AFIP AFIP Credit and Lending Fundamentals 2 — Questions and Answers
Question 1: What is 'negative equity' in auto lending?
- When a borrower has a negative credit score
- When the outstanding loan balance exceeds the vehicle's current market value (Correct answer)
- When a customer misses a loan payment
- When the loan interest rate exceeds the vehicle's depreciation rate
Correct answer: When the outstanding loan balance exceeds the vehicle's current market value
Negative equity (being 'upside down') occurs when a borrower owes more on a vehicle loan than the car is currently worth.
Question 2: Which of the following is NOT a factor in determining a borrower's FICO credit score?
- Payment history
- Credit utilization ratio
- Annual income level (Correct answer)
- Length of credit history
Correct answer: Annual income level
FICO scores are calculated using payment history, amounts owed, length of credit history, new credit, and credit mix — income is not a direct factor.
Question 3: What does 'LTV ratio' stand for in the context of auto lending?
- Loan-to-Value ratio (Correct answer)
- Lender-to-Vehicle ratio
- Liability-to-Value ratio
- Leverage-to-Volume ratio
Correct answer: Loan-to-Value ratio
LTV (Loan-to-Value) ratio compares the loan amount to the appraised value of the vehicle, helping lenders assess collateral coverage.
Question 4: Under the Equal Credit Opportunity Act (ECOA), which of the following is a prohibited basis for denying credit?
- Poor credit history
- Insufficient income
- National origin (Correct answer)
- Excessive existing debt
Correct answer: National origin
ECOA prohibits credit discrimination based on race, color, religion, national origin, sex, marital status, age, or receipt of public assistance.
Question 5: What is the primary purpose of a 'recourse' agreement between a dealer and a finance company?
- It allows the dealer to set the vehicle's residual value
- It requires the dealer to buy back a loan if the borrower defaults within a specified period (Correct answer)
- It gives the dealer the right to renegotiate loan terms after funding
- It establishes the dealer's reserve markup limits
Correct answer: It requires the dealer to buy back a loan if the borrower defaults within a specified period
A recourse agreement holds the dealer responsible for repurchasing defaulted loans, incentivizing dealers to submit creditworthy applications.
Question 6: What does 'subprime lending' refer to in auto finance?
- Loans offered below the prime interest rate
- Lending to borrowers with lower credit scores and higher default risk (Correct answer)
- Short-term bridge loans for vehicle purchases
- Loans secured by multiple vehicles simultaneously
Correct answer: Lending to borrowers with lower credit scores and higher default risk
Subprime lending involves extending credit to borrowers with lower credit scores (typically below 620), who pose a higher risk of default and are charged higher interest rates.
AFIP AFIP Credit and Lending Fundamentals 2
What is 'negative equity' in auto lending?