Understanding the Credit Application Review Process
Clear Network Recovery
What we will cover… Steps in the application process ⚫ Evaluating the Borrower ⚫ Calculating Ratios and Collateral Values ⚫ Credit Reports and other Credit History ⚫ Red Flags ⚫ Making the loan decisions ⚫
The Loan Application… ⚫
Gathers information that helps you assess the risk of this borrower and loan and includes: ⚫ Purpose of the loan and amount requested ⚫ Identifying information (name, address, SS#, Date of Birth) ⚫ Income and Employment information ⚫ Assets (what they own) ⚫ Liabilities (what they owe) ⚫ Key questions (US citizen or resident, over 17 years old, bankruptcies…) ⚫ Authorization to check their credit history and other information provided
Red Flags to watch for in the application… ⚫ ⚫ ⚫ ⚫ ⚫
Gaps in employment or addresses Sudden changes in employment or income Incomplete applications, missing key information that would be used to locate the borrower/collateral Address is a P.O. Box with no physical address for the borrower Purpose of loan and/or collateral is not clear
Underwriting the Loan/Borrower… ⚫
Evaluating the information provided to see if it meets the lending guidelines ⚫ Determining if the borrower has provided accurate information as a basis for your loan (income and expenses, “dates”, collateral information, etc.) ⚫ Determine the value of the collateral and financing options for the borrower. ⚫ What do they have for “reserves”- # months of expenses covered in savings?
Evaluating Credit History… ⚫
Verification of Income and Employment ⚫
Paystubs, tax returns, call to employer, written VOE
Verification of Residence/Rental history – contacting the landlord, utility bills, picture ID with address ⚫ Verification of Credit History ⚫
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Credit Report Non-traditional references (landlord, utilities, cell phone, cable, other bills with a monthly payment plan.)
The Credit Report… Name, address, date of birth and SS#verify they match what you have-look for logical explanations for variances (i.e. Jr./Sr.) ⚫ Fraud alerts (SS# not issued, name doesn’t match record, etc.) ⚫ Public records (tax liens, bankruptcy, judgements, etc.) ⚫
Credit Reports continued… ⚫
Name of lender, date opened, high balance, current balance, payment amount, payment history, account type, liability (signer, co-signer, guarantor) ⚫ Credit inquiries-who and when, how many? ⚫ Errors in credit reports, disputes
Credit report red flags… ⚫
Address does not match ⚫ Amount of new debt ⚫ Maxed out credit cards ⚫ Late payments (look for explanations of lates-events to match time of delinquency)
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No credit history for older borrowers ⚫ A lot of debt for younger borrowers ⚫ Charge-offs and other unpaid debt-need explanations-work with them to resolve them and clean up credit-HUD counseling agencies
Affordability… ⚫
Debt to income ratio includes: Mortgage/rent payment ⚫ Loan and credit card payments ⚫
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Does not include: ⚫
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Food,taxes, utilities, gifts,clothing, medical, dental, childcare, gas, insurance, etc.
Usually 38-40% is limit for lower income and with higher incomes and “reserves” could stretch to 42%
Evaluating the collateral… Purchase and sales agreement, NADA book value, look it up on the internet ⚫ Condition of the collateral and ease in accessing and selling it ⚫ Down payment from the borrower and/or trade in =equity in the collateral ⚫ Loan to value ($5,000 loan with $10,000 car value= 50% LTV) ⚫
Steps in the application process… ⚫
Completed application from borrower ⚫ Review for completeness ⚫ Check credit history and other key information stated on application ⚫ Verify collateral values ⚫ Calculate Debt/Income ratios-affordability ⚫ Obtain explanations from borrower for any areas in question ⚫ Inform the borrower of your decision and any options available to them (loan programs, HUD counseling to address debt, credit bureau dispute process to clean up credit, etc.)
Questions? Thanks! I hope this will help you better understand the lending process and assist your borrowers with financing.