Question 1

Which of the following should be part of the written loan policy?
A)Lending authority of each loan officer and loan committee
B)Lines of responsibility for finding and reporting information within the loan department
C)A statement of quality standards for all loans
D)A statement for the preferred upper limit for total loans outstanding
E)All of the options should be part of the written loan policy

Accepted Answer

All of the options should be part of the written loan policy to ensure clear guidelines for lending practices, accountability, and quality control. The lending authority and responsibility lines help to avoid confusion or errors, the quality standards uphold the institution's reputation and minimize risks, and the preferred upper limit for total loans outstanding helps to manage and control potential problems with loan delinquency or default.

Question 2

A lender reviews the partnership agreement of one of its small business customers.Which of the 6 Cs of lending would this piece of information belong to?
A)Character
B)Capacity
C)Cash
D)Collateral
E)Conditions

Accepted Answer

The answer of A lender reviews the partnership agreement of...

Question 3

A method whereby a loan officer focuses on why a borrower's cash flows may change over time is known as:
A)indirect cash flow.
B)direct cash flow.
C)pervasive cash flow.
D)variable cash flow.
E)total cash flow.

Accepted Answer

This method is known as direct cash flow since it focuses on the direct factors that may affect a borrower's cash flows in the future, such as changes in income, expenses, and debt payments. Indirect cash flow refers to the method of calculating cash flows by starting with net income and adjusting it for non-cash items, while pervasive cash flow and variable cash flow are not commonly used terms in this context. Total cash flow refers to the sum of all cash inflows and outflows for a given period.

Question 4

The TRC Company is required by its bank to pay no dividend over $3 per share.What is this restraint known as?
A)An affirmative covenant
B)A negative covenant
C)A special covenant
D)A horizontal covenant
E)None of the options is correct

Accepted Answer

This restraint is known as a negative covenant, which limits the actions that the company can take. In this case, it restricts the company from paying more than $3 per share in dividends.

Question 5

The Third National Bank of Wichita makes a loan so that Tim Bridges can buy 1,000 shares of Coca Cola stock.Which category of loans would this loan fit in best?
A)Financial institution loan
B)Commercial and industrial loan
C)Loan to an individual
D)Miscellaneous loan
E)Lease financing receivables

Accepted Answer

The answer of The Third National Bank of Wichita makes...

Question 6

Which of the following is a sign of a potential loan problem?
A)Timely receipt of financial statements from the company that has taken a loan
B)Regular increase in the stock price of the company that has taken a loan
C)Increase in earnings for each of the last three years of a company that has taken a loan
D)Changes in the methods used to account for inventory,depreciation,and other items
E)All of the options are signs of problems with the loan

Accepted Answer

Changes in accounting methods for inventory, depreciation, and other items can indicate potential manipulation of financial statements, which is a sign of a potential loan problem. The other options are positive indicators and not signs of loan problems.

Question 7

A lender's secondary source of repayment in case of a default is:
A)capacity.
B)collateral.
C)character.
D)capital.
E)credit.

Accepted Answer

Collateral is a secondary source of repayment for a lender in case of a default. It refers to assets that the borrower pledges as security for the loan, which can be sold or seized by the lender to recover the outstanding balance. Capacity, character, capital and credit are other factors that a lender considers in assessing a borrower's ability to repay a loan, but they may not be as reliable or tangible as collateral.

Question 8

Which of the following is a factor in determining the mix of loans that a bank has?
A)Location of the bank
B)Size of the bank
C)Written loan policy of the bank
D)Experience and expertise of the management
E)All of the options are factors in determining the mix of loans for a bank

Accepted Answer

All of the options are factors in determining the mix of loans that a bank has. The location of the bank and the size of the bank can affect the types of loans that are in demand in that area. The written loan policy of the bank will guide loan officers in their lending decisions. The experience and expertise of management will also influence the mix of loans, as well as their risk management strategies.

Question 9

A loan to a local business to purchase a new machine would be categorized as:
A)a consumer loan.
B)an agriculture loan.
C)a commercial and industrial loan.
D)a real estate loan.
E)None of the options is correct.

Accepted Answer

A loan to a local business for purchasing a new machine would fall under the category of commercial and industrial loan. This type of loan is specifically meant for businesses to invest in machinery, equipment, or other capital expenditures that will enhance their operations.

Question 10

A bank that primarily makes its loans to individuals,families,and small businesses is categorized as:
A)a retail bank
B)a wholesale lender
C)a money center bank
D)a money market bank
E)None of the options is correct

Accepted Answer

A retail bank is a type of bank that primarily deals with individual customers, families, and small businesses. They offer a range of services such as checking and savings accounts, personal loans, mortgages, credit cards, and other consumer-oriented products. Wholesale lenders and money center banks, on the other hand, focus on large corporate and institutional customers, while money market banks primarily deal with short-term investments and securities. Therefore, option A is the best choice for this question.

Question 11

Which of the following requires that bank loans to insiders be priced at market rates?
A)Community Reinvestment Act of 1977
B)Equal Credit Opportunity Act of 1974
C)Sarbanes-Oxley Act of 2002
D)Bank Lending Act of 2003
E)U.S.Patriot Act

Accepted Answer

The Sarbanes-Oxley Act of 2002 includes provisions aimed at improving corporate governance and preventing corporate fraud. One aspect of this is ensuring that loans to insiders (such as executives) are made at market rates, to prevent conflicts of interest and protect shareholders.

Question 12

A loan officer of Second National Bank of Laramie decides to review the insurance coverage of one of its business customers.Which of the 6 Cs of lending would this piece of information belong to?
A)Character
B)Capacity
C)Cash
D)Collateral
E)Conditions

Accepted Answer

Reviewing insurance coverage is related to "Collateral" as it assesses the value and security of the asset being used to secure the loan.

Question 13

The South Carolina National Bank makes a loan to the Heritage Credit Union.What type of loan did this bank make?
A)Financial institution loan
B)Commercial and industrial loan
C)Loans to individuals
D)Miscellaneous loans
E)Lease financing receivables

Accepted Answer

Financial institution loans are loans made by one financial institution to another. In this case, the South Carolina National Bank lending to the Heritage Credit Union is an example of a financial institution loan.

Question 14

A loan for Colin Beverly to purchase a new Mazda Miata would fit into which of the following categories of bank loans?
A)Financial institution loan
B)Commercial and industrial loan
C)Loan to an Individual
D)Miscellaneous loan
E)Lease financing receivables

Accepted Answer

The loan for Colin Beverly to purchase a new Mazda Miata would fit into the category of a loan to an individual since it is a personal loan for a specific individual to purchase a specific item.

Question 15

The process of resolving a troubled loan so that a lender can recover its funds is called:
A)loan review.
B)written loan policy.
C)loan workout.
D)loan commitment agreement.
E)None of the options is correct.

Accepted Answer

The process of resolving a troubled loan so that a lender can recover its funds is called a loan workout. This process involves negotiating with the borrower in order to restructure the terms of the loan or find an alternative means of repayment. Loan review, written loan policy, and loan commitment agreements are all important aspects of the lending process, but they do not specifically relate to the resolution of troubled loans.

Question 16

The Price Bank of Edmond makes a loan to Home Depot.What type of loan has this bank made?
A)Financial institution loan
B)Commercial and industrial loan
C)Loan to an individual
D)Miscellaneous loan
E)Lease financing receivables

Accepted Answer

A commercial and industrial loan is a loan given to a business entity, like Home Depot, for its commercial or industrial activities.

Question 17

First National Bank of Edmond asks a prospective customer for her driver's license.Which of the 6 Cs of lending would this piece of information belong to?
A)Character
B)Capacity
C)Cash
D)Collateral
E)Conditions

Accepted Answer

The answer of First National Bank of Edmond asks a...

Question 18

Sean Carter has an excellent credit rating.Which of the 6 Cs of lending would this piece of information belong to?
A)Character
B)Capacity
C)Cash
D)Collateral
E)Conditions

Accepted Answer

A person's credit rating is one aspect of their character, which assesses their willingness to repay loans based on past behaviors and financial responsibility.

Question 19

A lender that makes a loan to an individual whose only income is commission based and who hasn't made a sale in six weeks may be violating which of the 6 Cs of lending?
A)Character
B)Capacity
C)Cash
D)Control
E)Collateral

Accepted Answer

The answer of A lender that makes a loan to...

Question 20

The First State Bank of Duncan buys railroad cars and rents them to the Santa Fe Railroad Company.What type of loan has this bank made?
A)Financial institution loan
B)Commercial and industrial loan
C)Loan to an individual
D)Miscellaneous loan
E)Lease financing receivables

Accepted Answer

This is a lease financing receivables loan, as the bank is buying railroad cars and renting them out to the Santa Fe Railroad Company. This is a type of leasing arrangement, which falls under lease financing receivables.

Quiz 16: Lending Policies and Procedures: Managing Credit Risk

Which of the following should be part of the written loan policy?

A lender reviews the partnership agreement of one of its small business customers.Which of the 6 Cs of lending would this piece of information belong to?

A method whereby a loan officer focuses on why a borrower's cash flows may change over time is known as:

The TRC Company is required by its bank to pay no dividend over $3 per share.What is this restraint known as?

The Third National Bank of Wichita makes a loan so that Tim Bridges can buy 1,000 shares of Coca Cola stock.Which category of loans would this loan fit in best?

Which of the following is a sign of a potential loan problem?

A lender's secondary source of repayment in case of a default is:

Which of the following is a factor in determining the mix of loans that a bank has?

A loan to a local business to purchase a new machine would be categorized as:

A bank that primarily makes its loans to individuals,families,and small businesses is categorized as:

Which of the following requires that bank loans to insiders be priced at market rates?

A loan officer of Second National Bank of Laramie decides to review the insurance coverage of one of its business customers.Which of the 6 Cs of lending would this piece of information belong to?

The South Carolina National Bank makes a loan to the Heritage Credit Union.What type of loan did this bank make?

A loan for Colin Beverly to purchase a new Mazda Miata would fit into which of the following categories of bank loans?

The process of resolving a troubled loan so that a lender can recover its funds is called:

The Price Bank of Edmond makes a loan to Home Depot.What type of loan has this bank made?

First National Bank of Edmond asks a prospective customer for her driver's license.Which of the 6 Cs of lending would this piece of information belong to?

Sean Carter has an excellent credit rating.Which of the 6 Cs of lending would this piece of information belong to?

A lender that makes a loan to an individual whose only income is commission based and who hasn't made a sale in six weeks may be violating which of the 6 Cs of lending?

The First State Bank of Duncan buys railroad cars and rents them to the Santa Fe Railroad Company.What type of loan has this bank made?