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LFA Conference: Reading Critical Underwriting Documents

When underwriting a small loan, we will need to evaluate a client’s current financial status. Besides application and dialogues with the client, three official documents, credit report, pay stubs and bank statement are usually taken into consideration as an objective and quantitative measurement of the business income.

Credit Report:

Credit report gives MFIs a general idea of the client’s past borrowing behaviours. A credit report consists of 4 components, personal information; tradelines which is categorized into revolving, mortgage and installment accounts; public records in terms of civil judgment, bankruptcy, tax lien, collections and inquiries; and FICO score. It is important to make sure all 4 components are provided to be able to assess the client’s credit history in a more comprehensive manner. The most commonly used websites to pull credit reports from are Credit Karma, Credit Builders Alliance and Annual Credit Report. Potential online resources such as sample dispute letters and Bankitis can be utilized to help clients remove errors.

Things to keep in mind when reading a credit report:

- The credit report gives you the numbers; the client gives you the context. Use the credit report as a framework for questions for the potential client.

- Make sure you can find each account in the Credit Summary within the credit report.

Pay Stubs:

Pay stubs are one of the most critical documents to calculate net monthly income using two methods: YTD Average and Pay Period Gross-Up.

YTD Average:

Is considered to be the most accurate method. It is how much a client has taken home on average over the course of the year.

Monthly Net Income=YTD Net Income/(#of months elapsed through pay period)

=(YTD Gross-YTD Deductions)/(#of months elapsed through pay period)

Pay Period Gross-Up:

Calculates how much would be earned if the same paycheck was earned every pay period. There are 4 kinds of pay period: weekly and bi-weekly, which usually end on a Saturday and are for hourly employees; monthly and bi-monthly, which usually end on last day of month and are for salaried employees.

Monthly Net Income=(Pay Period Net Income/# of days in pay period)*30

                =((PP Gross-PP Deductions)/# of days in day period)*30

Pay period is not explicitly stated on pay stubs. It can be induced either by applying the general pattern listed above or using www.paycheckcity.com.

Bank Statement:

Is used for business sales or global HH cash flow, usually not for expenses. When looking at a bank statement, we should focus on beginning balance, ending balance and average balance. Average balance is the most important; however, most major banks only show average balances for business accounts while most of our potential clients own personal accounts only. It can be calculated using the formula below:

Ave. Balance=(Daily ending balance * # of days+…)/# of days in the period

Another figure that serves as an important measure of affordability is ADB Coverage Ratio.

ADB Coverage Ratio= Average Daily Balance/Monthly Loan Payment

- Diasy Yuan ’17

LFA Conference - Siyan

LFA Conference: Client Communication

Client communication is a big issue in loan application. In the meeting, speakers mentioned several points that we need to pay attention to particularly during our talk with the client.

The first one is that we need to build the trust with our client. This is the first step and a very important step to start a long-lasting and effective relationship with our client. Hence, we need to show our passion, patience, honesty and care at the very beginning of the contact with our client. Certainly, to keep trust also requires us to keep contact with the client. It is not a good choice just to contact the client once. The better choice is to keep contact with the client and talk with him or her like a professional friend.

The second one is to pay attention to details. That requires us to know our client as detailed as we can. For example, in the case they gave us to practice, we know how much the client goes to church, how many kids she has, her consuming habits, etc. In other words, we know almost everything related to her life. Then, we can provide as much useful information as we can. However, we need to keep in mind that all details are received based on the trust with the client.

In order to keep this trust, we need to keep in mind out relationship with the client. In other words, we need to know what we should say in different steps. If you two just know each other, it is impolite and inappropriate to ask some too secret questions. Hence, every time we talk with our client, we need to ask us, how deep our relationship is? Then, you can pick up appropriate questions to ask.

Another thing we need to keep in mind is that we can talk about one question multi-dimensionally. That means we can use both logical analysis and emotional persuasion at the same time. When you find that you cannot persuade your client in this way, except for listening to what he or she says carefully, you should try to communicate with him or her in another way to express your idea thoroughly.

The last point is to keep flexible. Change the way you talk according to the process of the talk with your client. It is ineffective and inefficient to read the outline you have written already. We should learn how to modify our talk with the client appropriately and immediately to increase the efficiency of our talk.

- Siyan Wang ’17