(A)

1. Case study
As a junior loan officer, you meet customer 1 and customer 2. They present the following
situations:

Customer 1: Customer 1 is single, he has a loan request for $20,000 to pay for college tuition.
His assets include a savings account balance of $1000 and a bike. He works part time as a
computer technician, with a monthly income of $1100.

Family 2: Customer 2 has a loan request for $30,000 to buy a new car. Her assets include a
saving account balance of $ 10.000 and a 10-year-old Ford Escort. He works as an assistant
manager at McDonalds, with a monthly income of $2000. He is married and his wife is
teacher in a primary school. She has a monthly income of $1500. They have no kids.

Table of monthly repayments for $10.000 (you can choose the length)
Loan amount Loan term Interest rate per year Monthly payment
10.000 3 years 5% $300
10.000 4 years 7% $239
10.000 5 years 9% $208

Required:
1. Which documents are required to study these loans applications for customer 1 and family
2?
• Valid proof of applicant’s identity: ID card/passport
• Marital status
• Proof of residence
• Financial documents
+ For salaried individuals: salary account statement for the last 3 months and
declaration from employer giving details of income and deductions
+ For self-employed individuals: audited and certified financial documents ( balance-
sheet and profit and lost account) and bank statement of the primary account for the
last 6 months
• Individual bank account statement ( at least the last 3 months)
• Statement or current loans/credit
• Credit history reports
• Car loans documents: sale contract, down payment

2. Suppose that you are the bank officer, do you grant this debt consolidation loan? Why? or
why not (calculate TDS and residual income, write the detail of calculations)

Customer 1: are you single or married ? Have already granted loans ? For how long do you
work in this company, do you own assets ?
We begin by calculating the monthly payment on the maximum length:
20000
On 5 years, the monthly payment for the loans will be: 208 x = $416
10000
Monthly income: $1100

TDS =
mortgage payments + property taxes+ credit card interest + car payments +loan expenses 416
=
annual income 1100
= 37.81% < 40%  accepted
Residual income = 1000 – 416 = $584 (enough for a single person or a couple if we consider
French standards)
As we have a comfortable margin, we can purpose to the customer a shorter length:
On 4 years, the monthly payment will be: 239 x 2 = $478
Monthly income: $1100
478
TDS = =43.45 % > 40%  not accepted
1100
Residual income is not enough: 1100 – 478 = $622
The maximum monthly payment could only be: 1100 * 40% = 440
The loan is accepted because income is sufficient to grant $10000 on 5 years but not accepted
when grant on 4 years
Customer 2: Are you single or married? Have already granted loans ? For how long do you
work in this company, do you own others assets (real estate for example), will you bring a
down payment?
We begin by calculating the monthly payment on the maximum length and without down
payment (remember that the customer owns $10.000 savings)
30000
On 5 years, the monthly payment will be: 208 x = $624
10000
Monthly income: 2000 + 1500 = $3500
TDS = 624/3500 = 17.8% < 40%  accepted
Residual income: 3500 – 624 = $2876 (enough for a single person or a couple if we consider
French standards).
As we have a comfortable margin, we can purpose to the customer a shorter length:
For example:
On 4 years, the monthly payment will be: 239 x 3 = $717
Monthly income: $3500
TDS = 717/3500 = 20.5%
Residual income: 3500 - 717= $2783 (enough for a single or a couple if you consider French
standards).
In that case, the total cost will be cheaper because interest rate is lower ( 7%) than on 5 years
(9%) but the customer have to choose what is the more convenient for him…
Total cost of the loan on 5 years: 624 *5*12= 37440  total cost: 37440 - 30000= $18720
Total cost of the loan on 4 years: 717 *4*12= 34416  total cost: 34416 - 30000= $4416

1. Krista and Nick put a down payment of 20% on the purchase of their house, and then
financed $200,000. What was the purchase price of the house?

a. $160,000
b. $220,000
c. $240,000
d. $250,000

2. Which type of credit generally charges borrowers the highest rate of interest?

a. Amortized mortgage
b. Collateralized loan
c. Secured loan
d. Unsecured loan

3. The best way to maintain your credit rating is to:

a. use credit sparingly.

b. pay cash for your purchases.
c. repay your debts on time.
d. use as many credit cards as you can.
4. Mr. and Mrs. Donahue want to buy a home valued at $365,000. If they have 21.5% of this
amount saved for a down payment, how much will their home loan be?

a. $78,475
b. $286,525
c. $341,275
d. $357,153

5. Give the definition of the TDS :Total Debt Service ratio. Most lenders require an
applicant to meet a particular total debt service ratio in addition to the GDS ratio. The TDS
ratio is a relationship between principal, interest, taxes, consumer loans, and the gross
income of the applicant. If the answer equals less than 40 per cent (industry standard), the
lender knows that the borrower has the money to make all of his monthly payments.

Formula:
mortgage payments + property taxes+ credit card interest + car payments +loan expenses
annual income

6. Give the definition of a collateral

 Asset pledged by a borrower to a lender. The lender has the right to seize the collateral if
the borrower defaults on the obligation of repaying the loan.
A good collateral protects the lender and should be:
- Durable
- Easy to identify
- Marketable
- Stable in value
- Standardized as much as possible to permit ease of recovery and sale

7. Jane Smith will be making loan monthly payments of $2,150.00. In addition, the monthly
taxes are $250.00. With a gross debt service of 39%, what amount of annual gross income
would the buyer have to earn to qualify for the loan?
Taxes = $250, loan monthly payments of $2,150.00, a gross debt service (GDS) of 39%,
GDS = (mortgage payments + property taxes)/ annual income
 Annual gross income = (2150+250)/39% = $6153.85/month  $73846.2 per year
 Hence, based on her monthly payments (2150$), she has to have a combined minimum
earning of $6153.85 per month to qualify with a gross debt service ratio of 39%. Annually
she would require an income of $73846.2 per year to qualify this loan

8. Luis wants to buy a house priced at $315.000. He plans to finance this amount less the
down payment required. His mortgage payment would then be $ 2100. Luis has an annual
income of $91.500 and $ 45.000 savings. Luis has a car payment of $370, a student loan
payment of $ 165 and a credit card payment of $45. Use a 20% down payment and the
maximum TDS ratio to determine if Luis is eligible for loan (give calculations).

Loan amount = 315000 – 315000 x 20% down payment = $252,000

Gross monthly income: 91500/12 = $7625, Monthly Mortgage Payment = 2,100

Other monthly debt payment = 370 + 165 + 45 = $580

TDS = (mortgage payment+ other debt payment)/Gross monthly income = 35.1% < 40%
Residual Income=7,625−2,680=4,945  Luis qualifies for the loan.

(B)

A. Case study

Mr. and Mrs. A. both worked in a local factory. Mr. A. earns $ 2350 per month and has
worked in this factory for 2 years. Mrs. A earns $ 1320 and has worked in this factory for 6
months. They were using the overdraft facility on their current account to its full extent. They
also had a personal loan from their bank and a home loan. They had borrowed from various
credit card companies.

In March 2019, realizing they were in financial difficulty but unsure what to do about it, they
visited their bank. They explained their situation to the lending officer, who told them the
bank could give them a consolidation loan to cover all their existing credit card debts.

Mr. and Mrs. A. were pleased with this suggestion and they took out the loan, which paid off
all their existing debts and returned their current account into credit. But the bank left the
couple's overdraft facility in place on their current account, and within a couple of months
Mr. and Mrs. A. had begun to go overdrawn again.

In June, M. and M. A decided to buy a new car and asked for a car loan. They would like to
borrow $15.000 over 5 years with a monthly repayment of $310.

A snapshot of their loan accounts revealed the following:

Loan account Interest (%) Interest rate per year Min monthly
repayment
Debt consolidation loan 13.5% 50,000 $395
Home loan 9.5% 120,000 $780
Total 170,000 $1175

Required:

1. What are the key factors and the criteria for the bank to analyze this loan application?

2 key factors: the character of the borrower and the borrower’s ability to pay

A/ CHARACTER OF THE BORROWER:

- The borrower must be assured that the borrowing customer has a sense of moral
responsibility to repay the loan on time
+ Do you grant a new loan allow this loan consolidation
+ They are overdraft despite the former loan consolidation

B/ ABILITY TO PAY

- Income level: Mr. A. earns $ 2350 per month and Mrs.A earns $ 1320  total
monthly income: $3670
- Deposit balances: daily average deposit balance maintained by the customer (indirect
- measure of income size and stability)
- Employment stability: duration of employment and length of residence are key
factors. The length of their employment (Mr.A – 2 years, Mrs.A – 6 months)  few
employment stability for Mrs.A
 - Residential stability: the ability of individuals and families to stay in their homes for
a long period without the risk of displacement
- Pyramiding of debt: when individuals draws credit at one lending institution to pay
another. This scheme collapses when interest payments become too large for the
debtor, resulting in bankruptcy if a debt consolidation is not arranged.

2. Which documents are required?

• Valid proof of applicant’s identity: ID card/passport

• Marital status
• Proof of residence
• Financial documents
+ For salaried individuals: salary account statement for the last 3 months and
declaration from employer giving details of income and deductions
+ For self-employed individuals: audited and certified financial documents ( balance-
sheet and profit and lost account) and bank statement of the primary account for the
last 6 months
• Individual bank account statement ( at least the last 3 months)
• Statement or current loans/credit
• Credit history reports
• Car loans documents: sale contract, down payment

Criteria: In order to apply for a personal loan, applicants must:

- Be a citizen or permanent resident.

- Be 18 years or older
- Be employed: Full time, part-time, self-employed
- Have no unpaid defaults ( late payments)
- Not be bankrupt or have a court judgment
- “Good” credit rating ( internal rating plus state bank rating)

3. Suppose that you are the bank officer, do you grant this car loan? Why? or why not

Calculate the TDS before the loan application

TDS = 1175/3070 = 38% very ofter overdraft

Mr. A: $2050/month, Mrs. A: $1020/month  Total monthly Income: $3070/month

Loan monthly payment: 310 + 1175 = 1485 USD

TDS = 1485/3070 = 48.4% > 40%

Residual income: 3070 – 1485 = 1585 USD  not efficient, loan rejected

1. An home loan that is linked to an asset is called mortgage

2. Krista and Nick put a down payment of 20% on the purchase of their house, and then
financed $200,000. What was the purchase price of the house?

a. $160,000
b. $220,000
c. $240,000
 d. $250,000

3. List three of the most common reasons why consumers don't pay their bills.

- He doesn’t know how much he owes.

- He often pays bills late.
- He gets a new loan to pay old loans.
- He pays only the minimum balance due each month.
- He spends more than 20% of his net income (after paying rent or mortgage) on debt
maintenance.
- He spends more than he earns, using his savings to pay for day-to-day expenses

4. The borrower's attitude toward his or her credit obligations is called:

a. capacity.
b. capital.
c. character.
d. collateral.
e. conditions.

5. Give the definition of the GDS: the Gross Debt Service ratio (GDS). Lenders calculate
the proportion of the income’s borrower used each month to own a particular property. If the
answer equals less than 30 per cent (industry standard), the lender can feel confident in the
borrower’s ability to pay the monthly housing costs.

mortgage payments + property taxes

Formula:
annual income

6. Which type of credit generally charges borrowers the highest rate of interest?

a. Amortized mortgage
b. Collateralized loan
c. Secured loan
d. Unsecured loan

7. Mr. & Mrs. Brown wish to purchase their first home with a monthly payment of $1,350.00
and a monthly taxes of $175.00. Their combined monthly income totals $4,700.00. What is
their GDS ratio? (Give calculations).

mortgage payments + property taxes 1350+175

GDS = = =32.45 %>30 %
annualincome 4700

8. Credit scoring model increase the cost and the risk for lenders

-Yes

- No  reduces the cost and risk for lenders by providing an objective, data-driven
method to assess the likelihood of a borrower repaying their loan.

1. List 2 warning signs of financial trouble.

- He doesn’t know how much he owes.

- He often pays bills late.
 - He gets a new loan to pay old loans.

2. Why is a larger down payment beneficial to a home investor?

a. A larger down payment would only be beneficial to an investor if they intended on

renting out the house.
b. A larger down payment would enable an investor to get a loan with a higher interest
rate and lower monthly payments.
c. A larger down payment would enable an investor to get a loan with a lower
interest rate and lower monthly payments.
d. A larger down payment is essentially a larger bribe to the lending institution and gets
the investor in their good favor.

3. Mr. and Mrs. Donahue want to buy a home valued at $365,000. If they have 21.5% of this
amount saved for a down payment, how much will their home loan be?

a. $78,475
b. $286,525
c. $341,275
d. $357,153

4. Give the definition of a secured loan: 5. Secured loan: debt that require collateral as a
condition of borrowing, the creditor may sell that which is offered for collateral if the loan is
unpaid.

6. Having a…higher……..credit score means a lower risk.

7. Give the definition of money laundering:

Money laundering is the process of illegally concealing the origin of money obtained from
illicit activities (often known as dirty money) such as drug trafficking, terrorism, … and
converting the funds into a seemingly legitimate source, usually through a front organiztion

(D)

1. Case study: as same as (A)

1. Mr. and Mrs. Jihn want to buy a home valued at $365,000. If they have 21.5% of this
amount saved for a down payment, how much will their home loan be?

a. $78,475
b. $286,525
c. $341,275
d. $357,153

3. A loan that is linked to an asset is called …secured loan………..(fill the gap in this
sentence)

5. What is co-signing?
Third party (spouse, sibling, relative) which is responsible for the debt if the primary
borrower fails to repay.

6. What is collateral? asset pledged by a borrower to a lender. The lender has the right to
seize the collateral if the borrower defaults on the obligation of repaying the loan.

7. What is the main source of income for banks?

(a) Interest on loans

(b) Interest on deposits
(c) Difference between the interest charged on borrowers and depositors
(d) None of these

(E)

1. Mortgage refinance case study

David and Helen are 40 years old and they both worked in a local administration. David earns
$ 3550 per month and has worked in this administration for 10 years. Helen earns $ 2020 per
month and has worked in this administration for 6 months

David and Helen purchased a property 8 years ago with a mortgage loan.

David and Helen also pay off 2 motor vehicle loans and a personal loan for an overseas
holiday. They also had 2 credit cards.

David and Helen's minimum monthly repayments are $2,650 and they were finding it
increasingly difficult to manage the repayments on all their loan accounts. A snapshot of their
loan accounts revealed the following:
Loan account Interest (%) Balance Min monthly
repayment
Mortgage loan 6 150,000 $1200
Mortgage vehicle loan 13.5 16,500 $300
1
Mortgage vehicle loan 11.5 22,500 $490
2
Personal loan 12.5 8,500 $480
2 credit cards 18 6,000 $180
Total $203,500 $2,650

Required:

1. Calculate David and Helen's TDS and their residual income. What do you think about
David and Helen financial situation?

Total Monthly Income: $3550 + $2020 = $5570

Total Debt Payments: $2650

TDS = 2650/5570 x 100 = 47.6% > 40%

Residual Income=5570−2650=2920
 TDS is high (47.6%) exceeding the standard 40%, indicating financial strain.

 Residual Income of $2920 is sufficient for living expenses but the high TDS suggests
financial stress.

2. David and Helen contacted a bank and applied for a mortgage refinance loan for $203,500
to consolidate all their debts into one monthly payment. Suppose that a bank gives the
opportunity of refinancing all their debts into one monthly mortgage repayment of $ 1550.
Suppose that you are the bank officer, do you grant this debt consolidation loan? Why? or
why no?

Proposed Monthly Payment: $1550

New TDS Calculation:

TDS=1550/5570×100=27.8%
This falls below the industry standard of 40%, indicating a significant reduction in financial
strain.

Residual Income:

Residual Income=5570−1550=4020

Key Considerations:

 TDS drops from 47.6% to 27.8%, making the loan more manageable.

 Residual income improves significantly.

 Consolidating debt reduces multiple high-interest payments into a lower, single

mortgage payment.

Recommendation: Approve Loan

 Reason: Improved TDS and higher residual income suggest reduced financial stress.

 Conditions: Ensure that credit cards are canceled post-refinancing to avoid recurring
debt.