![]() Cash flow, or earnings before interest expense, taxes, depreciation, and amortization (EBITDA), should be calculated and documented based on the past 3-5 years of tax returns or financial statements. Commercial loans generally utilize the debt service coverage (DSC) ratio. For consumer loans, it is common to calculate debt-to-income (DTI) ratio considering current debt load, additional debt, and current earnings. How is the borrower planning to service the debt?ĭocumenting the ability to service the debt as agreed is critical. ![]() The credit risk increases the more problems a borrower has shown in the past. Finally, the deposit history should be evaluated and included if the borrower has a history of overdrafts and NSF items, this information should be noted. Information such as the credit score, past due history, public records can help evaluate the borrower’s character. This should include previous credit performance with the bank or the borrower’s history with the lender at other institutions if the officer is new to the institution. What is the Bank’s history with the borrower? However, by including each of these elements in your credit memo, you can meet regulatory requirements and assist in monitoring credit risk. ![]() These principles have existed for years but aren’t always applied in the documentation. Below are the “five C’s” of credit that can be used in the underwriting documentation. Credit memos can be simple yet provide a road map to help someone other than the loan officer understand the nature of the credit. ![]()
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