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Sound
credit decisions are based upon the 3 Legged
Stool custom. Character, Capacity &
Collateral - it is just that simple, yet that
complex. As in a three legged stool, the
stronger each leg is, the more solid and
reliable it will be.
In a nutshell ...
Acceptable Character is basically a
detailed analysis of the credit report of an
applicant, along with their stability of
residence and employment. On balance, there is a
scale here - from top-notch gold plated all the
way down to lousy. The further away from lousy,
the stronger that leg of the stool is. This is
considered the most important leg by many long
experienced credit grantors.
An applicant Capacity to good lending
decisions is critical, as it is essential any
new customer has the ability to repay their
debts. The Character leg's strength tells us
their willingness to take care of their
obligations in an acceptable manner. This
Capacity leg however, measures their capacity -
their ability - can they afford it? This leg of
the stool needs the support of a likely reliable
and steady available future income stream so the
customer has the funds to make timely payment.
The Collateral which secures the
transaction is the third leg of this three
legged stool. Obviously, the more security which
collateralizes the loan the better, and the
stronger the stool will be. This is thought of
by many however, as the least important leg of
the stool, as it can lose value and is not
always of satisfactory quality, or accessible
upon default.
With two sturdy legs for our stool, with only
one weaker, even though not ideal, is still an
adequate formula. Two of the legs weakened is
generally a recipe for disaster. Having all
three of the legs fragile at origination,
barring a miracle, is most certainly a future
loss.
An ingredient missing from the training regimen
of most employers in our industry these days, is
teaching this concept to all personnel. Sure,
processors may get a small bit of it via
osmosis; naturally underwriters and
institutional investors should all be intimately
familiar with this sort of thinking; yet it is
our observation even many of them are not.
Unfortunately mainstream Loan Officers don't
have the first clue what it's all about, all too
regularly. They see themselves as sales experts,
closers, and regrettably not loan analysts. Yet
those very LOs are the face of our industry to
nearly everybody outside the business!
It's time for them to understand what a good
loan is.
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IT to discuss this item on our Board
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