Credit and Lending Activities
The credit lifecycle
Origination, underwriting, approval, disbursement, monitoring, and collection. Each stage has controls: credit policy, delegated authority, collateral valuation, covenant monitoring, and watchlist management. Candidates should map controls to stages-a common trap places covenant monitoring in underwriting rather than ongoing monitoring.
Underwriting fundamentals
Know the five Cs: character, capacity, capital, collateral, conditions. Debt service coverage ratio compares cash flow to debt obligations; loan-to-value compares loan size to collateral value. Traps ask which metric matters most for an income-producing commercial loan-capacity (DSCR), not collateral.
Credit risk classification
Loans are graded on a scale from pass to special mention, substandard, doubtful, and loss. Regulators expect timely charge-offs and adequate allowance for credit losses. The allowance under CECL estimates lifetime expected losses at origination, not just incurred losses.
Concentration and limits
Concentration risk arises from exposure to a single borrower, industry, or geography. Know that legal lending limits cap exposure to one borrower as a percentage of capital.
Worked example
A borrower's DSCR falls from 1.5 to 1.1 and LTV rises to 85%. Rule of thumb: DSCR near 1.0 signals thin coverage; combined with high LTV, downgrade to special mention and increase monitoring.
Traps to expect
Confusing DSCR with LTV, treating collateral as a substitute for repayment capacity, or missing that CECL is forward-looking.