds may not be advanced by the institution for this purpose
* No loan should be re-aged, extended, deferred, renewed, or rewritten more than once within any 12-month period; that is, at least 12 months must have elapsed since a prior re-aging.
* No loan should be re-aged, extended, deferred, renewed, or rewritten more than 2 times within any 5-year period.
46
3.2 LOANS
What items should be included in the category for asset concentrations representing 25% or more of TC *(for loans)* or Tier 1 Capital *(for non-loans)* (4)? ISSI
* Individual borrower
* Small, interrelated group of individuals
* Single repayment source with normal credit risk or greater
* Individual project
47
3.2 LOANS
What items should be included in the category for asset concentrations representing 100% or more of TC *(for loans)* or Tier 1 Capital *(for non-loans)* (4)?
* Industry
* Product lines,
* Such as leveraged financing, AR, home equity, row crops, farm equipment, and subprime
* Types of collateral
* ST obligations of a financial institution or related group
* ST obligations represent FFS with a maturity of one day or less or FFS sold under a continuing contract, and resale agreements that have an original maturity of one business, and are in immediately available funds in domestic offices
48
3.2 LOANS
Why do banks get involved with Federal funds sold and securities purchased under agreement for resale?
They represent convenient methods to employ excess funds to enhance earnings.
49
3.2 LOANS
Are Federal funds sold "risk free?"
* Federal funds sold are not "risk free" as is often supposed, and the examiner will need to recognize the elements of risk involved in such transactions
* While the selling of funds is on a one day basis, these transactions may evolve into a continuing situation
* Of particular concern to the examiner is that, in many cases, the selling bank will automatically conclude that the buying bank's financial condition is above reproach without proper investigation and analysis
* If this is the case, the selling bank may be taking an unacceptable risk unknowingly.
50
3.2 LOANS
How long is a UCC-1 valid?
* 5 years;
* Continuations can be filed during the last 6 months during the 5th year
51
3.2 LOANS
What are the 3 exceptions to the Rule of Priority?
* Dealers inventory
* example - a car
* When liens perfected by doing nothing are sold to a buyer buying in good faith
* example - a TV
* When a second creditor supplies replacements or additions to the collateral
* example - a computer
52
3.2 LOANS
What is a hypothecation agreement?
Agreement where the owner of property grants a security interest in collateral to the bank to secure the indebtedness of a third party.
53
3.2 LOANS
What are the three terms basic to perfecting the security interest related to secured transactions?
* Attachment
* Security agreement
* Security interest
54
3.2 LOANS
Regarding perfecting the security interest, what is meant by attachment?
* Attachment refers to that point when the creditor's legal rights in the debtor's property come into existence or "attach."
* This does not mean the creditor necessarily takes physical possession of the property, or does it mean acquisition of ownership of the property
* Rather, it means that before attachment, the borrower's property is free of any legal encumbrance, but after attachment,the property is legally bound by the creditor's security interest.
55
3.2 LOANS
Regarding perfecting the security interest, what does the security agreement provide?
* In order for the creditor's security interest to attach, there must be a security agreement in which the debtor authenticates and provides a description of the collateral
* A creditor's security interest can be possessory or non-possessory, a secured party with possession pursuant to "agreement" means that the "agreement" for possession has to be an agreement that the person will have possession for purposes of security
* The general rule is a bank must take possession of deposit accounts (proprietary), letter of credit rights, electronic chattel, paper, stocks and bonds to perfect a security interest therein
* In a transaction involving a non-possessory security interest, the debtor retains possession of the collateral
* A security interest in collateral automatically attaches to the proceeds of the collateral and is automatically perfected in the proceeds if the credit was advanced to enable the purchase.
56
3.2 LOANS
Regarding perfecting the security interest, what does the security interest relate to?
* A party's security interest in personal property is not protected against a debtor's other creditors unless it has been perfected
* A security interest is perfected when it has attached and when all of the applicable steps required for perfection, such as the filing of a financing statement or possession of the collateral, have been taken
* These provisions are designed to give notice to others of the secured party's interest in the collateral, and offer the secured party the first opportunity at thecollateral if the need to forecloseshould arise
* If the security interest is notperfected, the secured partyloses its secured status.
57
3.2 LOANS
What are the characteristics of Chapter 7 Bankruptcy?
* Trustee collects all of the debtors nonexempt property, converting it into cash, and distributing the proceeds amojng the debtor's creditors
* All debts are discharged
58
3.2 LOANS
What are the characteristics of Chapter 13 Bankruptcy?
* Debtors are allowed to retain their assets, but their obligations are restructured
* A plan is implemented whereby creditors may be paid
* Generally result in greater debt recovery than do liquidation situations under Chapter 7
* May only be used by individuals with regular incomes and:
* Secured debts must be \< $350M
* Unsecured Debts must be \< $100M
59
3.2 LOANS
What are the characteristics of Chapter 11 Bankruptcy?
* Debtors are allowed to retain their assets, but their obligations are restructured
* A plan is implemented whereby creditors may be paid
* Generally result in greater debt recovery than do liquidation situations under Chapter 7
* Available to all debtors, whether individuals, corporations or partnerships
60
3.2 LOANS
What is the definition of a SNC?
* Any loan and/or formal loan commitment, including any asset (ORE, stocks, bonds) which the original amount aggregates $20 million or more
* The loan is shared by three or more unaffiliated institutions under a formal lending agreement, or a portion of which is sold to two or more unaffiliated institutions,
* The purchasing institution assumes its pro rata share of credit risk.
61
3.2 LOANS
What are the four phases in a loan syndication?
* Pre-Launch Phase
* Launch Phase
* Post-Launch Phase
* Post-Closing Phase
62
3.2 LOANS
What actions take place in the pre-launch phase for a loan syndication?
* Syndicators identify the borrower’s needs and perform their initial due diligence
* Industry information is gathered and analyzed
* Background checks are performed
* Potenial pricing and structure of the transaction takes shape
* Formal credit write-ups are sent to credit officers for review and to senior members of syndication group for pricing approval
* Competitive bids are sent to the borrower
* An information memo is prepared by the agent addressing all principal credit issues relating to the borrower and to the project being financed. The memo should contain:
* Overview of the transaciton including a term sheet
* Overview of the borrowers' business,
* Quarterly and annual certified financial statements
* Memo acts as both the marketing tool and source of info. for the syndication
63
3.2 LOANS
What actions take place in the launch phase for a loan syndication?
* The transaction is launched into the market when banks are sent the information memo
* Legal counsel begins to prepare the documentation
* Negotiations over price, collateral, covenants, and other terms takes place between banks and the borrower
* Most often, a bank meeting will be held so potenial participants can discuss the company's business and industry both with the lead agent and with the company
64
3.2 LOANS
What actions take place in the post-launch phase for a loan syndication?
* Potential participants are given a two week period to evaluate the transaction and make a decision
* During this period, banks will perform thier due diligence and credit approval
* After the committment due date, participating banks receive a draft credit agreement for review (usually one week to make comments)
* Final credit agreement is then negotiated based on comments received
* The loan will close two-five days after the credit agreement is finalized
65
3.2 LOANS
What actions take place in the post-closing phase for a loan syndication?
* On-going communication between the borrower regarding financial/operating performace, and quarterly covenant compliance checks
* A full credit analysis and participant meeting should be completed annually
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What are some examples of SNCs?
SNCs include:
* All international credits to borrowers in the private sector, regardless of currency denomination, which are administered by a domestic office
* Assets taken for debts previously contracted
* Other real estate,
* Stocks,
* Notes,
* Bonds,
* Debentures
* Credits or credit commitments that have been reduced to less than $20 million and were classified or criticized at the previous SNC review, provided they have not been reduced below $10 million
* Any other large credit(s) designated by the supervisory agencies as meeting the general intent or purpose of the SNC program
* Two or more credits to the same borrower that aggregate $20 million and each credit has the same participating lenders.
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3.2 LOANS
What is Subprime Lending?
A lending program or strategy that targets borrowers who pose a significantly higher risk of default than traditional retail customers.
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3.2 LOANS
What are some characteristics of subprime borrowers?
* Two or more 30-day delinquencies in the last 12 months, or one or more 60-day delinquencies in the last 24 months
* Bankruptcy last 5 years
* Judgement, foreclosure, repossession, or charge-off in the prior 24 months
* FICO \< 660
* Debt to Income ratio of 50% or greater(28% - 36% is industry standard)
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3.2 LOANS
What is a concentration in subprime lending?
25% of Total Capital
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3.2 LOANS
How much more capital should a bank hold when engaging in subprime lending?
1.5 to 3 times more than non-subprime lenders
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3.2 LOANS
What is AR Financing used for?
* Rapidly growing businesses that need year-round financing in amounts too large to justify unsecured credit
* Non-seasonal businesses that need year-round financing because working capital and profits are insufficient to permit periodic cleanups
* Businesses whose working capital is inadequate for the volume of sale and type of operation
* Businesses whose previous unsecured borrowings are no longer warranted due to various credit factors
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3.2 LOANS
In AR financing, blanket assignment is one of basic methods used to make A/R advances, what is the process?
Borrower periodically informs bank of the amount of AR outstanding and bank advances funds based on a percentage.
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3.2 LOANS
In AR financing, ledgering is one of basic methods used to make A/R advances, what is the process?
Lender receives duplicate copies of invoices together with shipping documents and advances the agreed upon percentage of outstanding receivables.
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3.2 LOANS
What is mezzanine financing?
* A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies
* Mezzanine financing is basically debt capital that gives the bank the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full
* It is generally subordinated to debt provided by senior lenders such as banks and venture capital companies
* Mezzanine financing is usually provided to the borrower very quickly with limited due diligence on the part of the lender and little or no collateral on the part of the borrower
* This type of financing is aggressively priced with the lender seeking a return in the 20-30% range
