08-11-09/2:00 pm CT
August 11, 2009
2:00 pm CT
(Rick): All right, this is just (Rick) (unintelligible), we’re ensuring again after turning on the recording. What I’d like to do is go through the list of people that I had before I stepped away and see if anybody else has joined the call since.
I have (Carolyn) in Michigan, (Lisa) from Connecticut, (Patty) from Wisconsin, (Robyn Brine) from the RSA, (Lindsey) in Oklahoma, (Leslie) in South Carolina and (Robert) from Nevada. Has anybody else joined?
(Tina): Yeah, (Tina) from Florida.
(Rick): Oh hi, (Tina).
(Tina): Hey, how you doing?
(Rick): Really well, thanks.
Woman: Hi (Rick). (Tim) is going to be able to join us so he’s today too.
(Rick): I’m sorry, say that again?
Woman: (Tim Russell), he’s here.
(Rick): He is here. All right, excellent.
(Tim Russell): Hey (Rick).
(Rick): Hey (Tim) how are you?
(Tim Russell) Good.
(Rick): All right. Well, it’s a very nice showing, thanks. Appreciate everybody being here on the phone.
You’re here with us for Part 2 of what is our six part series for new directors of loan programs. The idea being sort of lay out the various steps that are involved in running a program. We started in June with an overview from (Tony Rice) of the focus on customer service programs have. And today we have the pleasure of having Cheryl Fatnassi who is in addition to being the CEO of the Opportunities Credit Union of Vermont, also the director of that states AFP program.
Today we’re looking at the application review process. The process whereby one takes in an application, looks it through for completeness, begins to make a check of things like collateral, some of the ratios that Cheryl will go on to explain. And just basically sort of get a clear understanding of the complete application.
She has sent and you should have received an email from me earlier today a PowerPoint that she is going to follow through, as well as a sheet that gives a couple of sample - of information pulled from applications that we can look at together as a group after we have a bit of an overview from Cheryl herself. So if there’s no questions in between I’ll hand it then to Cheryl and say Cheryl thank you very much for being willing to speak with us today.
Cheryl Fatnassi: Absolutely. So we’re going to cover understanding the credit application review process. And if you go to the next slide what we will be covering is the steps in the application process which will include evaluating the borrower, calculating all of those ratios that lenders calculate and what they mean. How you figure collateral values.
We’ll cover some credit reports and credit history and then we’ll talk about red flags and that’s the part where you’re going to learn about how you put all this information together and how you look for combinations of things to identify errors or problems with potential applicants. And then finally making the loan decision.
So if you go to the next slide after that we’re going to start off with the loan application and what that process is for. Basically when you’re completing a credit application or a loan application this is where you’re gathering information that’s going to assess the risk of this borrower, this loan and identify this borrower so that you know the person you’re dealing with is indeed the same person who has filled out the information on the application.
People can use false information, they can impersonate people and so basically if there’s any of those kinds of things happening as you start to do your verifications later on in the process you’ll see by gathering this information it’ll help you identify those red flags.
Part of what the application will ask is the purpose of the loan, how much does the borrower need. And those two things are going to help you identify the reasonableness of the request. If I ask you for $50,000 for hearing aides, you know, you would have some questions about what kind of hearing aides they were. But if I were to ask for $50,000 for a modified van that might be a more appropriate dollar amount.
Identifying information, these are things that are going to help you match up to the borrower’s IDs: their name, their address, their social security number and their date of birth. And those pieces of information when you go to run their credit report are going to help link this applicant to their application.
We’re going to look at and gather their income and their employment information. We’re going to want to know how long have they been at their job, what type of job do they have, who their employer is. All of these things are pieces of information that are going to help you assess the borrower. And when you gather income and employment information, as you’ll see at the end when we look at three different applications.
If I have a job where I’m self employed and I just started it you might expect to see a particular amount of assets that I’ve accumulated, types of assets and type of debt that would correspond to that. If I’ve been working 30 years and I have a professional possession in the same company you would expect to see my assets and my financial picture look a different way.
So you’re kind of gathering information and looking for the other pieces of information to add up to that. We’re going to gather information about their assets, what does this borrower own? A house, checking accounts, a savings account, do they have a retirement account, their car, what are the kinds of things that they own that you might be able to use to secure this loan?
Liabilities are things that they owe money on. So you’re going to gather information about how much do they owe and who do they owe it to. And some of it will come on the credit report but some of it won’t come through the credit report.
You may be working with borrowers who use non-traditional credit. Non-traditional credit won’t be verified through a credit report. It would be things like using their electric bill, using a reference from their landlord, using the reference from their - maybe their cell phone company or utility. So most of the liabilities commonly come from the credit report but in some cases you will use these liabilities that are from non-traditional sources.
You’re going to ask some key questions on the application. Is this a U.S. citizen or resident? Meaning are they legally allowed to be here and contract for loans in this country. Is the borrower over 17 years old? If they’re not over 17 years old then the contract they sign with you can’t be - in the court wouldn’t stand up if you tried to recover.
You’re going to ask about prior histories of bankruptcies or are they currently - have they currently filed for bankruptcy? And that will tell you whether you can do a loan with them right now or not.
And there are other key questions such as whether this person is in a state of separation, if a person is married or divorced, it’s clear who owns the assets and what their responsibilities are. If a person is in a position of being in a legal separation generally you’re not going to be making loans to them because it’s not clear who owns the assets and who’s going to end up with the debts.
Then you’re finally going to have a section where you are authorized by this individual or borrowers to check their credit history and to check other credit information on them.
If you go to the next slide, red flags that you’re going to watch for in the application. Some of these are going to come up when we look at the examples. Gaps in employment, so if I have my current job that I work at and I’ve been there two years and I give you my dates of employment and where I’m working and then I show you my prior job but there’s a period of a year or two years in between.
You know, a few years ago that might have been a very unusual situation. Today with people losing jobs and difficulty in getting jobs it may not be that unusual. But you want to understand, you know, what happened during that period of time, if it can help you understand this borrower’s financial situation.
It could be that they were in, you know, they just lost their job and they didn’t have employment. It could be there was a hardship in the family, maybe a serious illness or something and you want to make sure that they’ve recovered from that. In terms of paying bills and getting themselves financially back on track. Or it could be someone who was in jail or they were in drug treatment.
And so you really want to understand what those gaps are in employment and how they relate to this borrowers strength and ability to pay back the loan. Similarly with addresses, look for where I live now, look at my prior address. And if I live today in Vermont and last month I was in Florida and six months ago I was living in California but I tell you I work for two years in Vermont you’re going to wonder how I did that.
And so you’re looking for the information to match up. You’re looking for sudden changes in employment or income. If by - in working in a particular job maybe I’m working in a bank or a credit union and then I’m a nurse. There may be an explanation for that but you want to understand why is there this large change in my job or in my income.
Because you want to know that this person’s current employment and income is going to continue and you’re basing your loan decision on that. Incomplete applications where they haven’t filled in a lot of the information, it could be that this person doesn’t have a high level of literacy. So it may be that you need to do - fill out the application with them or have one of your staff interview them because they may not know how to fill it out.
It also could be that the borrower’s trying to hide information from you or trying to give you as little information as possible so that if they don’t pay you can’t find them. So incomplete applications are not necessarily bad. You want to make sure you fill them out. It can be a lack of understanding or it can be a borrower who’s trying to avoid on being found.
Look at their address. If the address is a post office box you always want to know the physical address where your borrower lives, what’s the street number, what’s the - you know, where are they physically living because that’s where your car, your wheelchair, your piece of collateral is going to be located. The P.O. Box may have nothing to do with where your borrower lives and you can’t find them at the P.O. Box.
You also want to know the purpose of the loan and what your collateral is. Meaning what are they going to use the money for. And make sure that it’s clear. Never be afraid to ask people questions. A little hard sometimes when you’re doing applications to ask questions but generally if you ask questions and you start to get people that are evasive, those are the areas that you want to probe more.
Go to the next slide, underwriting the loan and the borrower, you’re going to be - in this phase you’ve gathered the information, you’ve filled out the application, you now have information from the borrower. Now we’re going to start evaluating the information to see if it meets your underwriting guidelines.
So you’re going to determine if the borrower has given accurate information that you’re going to make your loan decision based on. So you’re going to look at the income that they have told you that they made on the application and you’re going to verify that. Depending on your own underwriting guidelines you may require the borrower provide you with a pay stub or you may be calling the employer and verifying over the phone dates of hire and income amounts.
But you’re going to be verifying that what’s put down is accurate. Similarly with expenses, you’re going to be looking at the credit report. And you’re going to be making sure that what they told you the payments were on loans and the balances match up to what they told you. You’re going to look at the dates that they provide you, the date that they said that they said that they were hired. The date that they said that they moved here.
The dates are very important because if someone had credit problems, they have unpaid collections, they have some lates, you’re going to want to look at when that - those lates occurred and in part of your discussion when you’re trying to understand this borrower’s background you’re going to want to make sure that the dates -- the date that I was divorced -- matches up to if that’s what caused me to be delinquent, that that matches up to the time in my credit report when I was behind.
You want information about the collateral. Generally a make, a model, a serial number, a description. And usually you’re going to get that from a bill of sale, from the medical store, from the modified van company, from the hearing aide company, from the dentures from the dentist that will give you the details and the cost of what it is you’re financing and the information about that.
Some things are a little harder to determine the value of if they’re used but most of the things you’re going to get from a purchase and sales agreement from the person who’s going to be buying it. You’re also going to look at what the person has in reserve. Meaning how much money do they have set aside to cover expenses. If they had some sort of financial hardship how much is set aside in savings. Is it one month worth, is it six months worth?
And it’s not necessarily going to cause you to make or not make the loan but it is going to help you see if given this borrower’s situation if you’re making a loan to them and you’re kind of pushing them higher up in terms of the size of their payments every month if they don’t have a lot set aside in reserve you know that you’re putting this borrower at risk and yourself at risk because if something happens they don’t have that cushion to fall back on.
Versus somebody who has a pretty good size reserve and they’re, you know, they’re - they may be borrowing a little bit more than you might lend normally but you know that they have enough set aside that if something happens they could cover themselves for awhile. So it’s really helping you assess if the borrower has a problem, you know, how are they going to be - how can they resist and handle that if something unexpected comes up.
Anybody have any questions so far?
(Lisa): I don’t but I just didn’t get the email so it’s tough for me to follow by the email. So I’m just listening and taking notes and maybe someone could send that link to me later.
Woman: Is this (Lisa)?
Woman: I can send it to you now.
(Rick): Be there momentarily, sorry about that (Lisa).
(Lisa): No problem. You need my email address?
(Rick): No, we’ve got it.
Cheryl Fatnassi: Okay the next one is evaluating the credit history. So this is where you’re going to verify the income and the employment. And as I mentioned earlier you could do this from pay stubs from your borrower. You could get tax returns and in our case whenever someone is self employed we always use tax returns to verify their income.
You could verify it by calling their employer and having them confirm the information that you have on your application or you could send out a written verification of employment where you basically put on a written form that has been authorized by the borrower what they stated their income and their position was and their dates of employment and you send that out and the employer signs that and sends it back to you.
But you do want to make sure that what was stated as income and where they work is correct because you’re relying on that generally to pay them back. You may have somebody whose income is social security and so they might provide you a copy of a bank statement showing the direct deposit of that.
They might provide you a copy of a benefit statement showing what they’re getting from social security. So all those are acceptable ways to verify their income. You may run into situations where people say well I make this amount of money but I don’t declare it.
That’s one of those situations where if they don’t declare it and you’re audited - your financial institution’s audited they have to be able to support that they made a loan to somebody that has the ability to pay back and money that’s not disclosed or cant be verified can generally not be used.
And so people really have to make a choice if they work kind of under the table then they have to understand that that may hurt them when it comes to borrowing. And so sometimes people may have to get in the habit of starting to declare that income so that it can be used to help them qualify for a particular loan that really would be beneficial to them.
Verification of residence and rental history. This is where you make sure that your borrower’s indeed living where they said they said they were living. And you can use this - in our case we have often times people who have very limited credit histories so this often times is an alternate credit history that we use for people that are building their credit histories. We get a hold of their land lord and either over the phone or in writing we have them confirm when this person started renting and what their payment history has been from what their monthly rent payment is.
We also use utility bills as a way to verify that they live at that address. And you want a picture ID that shows them at that address to verify who this borrower is. If they have a mortgage then generally you can verify that through the credit report because it will come up through there.
Verification of credit history is generally done through your credit report. So your financial institution is going to run a credit report for this borrower and you’re going to match that up, information such as the name and the address and the date of birth of the borrower. And they’re also going to match up all of the credit history that this borrower has stated that they had.
Non-traditional references will not appear in a credit report. And so if your financial institution or if your program uses that it’s going to require going directly to landlords, utilities, cell phone, cable and other bills that are not disclosed in a credit report that could be used to show this borrower’s history.
And I don’t know how many of you have used alternate references? Anybody? Guess we’re the only ones. We use it quite a bit. We work with an (unintelligible) population and so it’s very common for us to have borrowers that need to use alternate credit histories.
(Nancy): This is (Nancy). I think some of the loan programs do use that credit (unintelligible) alliance. That would be an alternate credit reporting too.
Cheryl Fatnassi: Yes. Okay the next slide is called the credit report. And I didn’t give you a copy of the credit report which maybe would have been more useful but I’m just going to talk about what kinds of information are on a credit report and what it’s used for.
As I mentioned earlier the name, the address, the date of birth and social security number for your borrower or borrowers will be on the credit report. Sometimes there will be a problem matching a social security number. It’ll come back and it might have a different name.
It could be that there’s a junior and senior or a first, second and third and so the dates of birth don’t match. But if the bank or credit union finds that there is a mismatch between those they’re going to want to get that resolved before they move on with the loan. Particularly if it’s a completely different name.
A completely different name can be somebody that’s had a name change through marriage, through a guardianship or through some other type of arrangement. So it’s not necessarily a bad thing but it is something that needs to be resolved.
You also will see many immigrants that have been brought here have all been given the date of birth of January 1 because a lot of times they didn’t know when they were born. You may see a whole bunch of people - in our program we deal a lot with immigrants and refugees and so the beginning it was rather odd, we kept seeing everybody was born January 1. We said that’s really strange, that doesn’t make sense. Well it’s something that the government just decided for ease of clarity to just give them all January 1 and an estimated year.
Fraud alerts are another piece that will come up in a credit report. And those will come up at the very top of the report and they’ll identify the social security number, for example, of this individual that you input was not issued. That’s a problem and that needs to be resolved.
It could be that you typed it in wrong, it could be that the borrower transposed the numbers in the applications. But if it is the number that the borrower says they’re using you may have to go to the social security office to get that resolved if they insist it’s the number and the credit report insists that it has never been issued.
And there are certain social security number ranges that are just never used. So if it’s one of those then clearly there’s fraud problem or something that needs to be resolved. If the name doesn’t match the record then you need some documentation from this borrower showing the name change or an explanation of they new use a middle initial or whatever it is that you need to get cleared up so that you end up with a match on the name.
You’ll also see public records. And these are things that are in the city and town’s records and state records. And they include things like federal and state tax liens. It could include whether somebody filed for bankruptcy and has had that bankruptcy discharged or not. Or any judgments against this individual. It could be a judgment to a small claims court, it could be any one of a number of types of judgments.
You want to look at those and see when they occurred. Was it seven years ago, ten years ago. Did they just happen? And they’ll help you determine what this borrower’s ability to pay you back is. It’s not necessarily a bad thing that they’ve had any of those because there could have been a life even that happened. Serious, you know, illness in the family, a death of a family member, a divorce, a serious change in job and income.
And so what you want to understand is how does this borrower handle this. But if you have somebody who has nothing but collections in their credit report and it spans a period of twenty years then you have to really figure out is this person - do they have any ability to pay back at all. Or is, you know, is it just they have a pattern of never paying.
So it’ll help you understand those kinds of things. Also in the credit report on the next slide will be all of the banks and credit unions that they have borrowed from. The name of the lender will be there. Generally there’s a phone number so you can contact them underneath the name.
The account number will be there, date opened, the highest balance on that account or the original loan amount, their current balance, payment amounts. Their payment history. And there will be a little code on the side which will tell you the type of account that this is. Is it a mortgage on a home, is it an installment on a car, boat, something like that with a monthly payback.
Or is it an open-end line of credit such as a home equity line or is it something else such as a credit card or other type of line of credit. It will also tell you what this person’s responsibility is on that debt. Are they a primary borrower, meaning a signer or cosigner? Or are they responsible for paying this back and they own the car or the boat or whatever’s behind the loan?
Or are they a guarantor who doesn’t’ own the house, the car, the boat but did sign to guarantee this loan? And so it’ll tell you what their relationship is on the loan.