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Flashcards in Asset Quality (Loans) Deck (107):

What are the three ways a bank can be involved in credit card plan?

Agent Bank - receives cc applications from customers and sales drafts from merchants and forwards them to sub-licensee and licensee banks

Sub-licensee Bank: maintains accountability for cc loans and merchant accounts; may maintain its own processing center for payments and drafts

Licensee Banks: same as sub-licensee banks, but may perform transaction processing and cc embossing services for sub-licensee banks, and acts as a regional or national clearinghouse for sub-licensee banks.


What are the 4 types of LOC?


Travelers – Generally sold for cash

Those sold for cash – not reported as a contingent liability, but rather as a demand deposit.

Commercial – issued specifically to facilitate trade or commerce. Drafts will be drawn when the underlying transaction is consummated as intended.

Standby – irrevocable commitment on the part of the issuing bank to make payment to a designated beneficiary. Not expected to be used unless the account party defaults in meetings an obligation to the beneficiary.


How can a nonaccrual loan return to accrual status?

P&I that are contractually due (including arrears) are reasonably assured of repayment within a reasonable period

There’s a sustained period of performance (6 mos.) in accordance with the contractual terms


AQ Rating?

Strong AQ and CA practices



What are the supervisory limits under Appendix A to Part 365?

Raw Land - 65%

Land development - 75%

Construction of commercial, MF, and other non-res.- 80%

Construction of 1-to-4 family residential - 85%

Improved property- 85%


AQ Rating?

Deficient AQ and CA



What is the percentage of capital for a bank to be considered a subprime lender?

25% of tier 1 capital


What is a hypothecation agreement?

An agreement whereby the owner of property grants a security interest in collateral to the bank to secure the indebtedness of a third party


AQ Rating?

Risk exposure is commensurate with C and M abilities



Under what circumstance would you classify an Ag loan? (suppose CF is poor)

Feeder and Grain Collateral - inspections have not been done within 90 days of the exam start date

Breeder - inspections have not been done within 180 days of the exam start date

Note: Copies of invoices are acceptable substitutes for inspection reports


When should a loan be placed on nonaccrual?

How can a nonaccrual loan by kept in accrual status?

Cash-basis interest payments are needed b/c of the borrower’s deterioration

90 days PD on P&I

Sooner than 90 days if M has reason to believe the bank won’t get all P&I

Loan can remain in accrual if its well secured and in process of collection



In an A/B note structure, when can you take the A note back to accrual?

4 criteria must be met:

Qualifies as a TDR

B note has been charged off

A note is reasonably assured of repayment and of performance in accordance with modified terms

Sustained performance (6 months) either immediately before or after the restructuring


AQ Rating?

Less than satisfactory AQ and CA



Loan Problems

misplaced emphasis upon loan income rather than soundness

Over emphasis on income


What makes up a concentration at 100% of TC?


Type of Collateral
Product Line
Short-term obligations of a bank or related group - not included are obligations secured by US Agencies


For a fixed asset that is owned, can you capitalize interest? Why? How?

Interest may be capitalized as part of the historical cost of acquiring assets that need a period of time to be brought to the condition and location necessary for their intended use.

Interest costs include actual interests incurred when the construction funds are borrowers and the interest costs imputed to internal financing of a construction project.


AQ Rating?

If left unchecked may threaten its viability



What is the definition of doubtful?

Loans with all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and value, highly questionable and improbable


What is the definition of substandard?

Inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged

Well-defined weaknesses or weaknesses that jeopardize the liquidation of the debt

Characterized by possibility that bank will sustain some loss if the deficiencies are not corrected


What are examples of off-balance sheet contingent liabilities?

Always Be Running

Asset-backed commercial paper programs

Bankers Acceptances

Revolving underwriting Facilities


AQ Rating?

Identified weaknesses are minor



Loan Problems

sometimes results in the compromise of sound credit principals and acquisition of unsound loans.



AQ Rating?

Critically deficient AQ or CA practices



AQ Rating?

Level and severity of classified assets, other weaknesses, and risks require elevated level of concern



AQ Rating?

Level and severity warrant a limited level of supervisory attention



How are fixed assets that are owned reported?

Original costs and are depreciated over useful life

Except for land which is not a depreciable asset


What are the 7 risk elements for an effective CRE risk management program? (2006 CRE Guidance)

Board Please Monitor Mgmt's Usage Per Call

Board and management oversight
Portfolio Management
Market Analysis
Portfolio stress testing/sensitivity analysis
Credit risk review


What is the definition of Special Mention?

Asset which has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution's credit position at some future date.

Weak origination and/or servicing policies are the cause for the SM designation.


When can an express determination letter be issued?

An express determination letter should be issued to a bank only if:

Consistent Application - bank maintains and applies loan loss classification standards that are consistent with the FDIC's standards regarding the identification and charge off such loans, and

No Material Deviations - there are no material deviations from FDIC standards.


Loan Review System is designed to address the following


Promptly identify loans with well-defined credit weaknesses
Provide information for determining the adequacy of the ALL
Assess adherences to loan policies and laws/regulations
Identify relevant trends affecting the collectability of the loan portfolio
Evaluate activities of lending personnel
Provide BOD an assessment of the portfolio
Provide management with info related to credit quality that can be used for financial and regulatory reporting purposes


AQ Rating?

Generally a need to improve CA and RM practices



What is a collateral dependent loan?

Repayment of the loan is expected to be provided solely by the underlying collateral. i.e. sale of the collateral and operation of the collateral (for example non-owner occupied CRE loan).


What are the AQ evaluation factors?


Underwriting, credit admin, and risk identification

Level and trend of problems assets


Securities underwriting and exposure to counter parties

Off-Balance Sheet Items - credit risk

Diversification - loans and securities

Policies, procedures, and practices

Asset Concentrations

Timely identification and collection of problem assets

Internal Controls and MIS



What is the definition of an impaired loan?

Based on current information, it is probable that the creditor will be unable to collect all P&I payments due according to the contractual terms of the loan agreement


What are the 9 Q-factors for the ALLL?

Changes in (LENEQ +VV) + CE

Lending policies/procedures

Economic and business conditions

Nature and volume of the portfolio

Experience, ability, and depth in lending management

Quality of loan review system

Volume and severity of problem assets

Value of collateral

Concentrations of credit

External factors such as competition and legal and regulatory requirements.


What is leveraged financing?

Obligor's post-financing leverage as measured by debt to assets, debt to equity, cash flow to total debt significantly exceed industry norms.

i.e. Business recaps, equity buyouts, M&A


What are the 3 exceptions to the rule of priority?

(1) Dealers inventory (Car)
(2) When liens perfected by doing nothing are sold to a buyer buying in good faith (TV)
(3) When a second creditor supplies replacements or additions to the collateral (contractor who performed remodeling work would get paid before the bank)


What are the sales criteria so that a loan can be accounted for as a sale?

Seller may not retain effective control of the asset - no right to repurchase

Cash flows must be provided proportionally

No recourse provision


Interagency Retail Credit Classification Policy

When do you classify 1 to 4 SFR and home equity loans Sub?

1-4 SFR: delinquent 90 days or more and LTV greater than 60 percent

Home Equity: delinquent 90 days or more and LTV greater than 60 percent. Also, home equity loans where the institution does not hold the senior mortgage, that are past due 90 days or more, should be classified Sub no matter the LTV.


Interagency Retail

When would a residential real estate loan not be classified based on delinquency status?

Properly secured

LTV equal to or less than 60 percent

However, home equity loans where the bank does not hold the senior mortgage, that are past due 90 days or more, should be classified Sub, even if the LTV is equal to, or less than, 60 percent.


What are the 3 appraisal methods?

Cost approach

Direct Sales Comparison Approach

Income approach


What are some characteristics of sub-prime borrowers?

Bankruptcy in the last 5 years

FICO less than 660

DTI greater than 50 percent

2 or more 30-day delinquencies in the last 12 month, or 1 or more 60-day delinquency in the last 24 months

Judgment, foreclosure, repossession, or charge-off in the prior 24 months


Loan Problems

overextensions of unsound credit to insiders, or their interests, who have improperly used their positions to obtain justified loans.



To perfect an AG lien, what must be filed?

A financial statement


AQ Rating?

Satisfactory AQ and CA



Loan Problems

loans beyond the reasonable capacity of the borrower to repay



How do you classify oil and gas loans with total support of debt provided solely by the value of the pledged collateral?

Substandard: 65% of discounted present worth of future net income (PWFNI)

Doubtful: 65-100%of discounted PWFNI

Loss: any remaining deficiency

Note: 65% should be used when the discounted PWFNI is determined using historical production.

When less than 75% of the reserve estimate is determined using historical production data, or discounted PWFNI predicated on engineering estimates, the collateral value assigned to Sub should be reduced accordingly.


What happens when a debtor defaults on a secured loan?

Secured party has the right to repossess w/o going to court, as long as the peach isn't breached.


Loan problems

documents that may aid the examiner in identifying potential problem loans

Potential problem indicators by document


Loan Problems

management’s inability to obtain and evaluate credit information or put together a well-conceived loan package. Also, management can be technically sounds in some forms or lending, but becomes involved in specialized types of credit in which it lacks expertise and experience.

technical incompetence


When is an evaluation required?

1.Transaction value of $250M or less

2.Transaction is a business loan that:
(1)has a transaction value of $1MM or less, and
(2) is not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment

3.The transaction involves an existing extension of credit at the lending institution, provided that
(1) there have been no obvious and material change in the market conditions or physical aspects of the property that threatened the adequacy of the institution's real estate collateral protection after the transaction, even with the advancement of new monies;
(2) or there is no advancement of new monies, other than the funds necessary to cover reasonable closing costs


What are the standards for safe and sound merchant credit card activities?

1.Scrutinize Prospective Merchants - A clearing institution should scrutinize prospective merchants with the same care and diligence used in evaluating perspective borrowers

2. Closely Monitor - Financial institutions engaging in credit card clearing operations must closely monitor their merchants.

3.Periodic Reviews - Create an account administration program that incorporates periodic reviews of the merchants financial statements and business activities

4.Periodic Reporting System - Establish a periodic reporting system of merchant account activities regardless of the amount or number of transactions cleared

5.Follow Network Guidelines - Clearing institutions should follow the guidelines established by the card issuing networks.


What are characteristics of Ch. 7 BK?


Trustee converts all assets to cash and distributes proceeds. All debts are discharged


What are the terms commonly encountered with direct leasing and what are there characteristics?

NFL Rentals

Net Lease: the bank isn’t obligated to assume the expenses of maintaining the equipment

Full Payout Lease: bank expects to be fully-repaid for its investment in the property 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 % of the capital needed (20-40%); bank gets long-term financing for the rest of it. Usually done as a tax shelter. The bank should only get involved with lessees it would make an unsecured loan to.

Rentals: include only the payments reasonably anticipated by the bank at the time


How is OREO booked?

Booked at time of foreclosure at the FV less costs to sell. This becomes the "cost" of the OREO parcel.

Any loss should be charged to the ALLL at time of foreclosure

However, if an asset is sold shortly after it is received in a foreclosure, it may be appropriate to substitute the value received in the sale (net of the cost to sell the property) for the fair value, with any adjustments made to losses previously charged against the ALLL.


In case of foreclosure, what is the priority for multiple creditors to get paid?


(1) Perfected SI in the order of perfection
(2) Unperfected creditors
(3) General creditors


What are the four phases in a loan syndication?

Pre-Launch Phase: syndicators identify the borrower’s needs and perform their initial dd

Launch Phase: banks are sent information on the syndication. Negotiations with the banks and the borrower occur over pricing, collateral, covenants, and other terms

Post-Launch Phase: Credit approval. Projection models, stress tests, industry research is completed.

Post-Closing: ongoing dialogue with the borrower about financial/operating performance


Loan Problems

failure to obtain and properly evaluate credit information (PFS, purpose of borrowing, source of repayment, progress reports, inspections, etc).

Inaccurate credit info


Loan Problems

loans granted without a well-defined repayment program

failure to implement liquidation agreements


Loan Problems

economic conditions, both national and local, are continuously changing, management must be responsive to these changes

lack of attention to economic conditions


What are the 3 methods to measure impairment?

(1) PV of the expected future cash flows discounted at the loan's effective interest rate (creates a reserve)

(2) Fair value of the collateral less costs to sell if the loan is collateral dependent (if fair value less costs to sell is less than the book value then charge off that amount)

(3) Observable market value (creates a reserve)


AQ Rating?

Minimal supervisory concern



What are the indicators of loan problems?


Technical incompetence
Inadequate credit info
Failure to enforce liquidation agreements
Lack of supervision
Lack of attention to changing economic conditions
Over-emphasis on loan income
Poor Selection of risks
Potential problem indicators by document


What is the definition of loss?

loans that are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.

This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.


When should comprehensive of oil/gas loan take place?

4 instances:

Loan balances exceeds 65% of the discounted present worth of future net income (PWFNI) of proved developed properties (PDP)

Loan does not amortize over 4 to 5 years

Credit is not performing

Credit is identified as problem credit


What are the minimum appraisal standards?


1.State licensed or certified appraisers

2.USPAP – conform to USPAP standards

3. Market Value - Be based on the definition of market value

4.Written and contain sufficient information to support the institutions decision

5.Appropriate deductions and discounts – analyze and review for proposed improvements, non-market terms, etc


Which transactions requires a state certified appraiser?

1.All transactions of $1MM or more

2. Non-residential transactions of $250M or more, other than those involving 1-to-4 family residential properties

3.Complex residential transactions of $250M or more.


When should examiners not issue an express determination letter?

Significant criticism - the bank's loan review process relating to charge-offs is subject to significant criticism;

Overstated/Understated Charge-Offs - loan charge-offs reported in the Call Reports are consistently overstated or understated; or

Pattern of Unrecognized Charge-Offs - there is a pattern of loan charge-offs not being recognized in the appropriate year.


Loan Problems

(1) absence of effective active management supervision of loans and (2) failure of the B/M to properly oversee subordinates to determine that sound policies are being carried out.

Lack of supervision


What are the limits of loans that exceed supervisory LTV limits?

Aggregate amount of loans that in excess of supervisory LTV limits should not exceed TC.

Total loans for commercial, AG, and MF (CAM) and other non 1 to 4 family residential should not exceed 30% of TC


AQ Rating?

Inadequately controlled and subject the FI to potential losses



Liens on aircrafts must be filed to who?

Federal Aviation Administration in Oklahoma City, OK


After foreclosure, how must each OREO parcel be carried?

The lower of
(1) the fair value less costs to sell, or
(2) the "cost" of the OREO parcel


AQ Rating?

Present an imminent threat to viability



How are capitalized leases reported in the Call report?

Premises and fixed assets


What are the steps to perfect a security interest?

(1) Attachment - point where the creditor's legal rights in the debtor's property come into existence

(2) Security agreement - debtor authenticates and provides a description of the collateral

(3) Security interest - SI not protected against a debtor's other creditors unless it has been perfected.


What are the two methods for advancing funds under an accounts receivable financing arrangement?

Blanket Assignment - more hands off; bank gets periodic BB info

Ledgering - bank micro-manages the process; receives duplicate copies of invoices prior to advancement. Borrower's customers remit payment directly to bank.


When combining potentially volatile funding sources, at what threshold does it make a concentration?

25% of TA


What are the 4 criteria to account as a capitalized lease?

Note: only need to meet one

Ownership of the property is transferred to the lessee at the end of the lease term

Lease contains a bargain purchase option

Lease terms represents at least 75% of the estimated economic life of the leased property

PV of the min lease payments at the beginning of the lease term is 90 percent or more of the fair value of the leased property to the lessor at the inception date.


AQ Rating?

Levels and problem assets are significant



What transactions are exempt from an appraisal?

1.Transaction value of $250M or less
2.Lien has been taken as an abundance of caution
3.Transaction not secured by real estate
4.Lien on real estate has been taken for purposes other than the real estate's value
5.Transaction is a business loan that:
(1) has a transaction value of $1MM or less, and
(2) is not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment.
6.A lease of real estate is entered into, unless the lease is the economic equivalent of a purchase or sale of the leased real estate
• Capital lease = appraisal.
• Operating lease = no appraisal if it is not the economic equivalent of the purchase or sale of the lease property
7.The transaction involves an existing extension of credit at the lending institution, provided that
1. there have been no obvious and material change in the market conditions or physical aspects of the property that threatened the adequacy of the institution's real estate collateral protection after the transaction, even with the advancement of new monies;
2.or there is no advancement of new monies, other than the funds necessary to cover reasonable closing costs
8.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 interest in real property, including MBS and each loan or interest in a loan, pooled loan, or real property interest met FDIC regulatory requirements at the time of origination
9.Transaction is wholly or partially insured or guaranteed by a US government agency or US government sponsored agency
10.The transaction either
1.Qualifies for sale to a US government agency or US government sponsored agency, or
2.Involves a residential real estate transaction in which the appraisal conforms to the FNMA or FHLMC appraisal standards applicable to that category of real estate
11.The regulated institution is acting in a fiduciary capacity and it not required to obtain an appraisal under other law; or
12.The FDIC determined that the services of an appraiser are not necessary


What is a SNC?

Any loan, formal commitment, ORE, repossession, stock, or bond that:

Adds up to $20MM or more (if adversely classified at prior exam then with a balance of at least $10MM)

Shared by 3 or more unaffiliated banks

Purchasing bank assuming its pro-rate share of credit risk


What are the five methods that may be used to account for the disposition of Real Estate?

First, I Come Ready, Dear

Full Accrual Method - Sale/Accrual

Installment Method - Sale/Accrual/ Small down pymt/profits recognized as bank receives pymt.

Cost Recovery - Sale/Nonaccrual/Weak borrower that doesn't qualify for full accrual or installment/no profit or accrual until the aggregate payments exceed the recorded loan amount.

Reduced Profit - Sale, Ok down pymt, odd amortization/profits recognized as payments received/nonaccrual

Deposit Method - no sale, rent to own/stays ORE/no profit/nonaccrual/pymts reported as liability


What makes up a concentration at 25% of TC?

Individual borrower
Single repayment source
Individual project
Small interrelated groups of individuals


What are the cause of carryover lending in an Ag loan?

(1) Unforeseen circumstances due to weather and/or drop in commodity prices

(2) Existing term debt that needs to be rescheduled bc of CF problems


How much more capital should a bank hold for a sub-prime portfolio?

1.5 to 3 times more


AQ Rating?

Risk exposure is modest in relation to C and M abilities



Loan Problems

absence of sound lending policies, and/or management’s lack of sound credit judgment.

Poor selection of risk


Interagency Retail Credit Classification Policy

Loan is substandard when?

Chargeoff closed end retail loans when?

Chargeoff open-end retail loans when?

What happens when accounts is in BK?

What happens for fraudulent loan?

Substandard = 90 days past due

Closed-end loan 120 days past due = chargeoff

Open-end loan 180 days past due = chargeoff

Bk = chargeoff account within 60 days unless can demonstrate that repayment is likely to occur

Fraud = charge-off within 90 days of discovery


What are the elements of a loan policy?


General fields of lending and types of loans

Interest rate and terms

Responsibility of BOD, in reviewing, ratifying, or approving loans

Lending authority



Loan files

Loans/asset ratio

Unsecured guidelines

Primary lending areas

Portfolio mix and diversification

LTV Limits




Loan Review


What is mezzanine financing in a leverage deal?

Represents those parts of a leveraged financing package that are neither equity nor senior debt.

It's generally subordinated to debt provided by senior lenders.


What are the general guidelines for re-aging delinquent retail credit accounts?

Renewed willingness and ability to repay the loan

Account should be at least 9 months old before re-aging

3 consecutive monthly payments are required before an account is re-aged, or the lump sum

No loan should be re-aged more than once in 12 months, or twice in 5 years


What are additional underwriting standards and credit analysis are performed for a leveraged deal?

U/S should also establish covenant requirements such as minimum interest and fixed charge coverage ratios and max leverage ratios

Credit Analysis
Cash flow analysis do not rely on over optimistic projections
Projections are stress tested
Transactions reviewed quarterly


What is included in an Engineering Report for Oil and Gas based lending


Discount factors


What are the added risks associated with floor plan lending?

Involved loan advances against a specific piece of collateral the bank can't exercise full control over. Also most dealers have minimal capital.

Curtailments and frequent inspections are necessary


Fixed Assets-Owned

What rate is used to determine amount of capitalized interest on internally financed projects?

Rate applicable to the bank's borrowings outstanding during the period.

Bank's borrowings include IBB and other IB liabilities.

Interest capitalized shall not exceed the total amount of interest cost incurred by the bank during the reporting period.


What does Article 9 of the UCC govern?

Secured transactions. Transactions that create a security interest in personal property or fixtures.


What are the characteristics of Ch. 11BK?


Debtor retains assets, submits a plan that needs to be approved by a majority of creditors.

Creditors must receive at least as much as they would have in Ch 7

Available to all debtors


AQ Rating?

Trends may be stable or indicate deterioration in AQ or increase in risk exposure



What are the most important aspects of the exam process related to AQ?

Evaluation of a bank's lending policies
Credit Administration
Quality of the loan portfolio


What are the types of plans available for construction lending?

Standard payment plan - pre-established schedule of fixed payments, get money (draws) at each stage based on completion

Progress payment plan - monthly disbursements totaling 90% of indicated completion value, with 10% held back.


What is the threshold for a single source to be considered a funding concentration?

10% of TA


Interagency Retail Credit Classification Policy

What happens when a residential or home-equity loan is 180 days past due?

Obtain current assessment of value. Any loan balance in excess of fair value less cost to sell = loss


How do you rate/classify a leverage deal?

Incorporate both the PD and LGD
Substandard if borrower's condition of future prospects have significantly weakened

If loan placed on non-accrual will likely have a doubtful component

When portion of loan is not protected by pledged assets or well supported EV, then classify the unprotected portion as doubtful or loss



When can the A note not be disclosed as a TDR?

If market rate and performing in accordance with the restructured terms

TDR disclosure can be eliminated in the year following the restructuring.


What long is a UCC good for? When are continuations filed?

UCC are good for 5 years

A continuation can be filed during the last 6 months of the 5 years.


What are the characteristics of Ch. 13 Bk?

Like Ch 11, but only available to individuals with regular incomes when their secured debts are under $350K and unsecured debts under $100K.

Only secured creditors vote on plan