Credit and Collection Reviewer.pdf

Credit and Collection – Final Exam Reviewer Credit instructions Credit Procedure Credit recommendations This procedure describes the rules that apply to the granting of credit Cre...

Credit and Collection – Final Exam Reviewer Credit instructions Credit Procedure Credit recommendations This procedure describes the rules that apply to the granting of credit Credit files in recognition of prior learning, how to apply for credit, and the bases Credit Process in Philippine Financial Institutions on which credit applications are assessed. Initiation Stage The following questions could be included in Credit Procedures for Documentation and Closing Evaluating Credit: Portfolio Management 1. Does the company consider the following data concerning the general Collection Procedure business entity when evaluating credit applicants. The set of procedures you define for your collections team to follow 2. Does the company evaluate the following factors concerning the credit will be the core component of your company‘s collections policy. They applicant‘s supplier payment history should be practiced consistently and should aim to apply to all 3. Does the company evaluate the following factors concerning the credit customers – but should also be flexible when necessary. applicant‘s banking relationship: Target Market Identification 4. Is the reliability of financial information on credit applicants A target market is defined by similar characteristics such as considered, including the extent of outside CPA involvement, if any (i.e., demographics and behaviors. You can start broad with gender, audited/reviewed/compiled/etc.)? education level, and mortgage holders, and then increasingly refine 5. 8. Do certain accounts get automatic credit approval (based on peso them. The trick is to be as specific as possible. limits under a certain amount)? Define as much as you can about target customers, such as where they 6. 10. Has the customer demonstrated the ability to pay bills in a prompt shop, what brands they like, what newspapers they read or websites manner? they visit, and what life events – such as getting married or retiring – are they experiencing. 7. 13. Are credit decisions made within a reasonable time frame, as outlined by the organization‘s guidelines? Pre-Screening of Loan Applicants The following could be included in Credit Procedures for Credit Prescreening is a highly effective marketing process used by savvy Approval and Administration: marketers in the lending and banking industry every day. Terms of sale It involves making unsolicited offers of credit or insurance to consumers who might be in the market. Terms codes Loans, Loan Packaging and Loan Approval In case of default, the lender has to exhaust collection options including debt collectors and lawsuit to recover the loan. Recap: For example- Loan in simplest terms can be explained as a thing that is borrowed, especially a sum of money that is expected to be paid back with ▪ credit card debt Interest. ▪ personal loans The act of giving money, property or other material goods to ▪ bank overdrafts another party in exchange for future repayment of the principal amount along with interest or other finance charges is called loan. ▪ credit facilities or lines of credit A loan may be for a specific, one-time amount or can be available as Open-ended Loans open-ended credit up to a specified ceiling amount. Open-ended loans are loans that you can borrow over and over. Secured Loans Credit cards and lines of credit are the most common types of open- A secured loan is a loan in which the borrower pledges some asset ended loans. (e.g. a car or property) as collateral. With both of these loans, you have a credit limit that you can purchase Secured loans are loans that rely on an asset as collateral for the loan. against. In the event of loan default, the lender can take possession of the Each time you make a purchase, your available credit decreases. asset and use it to cover the loan. As you make payments, your available increases allowing you to use Interests rates for secured loans may be lower than those for unsecured the same credit over and over. loans. Closed-ended Loans The asset may need to be appraised before you can borrow a secured loan. Closed-ended loans cannot be borrowed once they’ve been repaid. Unsecured Loans As you make payments on closed-ended loans, the balance of the loan goes down. Unsecured loans don’t have asset for collateral. These loans may be more difficult to get and have higher interest rates. However, you don’t have any available credit you can use on closed- ended loans. Unsecured loans rely solely on your credit history and your income to qualify you for the loan. Instead, if you need to borrow more money, you’d have to apply for another loan.  Common types of closed-ended loans include mortgage loans, auto Personal Loan loans, and student loans. A personal loan is typically issued for a specific amount and can be Types of Loans used for various purposes at the discretion of the borrower. Term Loan A personal loan can be a secured loan or an unsecured loan. A secured Consolidated Loan loan uses an asset — such as a house or car — as collateral (or Education Loan support). Gold Loan If the borrower defaults on the loan, the creditor can take the asset. Vehicle Loan Policy Loan An unsecured loan does not require collateral and is considered high Pay Day Loan risk. As such, it has a higher interest rate. Personal Loan Consolidated Loans Business Loan Home Loan Debt consolidation is a widely used term that can imply the use of a Property Loan number of different debt assistance plans that combine multiple Construction Equipment Loan debts, loans or payments. Term Loans There are three main types of debt relief options available: A term loan is simply a loan provided for business purposes that needs Debt Consolidation Loans, to be paid back within a specified time frame. Student Loan Consolidation, It typically carries a fixed interest rate, monthly or quarterly repayment Debt Management Plans and Debt Settlement. schedule - and includes a set maturity date. It is secure type of loan. Things debt consolidation can do: A secured term loan will usually have a lower interest rate than an unsecured one. Lower your interest rates Term Classification Protect your credit rating Lower your monthly payments Short Term (1 year) Help you get out of debt faster Medium Term (1-5 years) Long Term (More than 5 years) Education or Student Loan client and his / her business operations, you will be able to provide him/her with the necessary credit facility for his / her financing needs. A loan offered to students which is used to pay off education-related Underwriting in commercial banking and real estate refers to the formal expenses, such as college tuition, room and board at the university, or analysis of a loan request by a lender to determine the amount of risk textbooks. that can be accepted. Vehicle Loan Generally, underwriters review factors such as a borrower’s credit history and debt-to-income ratio. Most people today need a loan when they buy a new or used car. And the high cost of many cars means that consumers spend years paying Loan packaging, sometimes referred to as pre-underwriting, is a for their vehicles. process used to help speed up the loan approval process. Because a car loan is such a huge debt for most people, it pays to It entails gathering and preparing all necessary information related to understand it before entering into an agreement. the approval of a borrower’s loan request. A car loan is a secured loan, which means the vehicle serves as Cash and Prepayment Terms collateral on the debt. Cash terms also referred to as prepayment or closed terms, call for If you fail to make your payments, the lender can seize it as payment. payment before the transaction or at the time of the transaction. Policy Loan Cash in advance Policy loan is a loan issued by an insurance company that uses the Cash in Advance (CIA) terms require the buyer to make payment via cash value of a person's life insurance policy as collateral. one of the cash methods (e.g., electronic transfers, company check, certified check, cashier‘s check, etc.) before an order will be shipped. Traditionally, these were loans issued at a very low interest rate, but that is no longer universally true. CIA terms are most often used for very weak credit or when unsatisfactory, limited or no credit information is available. If the borrower fails to repay the loan, the money is withdrawn from the insurance death benefit. Cash before delivery Sometimes referred to as a "life insurance loan." Cash before Delivery (CBD) terms are synonymous with CIA: no delivery is allowed until the buyer has made payment. Otherwise, Loan Packaging the seller could bear the same risks as Cash on Delivery. Meaning of Loan Packaging This is the presentation of the credit facilities that will be granted to a client. After a thorough financial analysis and getting to know well the Cash with order 3. Value and type of collateral Cash with Order (CWO) terms are offered when the seller requires 4. Amount and type of claim payment before manufacturing of a product can take place. Important Factors for Credit Approval Cash on delivery 1. The purpose of credit and sources of repayment. Cash on Delivery (COD) terms require payment to the transportation 2. The current risk profile (including the nature and aggregate amounts of company for the full invoice amount at the time of the delivery. risks) of the borrower or counterparty and collateral and its sensitivity to There is the risk that the buyer will not accept the shipment or cannot economic and market developments; pay for the shipment at the time of delivery, which means that the seller 3. The borrower‘s repayment history and current capacity to repay, based will have to bear the costs of freight to and from the buyer‘s location, on historical financial trends and future cash flow projections, under various preparation, and packaging costs and the possible deterioration of the scenarios; product. 4. For commercial credits, the borrower‘s business expertise, the status of Loan Approval the borrower‘s economic sector, and position within the sector. Formal authorization to get a loan (usually from a bank). 5. The proposed terms and conditions of the credit, including covenants Credit Approval Process designed to limit changes in the future risk profile of the borrower; and  Substantive errors: These comprise the erroneous assessment of a 6. Where applicable, the adequacy and enforceability of collateral or credit exposure despite a comprehensive and transparent guarantees, including under various scenarios presentation. Loan Documentation  Procedural errors: Procedural errors may take one of two forms: On Involves showing all the documents to banks or financial the one hand, the procedural-structural design of the credit approval institutions to get loans. These documents are very necessary for the process itself may be marked by procedural errors. These errors lead security of loans. to an incomplete or wrong presentation of the credit exposure. If the loan is given without documents, it is a chance that the bank or Segmentation of Credit Approval financial institution will fail to get the same loan from a borrower Four factors should be taken into account in the segmentation of Documents Required for Income Verification credit approval processes: It is proof, he is earning what he is telling. 1. Type of borrower 1. Proof of Identity:- Passport / Driving License / Voters ID / 2. The source of cash flows 2. Proof of Residence:- Leave and License Agreement / Utility Bill (not A credit review—also known as account monitoring or account more than 3 months old) / Passport (anyone). review inquiry—is a periodic assessment of an individual‘s or business’s credit profile. 3. Income Tax Return for the Past Three Years Creditors—such as banks, financial services institutions, credit bureaus, 4. Past 6 Months’ Bank statements and copies of pay slips where his settlement companies, and credit counselors— may conduct credit income added reviews. Businesses and individuals must go through a credit review 5. Profit and Loss account of three years if he has his own business to become eligible for a loan or to pay for goods and services over an extended period. 6. Show proof of any other type of income The need for Credit Review 7. Proof of continuity of business To gauge creditworthiness Documents Required for Asset Verification Examine credit history 1. Balance Sheet for the past 3 years 2. Stocks and Bonds investment proofs Reveal potential negative information 3. All the vehicles ownership proof which has been paid in full The Loan Administration Documents Required for Already Taken Debt Loan administration is banking function that involves determining loan 1. Credit Card Bills for the past 6 months eligibility, tracking loan documentation, and generating reports. 2. Proofs of the Debt which you have taken Who is the Loan Administrator? Loan Disbursement Loan administrators provide administrative and clerical support to a A loan is disbursed when the agreed-upon amount is actually paid loan department. They obtain loan documents and collect client into the borrower's account and is available for use. information. They perform all modifications and ensure compliance to lower requirements in addition to processing fees. Loan Administration They compile data, gather information from various sources, prepare Typically, a loan administrator is part of the loan operations team reports, coordinate meetings, and manage correspondence to ensure and supports or oversees the bank‘s loan administration processes. the loan department generates maximum business revenue. Loan Purpose of a Credit Review administrators maintain a professional and healthy relationship with existing and prospective clients. They are responsible for documenting, closing, dispersing, and servicing loans that pertain  to construction, small business mortgages, or commercial Collection Department lending. Is responsible for monitoring and following up on receivables. The Qualifications of Loan Administrators credit manager should determine the reasons why accounts become overdue and delinquent and then the customers so that proper Bachelor's Degree in business, finance or business administration, or measures can be initiated. equivalent experience. Unfair Collection Practices – BSP Circular 454 Series of 2004 Strict attention to detail and enthusiasm for collaboration. Use or threat of violence or other criminal means to harm the person Advanced general ledger and spreadsheet management skills. physically, his/her reputation, or property; Strong command of English language and good communication skills. Disclosing the names of persons who refuse to pay for past due Comprehensive understanding of lending and refinancing processes. accounts; Ability to work independently. Use of profane language, insult, or obscenities to intimidate you or put you to shame; Collection and Repayments Informing family, friends, or colleagues that you are in debt; Collection Program Stages of Collection Strategies, organization and procedures for recovery of receivables 1. Preliminary Stage – usually involves the sending of monthly payments To reduce the amount of bad debt losses while controlling collection 2. Reminder Stage – reminder is sent to customer several days ater due costs date To reduce the company’s investment in accounts receivable 3. Follow-up Stage – where successive action are undertaken at regularly spaced interval Forces of Collection 4. Drastic Stage – this stage is only resorted to if the company is ready to Salesmen lose the customer (collection is through and attorney or collection House Collectors agency) Attorneys (Legal Counsel) Tools and Aids in Collecting Collection Agency Government 1. SMS 2. Telephone 3. Statement of Account 4. Notice or Reminder 5. Letters Remedial Account Management Remedial Measures 6. Third Party Letters 1. Loan Restructuring – Any change in the principal terms and Customer-Related Factors conditions of the loan in accordance with a restructuring agreement setting forth a new plan of payment on a periodic basis. The Dominance by one or few officers of business/project operations following are circumstances that warrant restructuring: Dependence on one product line resulting to inflexibility to changes in Admission by the borrower than can no longer comply with the the market present amortization schedule due to business reverses Inability of management to cope with changes in the industry Short-term borrowings used for the acquisition of fixed assets and/or Occurrence of unfavorable events that are beyond the control of the non-earning projects borrower and which will greatly impair the cash flow or liquidity of the Inappropriate timing of projects and inadequate financial planning project like natural calamities, fire, labor and management problems Lack of professionalism of officers and management Related Factors Note: Loan restructuring should be done only if the borrower still has the capacity to pay his obligations and needs a set of Failure to detect early warning signals new repayment terms. Inadequate loan agreement provisions and/or other terms and conditions 5. Assumption of Mortgage – Involves the assumption of mortgage by Unrealistic high targets on loan releases resulting to deviation from a third party, e.g. a private individual, partnership, company, etc. credit standards wherein he assumes the obligation of the borrower Neglect of basic credit criteria Credit Review Lapses in loan implementation/non-compliance to approved terms and conditions Credit Review is an integral part of a total system for managing the credit portfolio. The overriding concern is to help develop correct credit Remedial Account Management practices and procedures to minimize credit risks Objectives of Remedial Account Management Scope of Credit Review Process Quality To nurse a substandard or doubtful account back to health Credit Administration and Documents Management – The review To regularize credit and document deficiencies validates the effectiveness of the credit monitoring and supervision To strengthen weaknesses of the credit extension by way of and support system additional collateral, security or guaranty To locate missing customers (skip tracing) Problem Recognition – The review assesses the ability to anticipate To anticipate debtor’s defenses adverse factors affecting credit risk and detects potential problem  accounts, as well as timely reporting of such events to the proper authorities Organization and Staffing Organization and Deployment – This aspect of the review establishes the appropriateness of the organizational set-up in terms of staff adequacy, work experience, delineation of functions, account assignment, among others Coaching and Training – The review determines the availability and effectiveness of training programs and other coaching tools in the delivery of functions Loan Recovery Remedial Management – This generally shows the action plan as well as results of recovery measures on distressed accounts. Assessment of this block includes the evaluation of work-out plans, actions on vital documentary deficiencies, tracking of remedial actions and actual results of recovery programs and actions. Normal Management – This is an evaluation of the processes in the administration of problem accounts. The review deals basically on the credit monitoring and supervision activities, anticipation and recognition of problem