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Midterm

FIN3632 Notes Test 2

12 Pages
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Department
Finance
Course Code
FIN 3636
Professor
All

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Description
CHAPTER 16This chapter has focused on lending policies and procedures and the many different types of loans lenders offer their customers It makes these key pointsMaking loans is the principal economic function of lending institutions Loans support communities and nations by providing credit to finance the development of new businesses sustain existing activities and create jobs so that living standards can grow over timeLending is also risky because loan quality is affected by both external and internal factors External factors include change in the economy natural disasters and regulations imposed by government Internal factors affecting loan risk include management errors illegal manipulation and weak or ineffective lending policiesThe risk of loss in the lending function is at least partially controlled by a government regulation and b internal policies and procedures Regulatory agencies such as the FDIC send out teams of examiners to investigate lending policies and procedures and the quality of loans within each lending institution Among depository institutions today a fivepoint CAMELS rating system is used to evaluate the performance and risk exposure of lenders based upon the quantity and quality of their capital assets management earnings liquidity and sensitivity to market riskRisk is also controlled by creating and following written policies and procedures for processing each credit request Written loan policies should describe the types of loans the lender will and will not make the desired terms for each type of loan the necessary documentation before approval is granted how collateral is to be evaluated desired pricing techniques and lines of authority for loan approvals Lenders consider multiple factors in approving or denying each loan request 1 character including loan purpose and borrower honesty 2 capacity especially the legal authority of the borrower to sign a loan agreement 3 cash including the adequacy of income or cash flow 4 collateral including the quality and quantity of assets to backstop a loan 5 conditions including the state of the economy and 6 control Including compliance with the lenders loan policy and regulationsMost lending decisions center around three key issues 1 Is the borrower creditworthy 2 Can the loan agreement be properly structured to protect the lender and the publics funds 3 Can a claim against the borrowers assets or earnings be perfected in the event of loan defaultFinally a sound lending program must make provision for the periodic review of all outstanding loans When this loan review process turns up problem loans they may be turned over to a loan workout specialist who must investigate the causes of the problem and work with the borrower to find a solution that maximizes chances for recovery fundsKEY TERMSTypes of loans1Real Estate Loanssecured by real propertyland buildings and other structuresand include shortterm loans for construction and land development and longerterm loans to finance the purchase of farmland homes apartments commercial structures and foreign properties2Financial Institution loansinclude credit to banks insurance companies finance companies and other financial institutions3Agricultural loansextended to farms and ranches to assist in planting and harvesting crops and supporting the feeding and care of livestock4Commercial and industrial loansgranted to businesses to cover purchasing inventories paying taxes and meeting payrolls
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