CLFP Credit Analysis & Risk Assessment 3

Question 1

What is 'expected loss' in credit risk management for a lease portfolio?

Accepted Answer

Probability of Default (PD) × Loss Given Default (LGD) × Exposure at Default (EAD)

Answer

Expected loss is calculated as the product of probability of default, loss severity (what's lost after recovery), and total exposure, forming the basis for loan loss reserves.

Question 2

What does 'equipment obsolescence risk' mean for a lessor?

Accepted Answer

The risk that rapid technological change will reduce the equipment's market value faster than expected, eroding residual value

Answer

If technology advances quickly, off-lease equipment may be worth far less than projected, causing the lessor to realize losses when remarketing returned assets.

Question 3

What is 'charge-off' in the context of a lease portfolio?

Accepted Answer

The removal of an uncollectible lease receivable from the books as a loss after recovery efforts are exhausted

Answer

A charge-off is the accounting write-off of a lease receivable deemed uncollectible, recognized as a realized loss net of any recovered amounts.

Question 4

What is a 'guaranty' from a parent company in equipment leasing?

Accepted Answer

A legal commitment by the parent to pay the subsidiary's lease obligations if the subsidiary defaults

Answer

A parent company guaranty provides the lessor with recourse to a stronger credit (the parent) if the lessee subsidiary fails to meet its payment obligations.

Question 5

What does 'delinquency rate' measure in a lease portfolio?

Accepted Answer

The percentage of the portfolio with payments that are past due by a specified number of days

Answer

Delinquency rate measures portfolio credit quality by showing what proportion of outstanding balances are past due, typically tracked at 30, 60, and 90+ day buckets.

CLFP - Certified Lease & Finance Professional Practice Test

CLFP - Certified Lease & Finance Professional Practice Test

CLFP Credit Analysis & Risk Assessment 3