BMO Credit & Lending Fundamentals 1 — Questions and Answers
Question 1: What is the primary purpose of a credit score in a banking assessment context?
- To determine a borrower's employment history
- To evaluate the likelihood that a borrower will repay a debt as agreed (Correct answer)
- To calculate the interest rate mandated by the central bank
- To measure a customer's total net worth
Correct answer: To evaluate the likelihood that a borrower will repay a debt as agreed
A credit score quantifies a borrower's creditworthiness, helping lenders predict the probability of timely loan repayment.
Question 2: Which of the following is an example of secured credit?
- A personal line of credit with no collateral
- A standard credit card
- A mortgage loan backed by the property being purchased (Correct answer)
- An unsecured personal loan
Correct answer: A mortgage loan backed by the property being purchased
A mortgage is secured because the underlying property serves as collateral that the lender can seize if the borrower defaults.
Question 3: What does the debt-to-income (DTI) ratio measure?
- The percentage of a borrower's gross monthly income consumed by monthly debt payments (Correct answer)
- The ratio of total assets to total liabilities on a balance sheet
- The proportion of revolving credit used relative to total credit available
- The interest expense relative to total outstanding debt
Correct answer: The percentage of a borrower's gross monthly income consumed by monthly debt payments
DTI is calculated by dividing total monthly debt obligations by gross monthly income, indicating how much of a borrower's income is committed to debt service.
Question 4: Within the FICO scoring model, what is the standard credit score range?
- 0 to 500
- 300 to 850 (Correct answer)
- 100 to 900
- 500 to 1000
Correct answer: 300 to 850
FICO scores range from 300 to 850, with higher scores indicating lower credit risk and greater creditworthiness.
Question 5: Which factor carries the greatest weight in calculating a FICO credit score?
- Length of credit history
- Credit mix and variety of accounts
- Payment history (Correct answer)
- New credit inquiries
Correct answer: Payment history
Payment history accounts for approximately 35% of a FICO score, making it the single most influential factor in credit scoring.
Question 6: What is a revolving line of credit?
- A loan with a fixed repayment schedule and a set end date
- A credit facility allowing the borrower to draw, repay, and re-borrow up to a set limit (Correct answer)
- A loan fully disbursed at origination and repaid in equal installments
- A short-term bridge loan used exclusively for real estate transactions
Correct answer: A credit facility allowing the borrower to draw, repay, and re-borrow up to a set limit
A revolving line of credit gives borrowers flexible access to funds up to their credit limit, and repaid amounts become available to borrow again.
Question 7: In lending, what is collateral?
- The co-signer who guarantees the loan
- The interest charged on a loan beyond the principal
- An asset pledged by the borrower to secure a loan (Correct answer)
- The lender's internal credit approval committee
Correct answer: An asset pledged by the borrower to secure a loan
Collateral is an asset a borrower pledges to a lender; if the borrower defaults, the lender may seize and sell the asset to recover the outstanding debt.
BMO Credit & Lending Fundamentals 1
What is the primary purpose of a credit score in a banking assessment context?