1. Steps in the Lending Process
16-1
Steps in the Lending Process
Finding Prospective Loan Customers
Evaluating a Customer’s Character and Sincerity of Purpose
Making Site Visits and Evaluating a Customer’s Credit Record
Evaluating a Prospective Customer’s Financial Condition
Assessing Possible Loan Collateral and Signing the Loan Agreement
Monitoring Compliance with the Loan Agreement and Other Customer Service Needs
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

2. Credit Analysis: What Makes a Good Loan?
16-2
Credit Analysis: What Makes a Good Loan?
Is the Borrower Creditworthy? The Cs of Credit
Character
Specific purpose of loan and serious intent to repay the loan
Capacity
Legal authority to sign binding contract
Cash
Ability to generate enough cash to repay loan
Collateral
Adequate assets to support the loan
Conditions
Economic conditions faced by borrower
Control
Does loan meet written loan policy and how would loan be affected by changing laws and regulations
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

3. Credit Analysis: What Makes a Good Loan? (continued)
16-3
Credit Analysis: What Makes a Good Loan? (continued)
Can the Loan Agreement Be Properly Structured and Documented?
This requires drafting a loan agreement that meets the borrower’s need for funds with a comfortable repayment schedule
If a major borrower gets into trouble because of an inability to service a loan, the lending institution may find itself in trouble
Proper accommodation of a customer may involve lending more or less money than requested over a longer or shorter period
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

4. Credit Analysis: What Makes a Good Loan? (continued)
16-4
Credit Analysis: What Makes a Good Loan? (continued)
Can the Lender Perfect Its Claim against the Borrower’s Earnings and Any Assets That May Be Pledged as Collateral?
Reasons for Taking Collateral
If the borrower cannot pay, the pledge of collateral gives the lender the right to seize and sell those assets
It gives the lender a psychological advantage over the borrower
Types of Collateral
Accounts Receivables
Factoring
Inventory
Real Property
Personal Property
Personal Guarantees
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

5. 16-5
EXHIBIT 16–1 Safety Zones Surrounding Funds Loaned in Order to Protect a Lender
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

6. 16-6
TABLE 16–4 Sources of Information Frequently Used in Loan Analysis and Evaluation by Lenders and Loan Committees
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

7. Parts of a Typical Loan Agreement
16-7
Parts of a Typical Loan Agreement
The Promissory Note
Loan Commitment Agreement
Collateral
Covenants
Affirmative
Negative
Borrower Guaranties or Warranties
Events of Default
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

8. 16-8
Loan Review
Carrying out reviews of all types of loans on a periodic basis
Structuring the loan review process
Record of borrower payments
Quality and condition of collateral
Completeness of loan documentation
Evaluation of borrower’s financial condition
Assessment as to whether the loan fits with the lender’s loan policies
Reviewing Largest Loans Most Frequently
Conducting More Frequent Reviews of Troubled Loans
Accelerating the Loan Review Schedule if Economy or Industry Experiences Problems
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

9. 16-9
Loan Workouts
Loan workout – the process of recovering funds from a problem loan situation
Warning Signs of Problem Loans
Unusual or unexpected delays in receiving financial statements
Any sudden changes in accounting methods
Restructuring debt or eliminating dividend payments or changes in credit rating
Adverse changes in the price of stock
Losses in one or more years
Adverse changes in capital structure
Deviations in actual sales from projections
Unexpected or unexplained changes in deposits
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

10. TABLE 16–5 Warning Signs of Weak Loans and Poor Lending Policies
16-10
TABLE 16–5 Warning Signs of Weak Loans and Poor Lending Policies
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

11. Loan Workouts (continued)
16-11
Loan Workouts (continued)
What steps should a lender take when a loan is in trouble?
Do not forget the goal: Maximize full recovery of funds
Rapid detection and reporting of problems is essential
Loan workout should be separate from lending function
Should consult with customer quickly regarding possible options
Estimate resources available to collect on loan
Conduct tax and litigation search
Evaluate quality and competence of management
Consider all reasonable alternatives
Preferred option: Seek a revised loan agreement
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

12. 16-12
Quick Quiz
Why is lending so closely regulated by state and federal authorities?
What is the CAMELS rating, and how is it used?
What three major questions or issues must a lender consider in evaluating nearly all loan requests?
Explain the following terms: character, capacity, cash, collateral, conditions, and control.
What sources of information are available today that loan officers and credit analysts can use in evaluating a customer loan application?
What is loan review?
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.