PCS Credit Risk Assessment & Analysis 2 — Questions and Answers
Question 1: A debtor's debt-to-income (DTI) ratio is 55%. How does this affect the collector's risk assessment?
- It indicates the debtor is low-risk and likely to pay
- It signals high financial stress, reducing the probability of voluntary repayment (Correct answer)
- DTI ratios above 50% are irrelevant to collection risk
- It means the debtor qualifies for additional unsecured credit
Correct answer: It signals high financial stress, reducing the probability of voluntary repayment
A DTI above 43-50% indicates the debtor is overextended, making voluntary repayment less likely without a structured arrangement.
Question 2: Which credit bureau score model is most commonly used by lenders to assess consumer creditworthiness in the United States?
- VantageScore 1.0
- FICO Score (Correct answer)
- ChexSystems Score
- Dun & Bradstreet PAYDEX
Correct answer: FICO Score
The FICO Score, developed by Fair Isaac Corporation, is the most widely used credit scoring model by U.S. lenders.
Question 3: When performing a skip trace to locate a debtor, which source is considered most reliable for current address information?
- Social media profiles
- Credit bureau header data (Correct answer)
- Old collection notes
- Debtor's last known employer records from five years ago
Correct answer: Credit bureau header data
Credit bureau header data is updated frequently by lenders and creditors, making it one of the most reliable sources for current debtor addresses.
Question 4: A collector reviews a charged-off account and notices the debtor has opened three new credit cards in the past six months. What does this suggest?
- The debtor is improving their credit and likely to pay all debts soon
- The debtor may have access to credit resources and could potentially satisfy the debt (Correct answer)
- New credit card openings are irrelevant to collection risk assessment
- The debtor is about to file for bankruptcy
Correct answer: The debtor may have access to credit resources and could potentially satisfy the debt
New credit account openings suggest the debtor has been approved for credit, indicating lenders see them as capable of repayment, which may mean collection is more viable.
Question 5: What is the primary purpose of a credit risk scorecard in the collections process?
- To determine the interest rate on the original loan
- To rank debtors by likelihood of payment to prioritize collection efforts (Correct answer)
- To calculate the statute of limitations on a debt
- To verify the debtor's identity
Correct answer: To rank debtors by likelihood of payment to prioritize collection efforts
Credit risk scorecards help collectors prioritize accounts by scoring the probability of payment, enabling efficient allocation of collection resources.
Question 6: Which of the following is an example of a 'hard inquiry' on a credit report?
- A consumer checking their own credit score
- A lender reviewing credit to make a lending decision (Correct answer)
- An employer performing a background check
- A utility company verifying identity
Correct answer: A lender reviewing credit to make a lending decision
A hard inquiry occurs when a lender accesses a consumer's credit report to make a credit decision, and it can temporarily lower the credit score.
Question 7: A debtor has a mortgage, two auto loans, and five credit cards — all current — but has a charged-off medical debt in collections. This pattern most likely indicates:
- The debtor is a systemic non-payer who will never repay
- The debtor selectively manages debt and may respond to targeted collection efforts (Correct answer)
- The medical debt should be dismissed as uncollectable
- The debtor is planning to file for Chapter 7 bankruptcy
Correct answer: The debtor selectively manages debt and may respond to targeted collection efforts
A debtor maintaining secured and revolving debts while defaulting on medical debt suggests selective payment behavior, meaning focused collection strategy may yield results.
PCS Credit Risk Assessment & Analysis 2
A debtor's debt-to-income (DTI) ratio is 55%.
How does this affect the collector's risk assessment?