BMO Credit & Lending Fundamentals 3

Question 1

What are the '5 Cs of Credit' used by lenders to evaluate loan applications?

Accepted Answer

Character, Capacity, Capital, Collateral, Conditions

Answer

Cost, Coverage, Compliance, Collateral, Cycle

Answer

Credit, Cash, Commitment, Control, Continuity

Answer

Confidence, Competence, Currency, Contracts, Covenants

Question 2

What is a non-performing loan (NPL)?

Accepted Answer

A loan on which the borrower has stopped making scheduled payments, typically for 90+ days

Answer

A loan that has been refinanced at a lower interest rate

Answer

A newly originated loan not yet reflected in financial statements

Answer

A loan fully repaid ahead of its scheduled maturity date

Question 3

What is subprime lending?

Accepted Answer

Providing credit to borrowers with weaker credit profiles at higher interest rates to compensate for elevated risk

Answer

Lending to government entities at below-market interest rates

Answer

A lending strategy that prioritizes small business clients over retail customers

Answer

Offering below-prime-rate mortgages to first-time homebuyers

Question 4

What is a promissory note in a lending transaction?

Accepted Answer

A legal document in which the borrower promises in writing to repay the loan under specified terms

Answer

A bank's internal credit approval memo signed by the lending officer

Answer

A credit bureau alert notifying the borrower of a new inquiry

Answer

A government certificate guaranteeing a loan against default

Question 5

What does 'charge-off' mean in a banking context?

Accepted Answer

The reclassification of a delinquent loan as a loss after the bank determines collection is unlikely

Answer

The prepayment of a loan balance to reduce interest expense

Answer

A penalty assessed for an insufficient funds transaction

Answer

The process of converting a variable-rate loan to a fixed-rate loan

Question 6

Which credit utilization rate is generally recommended to maintain a healthy credit score?

Accepted Answer

Below 30% of total available revolving credit

Answer

Above 75% to demonstrate active use of available credit

Answer

Exactly 50% to show balanced borrowing behavior

Answer

100% to maximize credit limit usage

Question 7

In the context of mortgage lending, what is mortgage default insurance (e.g., CMHC in Canada) required for?

Accepted Answer

High-ratio mortgages where the down payment is less than 20% of the purchase price

Answer

All mortgages regardless of down payment amount

Answer

Mortgages on investment properties only

Answer

Any variable-rate mortgage over $500,000