49 Questions
What risk arises when a lender refuses to make advances under a discretionary line of credit without providing a reason?
The borrower may claim that the lender did not act in good faith.
Why do lenders get into trouble with discretionary line of credit agreements?
Making statements that contradict the written documents.
How can financial institutions protect themselves from failing-or-refusing-to-lend risk?
Having all agreements and amendments in writing and signed by all parties.
In litigation, what is subject to discovery?
All written materials related to the loan and security.
What action can expose a lender to possible future litigation regarding discretionary lines of credit?
"Although the documents state that the line is available at the lender’s discretion, all things being equal, we would expect to honor your request for advances."
What should lenders provide borrowers with in case of an event of default?
A written notification of the event of default.
Why should lenders limit credit file comments to factual matters?
To prevent disputes arising from inaccurate or misleading comments.
What happens when everyone understands discretionary line of credit agreements?
Problems with these agreements are typically few.
Why are lenders advised to have all agreements and amendments in writing and signed?
To protect themselves from failing-or-refusing-to-lend risk.
What is a major risk for lenders who go beyond written documents in discretionary line of credit agreements?
Exposing themselves to potential litigation.
What should lenders do to protect themselves from failing-or-refusing-to-lend risk?
Keep records of borrower defaults and conversations
In discretionary line of credit agreements, what does the lender reserve the right to do?
Refuse to make any advances
What action exposes a lender to possible future litigation concerning discretionary lines of credit?
Going beyond written documents in statements to the borrower
Why should lenders avoid making promises beyond what is written in discretionary line of credit agreements?
To avoid potential future legal issues
What can lenders do to avoid failing-or-refusing-to-lend risk when dealing with borrowers?
Document all defaults and related conversations
Why do lenders get into trouble with discretionary line of credit agreements?
By making statements beyond the written documents
What is the consequence of a lender refusing to make advances under discretionary lines of credit without providing a reason?
The borrower may claim the lender did not act in good faith
What should lenders provide borrowers with regarding an event of default?
Written notification of an event of default
Why is it important for lenders to have all agreements and amendments in writing and signed by all parties?
To have a legally binding record of the agreement
What is recommended regarding credit file comments for financial institutions?
Include only facts in credit file comments
What is the purpose of early identification of a problem loan?
To successfully address the issue before it worsens
What could trigger a company being watch-listed as a potential problem loan?
Change in company management
When should warning signs of a potential loan problem be addressed?
Immediately upon detection
What does the appearance of a warning sign regarding a loan indicate?
That questions should be asked and further investigation is needed
What is one possible cause of a potential loan problem mentioned in the text?
The borrower changing management
What is the main focus when a borrower hands over the keys to their plant and indicates an inability to continue operations?
Understanding why the due diligence before funding was ineffective
What could indicate that an owner or manager has changed their personal investing style?
The owner or manager has become less willing to share information about the company
What is a potential issue if a company has family members on the payroll?
The money spent on family members should be redirected to hiring management expertise
What is a risk when a company ventures into new business areas outside of its proven expertise?
The company's attention is diverted from the ongoing operation of the entity for which financing was provided
What could indicate that an owner or manager is diverting business funds for personal use?
The owner or manager has become more supportive of multiple family members on the company payroll
How can a company's diversification into new business areas affect a lender?
It can lead to the company having insufficient operating funds due to diverting funds into unrelated investments
What is a potential issue if an owner or manager becomes less willing to share information about the company?
It could indicate that the owner or manager has changed their personal investing style
What formula is used to calculate the break-even level in units?
$970,000 / $3,000
What is the Break-Even Sales level when considering fixed costs and profit?
$3,400,000
What aspect of historical relationships is a special concern in the analytical process?
Customer's history with other financial institutions
How can documentation flaws impact the analytical process?
Expose to lender liability claims
What should lenders consider about other creditors in credit analysis?
Willingness to share risk
What should the lender do with the signed copy of the letter provided to the borrower and guarantors?
Keep it for their records
What does the Ability to Improve Your Collateral Position refer to?
Existence of unencumbered assets
What strategy could be best for a customer with rapid growth but limited capital, causing over-advances on its line of credit?
Move the loan to an asset-based lender
What is the main reason why the text suggests lenders should fully disclose all known information to the buyer when selling a problem loan?
To ensure the buyer is aware of the risks involved
What is the main reason why the text suggests that liquidation should only be considered as an option when there is a high probability that it is the lender's only source of repayment?
To maximize the recovery for the lender
What is the main reason why the text suggests that lenders should obtain and keep evidence that the guarantor understood the terms of the guaranteed loan?
To avoid potential future litigation
What is the main reason why the text suggests that many guarantors look for ways to avoid having to pay on the guarantee?
They are trying to protect their own investment
What are the key elements that must be proven for a successful negligent misrepresentation claim against a financial institution?
Failure to exercise reasonable diligence, reasonable reliance by the plaintiff, and damages caused by the reliance.
What is a recommended practice for financial institutions to limit the possibility of litigation related to credit information exchange?
Refer all credit inquiries to a central group or individual to ensure consistency.
What is a recommended practice for financial institutions regarding confidentiality agreements with borrowers?
Obtain agreements from borrowers to release information to parties with legitimate business reasons.
In the context of breach of fiduciary duty claims, what must borrowers typically prove regarding the financial institution representative?
The representative had superior knowledge and used it to benefit the lender at the borrower's detriment.
What should financial institutions do to maintain a record of credit inquiries and responses?
Document who made the inquiry, when it occurred, what was asked, and how the institution responded.
Learn about the importance of monitoring overdrafts as an early warning sign of financial trouble in a company. Discover how poor cash management, lack of working capital, and held check problems can contribute to the issue. Explore strategies for tracking monthly average collected balances.
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