Credit and Lending: Affordability, Security and Arrears
What this domain tests
Credit and Lending tests credit assessment, affordability, security, SME lending, arrears and responsible lending. The exam rewards candidates who can separate repayment capacity from collateral.
Core rules
- The five Cs are character, capacity, capital, collateral and conditions. Capacity is the primary driver.
- Affordability uses verified income, committed outgoings and stress-tested repayments. For SMEs, use cash flow and debt-service coverage, not EBITDA alone.
- Security should be valued, legally enforceable and monitored. A guarantee needs independent advice and clear documentation.
- The SME Regulations require transparent application handling, reasons for refusal and an appeals route.
- Mortgage arrears handling follows the Mortgage Arrears Resolution Process, with alternative repayment arrangements and clear communications.
- Forbearance must be recorded and monitored.
Worked example
An SME seeks €250,000. Net operating cash flow is €180,000 and annual debt service is €120,000, giving a debt-service coverage ratio of 1.5. A 2% interest-rate stress raises debt service to €140,000, giving 1.29, still above the 1.25 covenant. The lender approves with quarterly reporting and a covenant test. If stressed coverage fell below 1.0, the lender should decline or require more equity, not rely on collateral alone.
Traps
- Treating collateral as repayment capacity.
- Using EBITDA as cash flow.
- Taking a guarantee without independent advice.
- Recording forbearance without monitoring.