Banking Exam Commercial Lending Principles 3 — Questions and Answers
Question 1: Which of the following best describes 'recourse' in a commercial loan?
- The lender's ability to only seize the pledged collateral in the event of default
- The lender's right to pursue the borrower's other assets beyond the collateral if the collateral is insufficient (Correct answer)
- The borrower's right to prepay the loan without penalty
- The process of renewing a commercial loan at maturity
Correct answer: The lender's right to pursue the borrower's other assets beyond the collateral if the collateral is insufficient
In a recourse loan, the lender can pursue the borrower's personal or additional business assets if the collateral does not fully satisfy the debt upon default.
Question 2: A borrower's quick ratio (acid-test ratio) excludes which asset from the calculation?
- Accounts receivable
- Cash and cash equivalents
- Inventory (Correct answer)
- Marketable securities
Correct answer: Inventory
The quick ratio excludes inventory because it may not be quickly convertible to cash, providing a more conservative view of short-term liquidity than the current ratio.
Question 3: What is the role of a guaranty in commercial lending?
- It replaces the primary collateral with government insurance
- It provides a secondary source of repayment by making a third party liable for the debt (Correct answer)
- It exempts the borrower from personal liability for the loan
- It sets a cap on the interest rate the lender can charge
Correct answer: It provides a secondary source of repayment by making a third party liable for the debt
A guaranty is a promise by a third party (guarantor) to repay the loan if the primary borrower defaults, serving as an additional repayment source.
Question 4: Under the uniform commercial code (UCC), what document does a lender file to perfect a security interest in personal property?
- Deed of trust
- Mortgage
- Financing statement (UCC-1) (Correct answer)
- Promissory note
Correct answer: Financing statement (UCC-1)
A UCC-1 financing statement is filed with the appropriate state office to publicly perfect a lender's security interest in a borrower's personal property collateral.
Question 5: A commercial lender is analyzing a company's working capital. Which formula is correct?
- Total assets minus total liabilities
- Current assets minus current liabilities (Correct answer)
- Net income minus dividends
- Long-term assets minus long-term debt
Correct answer: Current assets minus current liabilities
Working capital equals current assets minus current liabilities, measuring the short-term liquidity available to fund day-to-day operations.
Question 6: What distinguishes a 'term loan' from a 'revolving credit facility' in commercial banking?
- Term loans have no fixed repayment schedule while revolving facilities do
- Term loans disburse a lump sum repaid on a fixed schedule; revolving facilities allow repeated borrowing up to a limit (Correct answer)
- Term loans are only used for real estate while revolving facilities fund equipment
- Term loans carry variable rates while revolving facilities always carry fixed rates
Correct answer: Term loans disburse a lump sum repaid on a fixed schedule; revolving facilities allow repeated borrowing up to a limit
A term loan provides a one-time disbursement repaid over a set schedule, while a revolving facility lets borrowers draw, repay, and re-borrow funds up to an approved limit.
Question 7: When evaluating commercial loan applications, what does the acronym 'CAMELS' refer to in bank regulatory examinations?
- Capital, Assets, Management, Earnings, Liquidity, Sensitivity (Correct answer)
- Collateral, Accounts, Market, Equity, Leverage, Stability
- Credit, Assets, Margins, Earnings, Liabilities, Solvency
- Cash, Adequacy, Management, Efficiency, Lending, Security
Correct answer: Capital, Assets, Management, Earnings, Liquidity, Sensitivity
CAMELS stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to market risk—the six components used by regulators to rate bank health.
Banking Exam Commercial Lending Principles 3
Which of the following best describes 'recourse' in a commercial loan?