CAC Risk Analysis 2 — Questions and Answers
Question 1: In auto lending, what does the payment-to-income (PTI) ratio measure?
- Total monthly debts divided by net monthly income
- The monthly vehicle payment divided by gross monthly income (Correct answer)
- The loan amount divided by the vehicle's wholesale value
- Annual income divided by the total amount financed
Correct 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.
Question 2: A contract with a loan-to-value (LTV) ratio of 125% indicates what?
- The borrower made a 25% down payment
- The vehicle is worth 25% more than the loan
- The amount financed exceeds the vehicle's value by 25% (Correct answer)
- The interest rate is 25% above the base rate
Correct 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.
Question 3: Expected credit loss on a loan is commonly estimated using which formula?
- Probability of default x loss given default x exposure at default (Correct answer)
- Credit score x loan term x interest rate
- Down payment x LTV x PTI
- Gross income x debt-to-income x term
Correct 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.
Question 4: Which applicant characteristic generally signals greater stability and lower credit risk?
- Three address changes in the past year
- A newly opened revolving account with a high balance
- Recent job change into a probationary period
- Five or more years at the same residence (Correct answer)
Correct answer: Five or more years at the same residence
Long time at residence is a traditional stability indicator associated with lower default rates.
Question 5: What is the purpose of vintage analysis in a loan portfolio?
- To value classic vehicles used as collateral
- To track the performance of loans originated in the same period over time (Correct answer)
- To rank dealers by sales volume
- To set the minimum credit score for approval
Correct 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.
Question 6: A lender raises rates for all applicants, and mostly higher-risk borrowers continue to accept offers. This illustrates what risk?
- Adverse selection (Correct answer)
- Interest rate risk
- Liquidity risk
- Operational risk
Correct answer: Adverse selection
Adverse selection occurs when the pool of accepting borrowers skews toward higher risk.
Question 7: A portfolio where 40% of contracts come from a single dealer is most exposed to which risk?
- Prepayment risk
- Currency risk
- Concentration risk (Correct answer)
- Model risk
Correct answer: Concentration risk
Heavy reliance on one dealer means that dealer's practices or failure can disproportionately affect losses.
In auto lending, what does the payment-to-income (PTI) ratio measure?