Credit and Lending Fundamentals
Credit and Lending Fundamentals tests the vocabulary and arithmetic behind credit decisions, plus the disclosure and fair-lending rules surrounding them. Expect the five Cs, debt-to-income ratios, APR versus note rate, and adverse action requirements.
Core rules
- The five Cs: character (credit history), capacity (income and debts), capital (down payment, reserves), collateral and conditions.
- Debt-to-income ratio = total monthly debt payments divided by gross monthly income. Use gross income, never net. Back-end ratios near 36-43% are common cutoffs; the housing ratio is calculated separately.
- Loan-to-value = loan amount divided by appraised value; a higher LTV usually means mortgage insurance or a higher rate.
- The note rate prices the loan; the APR includes fees and is the number disclosed under Truth in Lending.
- Adverse action notices under ECOA/Reg B generally must be sent within 30 days, with specific reasons or notice of the right to request them.
- Pulling a credit report requires a permissible purpose under the FCRA; a prequalification is not an approval.
Worked example
Gross monthly income is $6,000. Existing debts are a $300 car payment and a $200 minimum card payment. A proposed housing payment of $1,400 gives total debt of $1,900, or 31.7% DTI - inside a 43% guideline. The application is not approved on that number alone; credit history, reserves and appraisal still apply.
Traps
- Using take-home pay, which understates capacity.
- Presenting the note rate as the APR.
- Telling a customer they are 'approved' before underwriting.
- Asking about marital status, age or other prohibited bases when not required for the product.