Question 1

Loans granted to businesses appear to convey positive information to the market place about a borrower's credit quality,enabling a borrower to obtain more and cheaper funds from other sources.

Accepted Answer

Loans granted to businesses are usually seen as an indicator of creditworthiness, and this positive information can help borrowers secure additional funding at lower costs.

Question 2

The process of loan review means that a loan committee must generally approve a loan before the borrower is told the loan is approved.

Accepted Answer

The answer of The process of loan review means that...

Question 3

Cash is one of the six Cs of lending and refers to the fact that the lender wants to make sure that the borrower has the ability to generate enough cash to repay the loan.

Accepted Answer

Cash is indeed one of the six Cs of lending and lenders look at the borrower's ability to generate enough cash flow to repay the loan.

Question 4

For ease and convenience,most banks have the loan review conducted by the same person who makes the loan.This is particularly true of large banks.

Accepted Answer

Most banks, especially large ones, separate the loan origination and loan review functions to ensure an unbiased assessment of credit risk and to maintain internal controls.

Question 5

If the economy slows down,a bank should review its outstanding loans more frequently.

Accepted Answer

When the economy slows down, borrowers may face difficulties in repaying their loans, leading to higher rates of default. Thus, banks should review their outstanding loans more frequently to assess the creditworthiness of the borrowers and to minimize their exposure to risk. This practice may involve monitoring the financial performance of the borrower and/or requiring additional collateral or credit enhancements.

Question 6

Loans to a bank's officers,extended for purposes other than purchase of a home or funding education and those that are not fully backed by government securities,cannot exceed 2.5 percent of the bank's capital and unimpaired surplus or $25,000 whichever is larger but cannot exceed $100,000.

Accepted Answer

This statement is true according to Section 22(h) of the Federal Reserve Act.

Question 7

Banks should concentrate their lending on those types of loans in which they have the greatest cost advantage.

Accepted Answer

By concentrating on loans in which they have the greatest cost advantage, banks can optimize their profitability and efficiency. It allows banks to focus their resources on areas where they can offer the most attractive rates and terms, and hence increase their customer base. Additionally, concentrating on these areas can help banks achieve scale and operational efficiencies, thereby reducing their overall costs and increasing profitability.

Question 8

Troubled loans normally are subject to more frequent reviews than sound loans.

Accepted Answer

Troubled loans require closer monitoring and are considered higher risk, so they are typically reviewed more frequently than loans that are performing well. This helps lenders stay on top of any potential problems and take action to minimize losses.

Question 9

A restriction against a borrower taking on new debt during a loan period is an affirmative covenant in a loan contract.

Accepted Answer

A restriction against a borrower taking on new debt during a loan period is a negative covenant, not an affirmative covenant. Negative covenants restrict certain actions by the borrower, whereas affirmative covenants require the borrower to perform specific actions.

Question 10

Loan review is considered to be a luxury,not a necessity for most banks,especially those with sound lending policies.

Accepted Answer

Loan review is actually a necessity for most banks, even those with sound lending policies. It helps to identify potential risks and ensure compliance with banking regulations.

Question 11

A written loan policy gives loan officers and the bank's management specific guidelines in making individual loan decisions and in forming the bank's loan portfolio.

Accepted Answer

A written loan policy provides clear and consistent guidelines for loan officers and management to follow when making loan decisions and managing the overall loan portfolio. It helps ensure that loans are made based on sound business principles and in compliance with applicable laws and regulations.

Question 12

Negative covenants require the borrower to take certain actions,such as periodically filing of financial statements and maintaining insurance coverage.

Accepted Answer

Negative covenants actually require the borrower to refrain from certain actions, such as taking on additional debt or selling off major assets without the lender's consent. The actions described in the statement are typically required by affirmative covenants.

Question 13

Affirmative covenants restrict a borrower from doing certain things,like taking on new debt without the lender's approval.

Accepted Answer

Affirmative covenants are conditions in a loan that require the borrower to do certain things, such as maintaining insurance or financial ratios, rather than restricting them from certain actions. Restrictions like not taking on new debt without approval are typically found in negative covenants.

Question 14

Accounts receivable financing entails a bank actually taking over the ownership of receivables,whereas factoring entails a bank merely lending money against a borrowing customer's receivables and the customer still retains the ownership of the receivables.

Accepted Answer

Accounts receivable financing generally involves a bank lending money against a company's receivables, while factoring involves a bank purchasing the receivables at a discount and assuming ownership of them.

Question 15

Financial institutions that disagree with an examiner's classifications of their loans can appeal against these ratings.

Accepted Answer

Financial institutions have the right to appeal against the examiner's classifications of their loans.

Question 16

A loan workout is when a bank and its customer initially negotiate the terms of a loan.

Accepted Answer

A loan workout is a process where a bank and its customer renegotiate the terms of an existing loan due to the borrower's inability to repay under the original terms, not the initial negotiation of the loan.

Question 17

A rating of "5" is the highest and the best rating that a U.S.bank can receive under the CAMELS rating system.

Accepted Answer

The highest and best rating under the CAMELS rating system is a "1", indicating the strongest performance and lowest level of supervisory concern.

Question 18

Credit card loans are generally more profitable for small and medium-size banks than for the large banks.

Accepted Answer

Large banks often have economies of scale, allowing them to offer credit card loans at lower costs and with more competitive terms, making them more profitable compared to small and medium-sized banks.

Question 19

Construction loans by a bank fall under the loan category known as commercial and industrial loans.

Accepted Answer

Construction loans are typically categorized under real estate loans, not commercial and industrial loans, as they are specifically used for real estate development and construction projects.

Question 20

There are three principal sources of cash to repay a loan.These are cash flows generated from sales or income,funds generated from the liquidation of assets,and,funds raised by selling debt or equity securities.

Accepted Answer

The statement is true, as cash flows from sales or income, funds from the liquidation of assets, and funds raised from selling debt or equity securities are the primary sources of cash that can be used to repay a loan.

Quiz 16: Lending Policies and Procedures: Managing Credit Risk