Deck 16: Lending Policies and Procedures: Managing Credit Risk

Question 1

One of the 6 Cs of lending is ______________ which suggests that the lender must look at the position of the business firm in the industry and the outlook of the industry to evaluate a loan.

Answer 1

condition

Question 2

______________ is one of the key features of any loan.This is one of the Cs of lending that examines whether a borrower will be able to generate enough liquid assets to repay the loan.

Answer 2

Cash

Question 3

Smaller banks tend to emphasize on _________________ in the form of smaller denomination personal cash loans and home mortgage loans extended to individuals and families as well as smaller business loans.

Answer 3

retail credit

Question 4

One of the 6 Cs of lending is ______________ which suggests that a lender must ensure that the borrower is legally entitled to sign a binding loan agreement.For an individual this entails making sure the borrower is of a legal age to sign a contract.

Question 5

______________ loans are ones that carry a strong probability of loss to the bank.

Question 6

____________________________ loans are ones that are secured by land,buildings,and other structures.These loans can be short term construction loans or longer term loans to finance the purchase of homes and apartments among others.

Question 7

Loans that have minor weaknesses because a bank has not followed its written loan policy or which have missing documentation are called ______________ loans.

Question 8

___________________________,usually large banks,devote a bulk of their credit portfolio to large-denomination loans directed towards corporations and other businesses.

Question 9

________________________ are types of loans where a lender buys equipment or vehicles and rents them to its customers.

Question 10

____________________________ loans are ones that are extended to farmers and ranchers to assist in planting crops,harvesting crops,and to support the feeding and care of livestock.

Question 11

When a bank purchases a whole loan or a piece of a loan from another bank,they are purchasing what is known as a ___________________________.

Question 12

____________________________ are certain actions that a borrower must take during a loan period.Examples include filing periodic financial statements with the bank and purchasing insurance on any collateral pledged.

Question 13

An approach that divides the cash flows of a firm into three principal sources,namely cash flow from operations,cash flow from financing activities,and cash flow from investing activities,is known as the _____________ cash flow method.

Question 14

______________________ loans are those that are granted to businesses to cover purchases of inventory,paying taxes,and meeting payrolls.

Question 15

A(n)______________ is the process of resolving a troubled loan so that a bank can recover its loaned funds.

Question 16

A(n)______________ is a written contract signed by a borrower and states the principal amount of the loan,the interest rate on the loan,and the terms under which repayment must take place.

Question 17

Credit extended to banks,insurance companies,finance companies,and other similar institutions is known as _______________.

Question 18

A bank's _____________________________________ gives its loan officers specific guidelines in making individual loan decisions and in shaping the overall loan portfolio.

Question 19

________________________ include credit to finance the purchase of automobiles,mobile homes,appliances,and other retail goods and services purchased by consumers.

Question 20

The ______________ is a uniform rating system developed by regulators where banks are given a rating between one and five in each of the six categories and an overall rating.

Question 21

According to the Community Reinvestment Act,selected lenders must make an "affirmative effort" to provide loans and other services to all credit-worthy borrowers in their chosen service area.

Question 22

The loan mix of any lending institution depends heavily on the _____________________ that each loan offers compared to all other assets a lending institution can acquire.

Question 23

Under the ___________________________ Act,no individual can be denied credit because of race,sex,religious affiliation,age or receipt of public assistance.

Question 24

Risk in banking tends to be concentrated in a bank's loan portfolio.

Question 25

The letter "M" in the CAMELS rating system for banks in the U.S.refers to the "management quality" of a bank.

Question 26

Loans made by a particular bank secured by its own stock are not usually permitted except under special circumstances.

Question 27

The letter "C" in the CAMELS rating system for banks in the U.S.refers to the "condition" of a bank.

Question 28

In the mortgage environment of the early 2000s,lenders were encouraged to sell individual loans and packages of loans to buy more liquid securities,thus shifting much of the risk of lending to capital markets.This process is referred to as _________________.

Question 29

In a loan workout process,the preferred option is nearly always to seek a ___________,which gives both the lending institution and its customer a chance to restore normal operations.

Question 30

At least once in a year,banks in the United States are required to report the composition of their loan portfolio by purpose of loan on a report form known as Schedule
A.

Question 31

Retail credit in banking refers to such loans as residential mortgages and installment loans to individuals.

Question 32

The principal reason why banks are chartered by federal and state governments is to make loans to their customers.

Question 33

One of the most widely consulted sources of data on business firms is ______________ which was founded in Philadelphia in 1914 to exchange credit information among business lending institutions and to organize conferences and publish educational materials to train loan officers and credit analysts.

Question 34

Smaller banks tend to emphasize wholesale banking services.

Question 35

Real estate lending is popular with banks,in part,due to the growth of the secondary mortgage market.

Question 36

One of the problems with the newer lending model called _________________ was found to at least partially contribute to the recent crisis in the mortgage market.

Question 37

One of the elements of CAMELS rating system is _____________________ which looks at the quality of a bank's loans.Examiners look at all loans over a certain size and a random selection of all other loans when looking at this aspect of a bank.

Question 38

Loans to minors are not legally enforceable contracts in most states.

Question 39

One of the six Cs of lending is ______________________ which looks at whether the borrower has a well-defined purpose for the loan and a serious intent to repay the loan.

Question 40

The risk of change in the quality of assets due to factors such as changes in the economy,natural disasters,and regulations are referred to as __________ factors,while management errors,illegal manipulation,and ineffective lending policies are considered as ___________ factors.

Question 41

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.

Question 42

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

Question 43

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.

Question 44

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.

Question 45

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

Question 46

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.

Question 47

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

Question 48

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

Question 49

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

Question 50

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

Question 51

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.

Question 52

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

Question 53

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

Question 54

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.

Question 55

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

Question 56

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

Question 57

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

Question 58

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

Question 59

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

Question 60

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.

Question 61

The "A" in the CAMELS rating system stands for asset quality.

Question 62

A lender that makes a loan to a minor would be violating which of the 6 Cs of lending?

A)Character
B)Capacity
C)Cash
D)Control
E)Collateral

Question 63

A lender that makes a loan that violates its written loan policy would be violating which of the 6 Cs of lending?

A)Character
B)Capacity
C)Cash
D)Control
E)Collateral

Question 64

According to the textbook,the largest category (by dollar volume)of loans extended by U.S.banks is:

A)real estate loans.
B)financial institution loans.
C)agricultural loans.
D)commercial and industrial loans.
E)None of the options is correct.

Question 65

Commercial banks are the largest originator of household loans.

Question 66

Real estate loans made by national banks in the U.S.cannot exceed:

A)15 percent of that bank's total assets or 25 percent of its total capital.
B)that bank's total capital and surplus or 70 percent of its time and savings deposits,whichever is greater.
C)20 percent of that bank's capital and surplus or 80 percent of its savings deposits,whichever is lesser.
D)25 percent of capital or 10 percent of core deposits of the bank,whichever is higher.
E)None of the options is correct.

Question 67

Banks that emphasize on lending to commercial customers are categorized as:

A)wholesale banks.
B)retail banks.
C)personal banks.
D)investment banks.
E)regional banks.

Question 68

Following the recent global credit crisis,regulators have begun to emphasize the need for loan originators to know their borrowers better and retain some of the risk on loans that they sell.

Question 69

Loans to finance one-to-four family homes fall under which loan category?

A)Commercial and industrial loans
B)Real estate loans
C)Loans to individuals
D)Single-payment loans
E)None of the options is correct.

Question 70

The maximum outstanding loans for all FDIC-insured institutions are classified as:

A)lease financing receivables.
B)miscellaneous loans.
C)loans to depository institutions.
D)real estate loans.
E)agricultural loans.

Question 71

Loans extended to farm and ranch operations to assist in planting and harvesting crops and to support the feeding and care of livestock are known as:

A)real estate loans.
B)commercial and industrial loans.
C)land loans.
D)agricultural loans.
E)None of the options is correct.

Question 72

Commercial and industrial loans are loans to businesses to cover such things as purchasing inventory,paying taxes,and meeting payroll expenses.

Question 73

Loans providing credit to finance the purchase of automobiles,mobile homes,appliances,and other retail goods to repair and modernize homes are classified under the category:

A)financial institution loans.
B)commercial industrial.
C)loans to individuals.
D)miscellaneous loans.
E)None of the options is correct.

Question 74

In the United States,national banks cannot extend an unsecured loan to a single borrower that exceeds _____________ of the bank's capital and surplus.

A)25 percent
B)10 percent
C)15 percent
D)20 percent
E)None of the options is correct

Question 75

Loans extended to finance the purchase of automobiles,mobile homes,home appliances,and vacations are classified as:

A)real estate loans.
B)financial institution loans.
C)agricultural loans.
D)commercial and industrial loans.
E)None of the options is correct.

Question 76

The "direct cash flow" method and "cash flow by origin" are two very different ways of assessing the cash flows of a potential borrower.

Question 77

The principal economic function of banks is to:

A)take deposits.
B)make loans.
C)sell financial services.
D)encourage spending.
E)None of the options is correct.

Question 78

Agriculture loans are ones that are made to individuals to finance vacations,purchase durable goods,and other retail goods.

Question 79

Loans granted to businesses to cover such expenses as purchasing inventories,paying taxes,and meeting payrolls are known as:

A)commercial and industrial loans.
B)agricultural loans.
C)real estate loans.
D)loans to individuals.
E)None of the options is correct.

Question 80

Net cash flow from operations is a borrower's net income expressed in cash rather than on an accrual basis.