17 8 Should a loan officer ever say no to a business firm requesting a loan

17 8 should a loan officer ever say no to a business

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17-8. Should a loan officer ever say “no” to a business firm requesting a loan? Please explain when and where. Loan officers will inevitably be confronted with some loan requests that will have to be flatly rejected, particularly in those cases where the borrower has falsified information or has a credit history of continually "walking away" from debt obligations. Even in these cases, however, the loan officer should be as polite as possible, suggesting to the customer what needs to be changed or improved for the future to permit the customer to be seriously considered for a loan. 17-9. What methods are used today to price business loans? The following methods are in use today to price business loans: a. Cost-plus pricing d. Customer Profitability Analysis b. Price leadership pricing model c. Below-prime market pricing Cost-plus-profit pricing requires the bank to estimate the total cost involved in making a loan and then adds to that cost estimate a small margin for profit. The price-leadership model, on the other hand, bases the loan rate upon a national or international rate (such as prime or LIBOR) posted by major banks and then adds a small increment on top for profit or risk. The below-prime market prices a loan on the basis of cost of borrowing in the money market plus a small profit margin. Customer profitability analysis looks at all the revenues and costs involved in serving a customer and then requires the bank to calculate the net rate of return from this particular customer. 17-11. What are the principal strengths and weaknesses of the different loan-pricing methods in use today? Cost plus pricing is the simplest loan pricing model. However, it assumes that a lending institution can accurately know what its costs are and often they don’t. Price leadership overcomes the problems of accurately predicting what the costs of a loan will be to a lending institution. However, it is still difficult to assign risk premiums to loans. In addition, using something like the prime rate as the base rate has been challenged by LIBOR and other market based rates. Below prime market pricing uses LIBOR as the base rate and includes only a small profit margin as part of the loan price. This works well for short term loans for large, well known corporations but is not generally used for small and medium sized companies or longer term loans Customer profitability analysis is similar to cost plus pricing but differs in that it considers the whole customer relationship into account when pricing a loan. Customer profitability analysis has become increasingly sophisticated as computer models have been designed to help with the analysis. 17-12. What is customer profitability analysis ? What are its advantages for the borrowing customer and the lender? Customer profitability analysis is a loan pricing method that takes into account the lender’s entire relationship (all revenues and expenses associated with a particular Customer) with the customer when pricing the loan. It is based on the difference between revenues from loans and other services provided and expenses from providing loans and other services is taken over net
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loanable funds. Net loanable funds are those funds used in excess of the customer’s deposits. If
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  • Fall '16
  • Thu Trang
  • Debt, Financial services, Mortgage loan, Deposit account

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