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

The 5 Cs — Character, Capacity, Capital, Collateral, and Conditions — form the traditional framework lenders use to assess a borrower's creditworthiness.

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 non-performing loan is one where the borrower has missed payments for an extended period (commonly 90 days), signaling significant default risk for the lender.

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

Subprime lending targets borrowers with poor or limited credit histories, with lenders charging higher rates to offset the greater probability of default.

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 promissory note is a written, legally binding promise by the borrower to repay a specified amount under agreed terms, and it serves as the core loan contract.

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

A charge-off occurs when a bank removes an uncollectable debt from its balance sheet as a loss, typically after the loan has been delinquent for 180 days, though collection efforts may continue.

(BMO) Bank of Montreal Assessment Practice Test

(BMO) Bank of Montreal Assessment Practice Test

BMO Credit & Lending Fundamentals 3