Risk Analysis Flashcards

In auto lending, what does the payment-to-income (PTI) ratio measure?

Answer: The monthly vehicle payment divided by gross monthly income

PTI compares the proposed vehicle payment to the applicant's gross monthly income to gauge affordability.

A contract with a loan-to-value (LTV) ratio of 125% indicates what?

Answer: The amount financed exceeds the vehicle's value by 25%

An LTV above 100% means the borrower starts with negative equity, raising loss severity on default.

Expected credit loss on a loan is commonly estimated using which formula?

Answer: Probability of default x loss given default x exposure at default

Expected loss combines how likely default is, how much is lost if it happens, and the balance exposed.

Which applicant characteristic generally signals greater stability and lower credit risk?

Answer: Five or more years at the same residence

Long time at residence is a traditional stability indicator associated with lower default rates.

What is the purpose of vintage analysis in a loan portfolio?

Answer: To track the performance of loans originated in the same period over time

Vintage analysis groups loans by origination period so their delinquency and loss curves can be compared.

A lender raises rates for all applicants, and mostly higher-risk borrowers continue to accept offers. This illustrates what risk?

Answer: Adverse selection

Adverse selection occurs when the pool of accepting borrowers skews toward higher risk.

A portfolio where 40% of contracts come from a single dealer is most exposed to which risk?

Answer: Concentration risk

Heavy reliance on one dealer means that dealer's practices or failure can disproportionately affect losses.