Risk Assessment & Underwriting Flashcards

A vehicle is financed at 120% LTV. Which factor MOST increases GAP risk exposure for the lender?

Answer: Rapid early depreciation of the vehicle model

Rapid early depreciation widens the gap between ACV and outstanding loan balance, directly increasing GAP exposure.

Which vehicle type is typically considered HIGHEST risk from a GAP underwriting perspective?

Answer: New luxury vehicles with high MSRP

New luxury vehicles depreciate steeply in the first year, creating a large potential GAP exposure relative to ACV.

An underwriter is reviewing a GAP application for a vehicle financed at 84 months. What is the PRIMARY risk concern?

Answer: Extended term leads to slow equity building and prolonged negative equity

Longer loan terms mean minimum payments barely cover interest initially, keeping the borrower underwater (negative equity) for a longer period.

Which metric do GAP underwriters most commonly use to quantify initial risk at loan origination?

Answer: Loan-to-value (LTV) ratio

LTV ratio directly measures how much is financed relative to the vehicle's value, which determines the starting GAP exposure.

A GAP policy is written on a vehicle with a $40,000 ACV and a $46,000 loan balance. The LTV is approximately:

Answer: 115%

LTV = loan balance / ACV = $46,000 / $40,000 = 115%, meaning the borrower is 15% underwater at origination.

Which of the following conditions would cause an underwriter to DECLINE a GAP application?

Answer: Vehicle's LTV exceeds the program's maximum threshold

Most GAP programs set a maximum eligible LTV (e.g., 150%); exceeding this threshold means the risk is outside acceptable underwriting guidelines.

How does a borrower's decision to skip a down payment affect GAP underwriting risk?

Answer: It increases LTV at origination, expanding potential GAP exposure

Without a down payment, the financed amount equals or exceeds MSRP, immediately creating negative equity as the vehicle depreciates off the lot.