Understanding the Credit Application Review Process August 2009 By Cheryl Fatnassi-President/CEO Opportunities Credit Union

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 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 doesnt 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) 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 Does not include: 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.