Question

On the Risk Pyramid, what 5 investments are considered higher risk, higher return?

Proper loan documentation by a bank or lender accomplishes what five items to ensure the loan is enforceable?

Name the 5 requirements needed for a substitute check.

Unsecured commercial loans are complex and require quite a bit of analysis

If you have a client seeking a business loan to purchase a restaurant for $200,000 but does not include the real estate, only the FF&E (furniture fixtures and equipment) that show $200,000 on the balance sheet, and there was no other collateral or personal collateral, would this be considered a "secured loan". Why or why not?

Answer 1

1. On risk pyramid, following are the 5 investment considered as higher risk , higher return:

1. Options
2. Futures
3. Collectibles
4. Real estate
5. Equity mutual funds

2. Loan documentation to ensure loan is enforceable are:

1. Credit history
2. Cash flow history and projections for the business
3. Collateral available to secure the loan
4. Borrower Character
5. Myriad pieces of loan documentation that includes business and personal financial statements, income tax returns, a business plan and that essentially sums up and provides evidence for the first four items listed

3. Every substitute check must adhere to the following requirements before it can be recognized as the legal equivalent of the original check:

1. The substitute check must accurately represent all information depicted on the front and back of the original paper check at the time the financial institution truncates that check, including the names of the payor and payee, courtesy and legal amounts, endorsements, and encoding information, among other details.
2. The substitute check must accurately represent the MICR line of the original check.
3. The substitute check must bear the legend "This is a LEGAL COPY of your check. You can use it the same way you would use the original check."
4. The financial institution or processor must provide a warranty for the substitute check. This warranty must be provided by the financial institution when it removes or truncates the original paper check from the forward collection or return process and reconverts the paper check to a substitute check.
5. The financial institution or processor that truncated the original check must follow ASC X9.100-140 standards in the capture of check images and MICR data when it produces the substitute check

4. Unsecured loans are the loans where no asset is placed as collateral or security against the loan. Therefore, special analysis is required under unsecured loan of factors like credit worthiness, financial stability, co-borrower, guarantor details, the ratio of FOIR i.e. fixed obligation income ratio and LTV i.e. loan to value ratio. Typically, borrowers must have high credit scores to be approved for certain unsecured loans. A credit score is a numerical representation of a borrower's ability to pay back debt and reflects a consumer's creditworthiness based on credit history.

5. If a client seeking a business loan to purchase a restaurant for $200,000 but does not include the real estate, only the FF&E (furniture fixtures and equipment) that show $200,000 on the balance sheet, and there was no other collateral or personal collateral, this would NOT be classified as secured loan.

A collateral value is the estimated fair market value of an asset that is being used as loan collateral. Collateral value is determined by appraisal from a qualified expert. Since in the given question, the collateral value is considered as balance sheet value , hence , it won't be classified as secured loan.