CLFP Exam - Credit Process and Financial Statement-
Questions & Solutions
What are some key consideration when reviewing a personal financial statement? Correct
Ans-1.) Joint - means filed with someone else. All assets may not be available in a liquidation.
2.) global cash flow (guarantor and lessee) may paint a more comprehensive picture borrowers
ability to repay.
When did credit scoring start? Correct Ans-1.) late 50's early 60's
2.) large consumer finance companies
Who is credited with founded credit scoring? Correct Ans-1.) Bill Fair and Earl Isaac
2.) FICO
What is the concept behind Credit Scoring? Correct Ans-1.) history repeats itself with respect
to borrower behavior
2.) Look for "characteristics & attributes" similar to historical data pool
3.) Characteristics/attributes used to create a score
Hos is score used? Correct Ans-1.) rank records in terms of risk
2.) can id specific problems but can put a record in a risk pool
3.) Rank order and pooling does have a high level of accuracy in predicting delinquency and
default
, 4.) adjustments can be made to transaction pricing and structure based on pool
How do you build a scorecard? Correct Ans-1.) review data from past borrowers to
determine which characteristics are most use in predicting future behavior
2.) historical data MUST be of sufficient size to make analysis valid
3.) Need to review characteristics for both good and bad clients
4.) small business loans must look at both business and PG data
What is Regression Analysis? Correct Ans-1.) "regression to the mean"
2.) identify which combination of attributes best predicts potential problems
3.) Of may attributes, only a few may be meaningful
4.) most predictive attributes might be give more "weight"
How are Credit Scores used in making credit decisions? Correct Ans-1.) higher scores are
typically better an represent lower risk
2.) Appove above a certain score
3.) review scores below cutoff to attempt to broaden the scorecard
4.) Below cutoff approvals can be used to test the model
What is the linear probability modelin Credit Scoring? Correct Ans-Assumes a linear
relationship between probability of default and factors.
Questions & Solutions
What are some key consideration when reviewing a personal financial statement? Correct
Ans-1.) Joint - means filed with someone else. All assets may not be available in a liquidation.
2.) global cash flow (guarantor and lessee) may paint a more comprehensive picture borrowers
ability to repay.
When did credit scoring start? Correct Ans-1.) late 50's early 60's
2.) large consumer finance companies
Who is credited with founded credit scoring? Correct Ans-1.) Bill Fair and Earl Isaac
2.) FICO
What is the concept behind Credit Scoring? Correct Ans-1.) history repeats itself with respect
to borrower behavior
2.) Look for "characteristics & attributes" similar to historical data pool
3.) Characteristics/attributes used to create a score
Hos is score used? Correct Ans-1.) rank records in terms of risk
2.) can id specific problems but can put a record in a risk pool
3.) Rank order and pooling does have a high level of accuracy in predicting delinquency and
default
, 4.) adjustments can be made to transaction pricing and structure based on pool
How do you build a scorecard? Correct Ans-1.) review data from past borrowers to
determine which characteristics are most use in predicting future behavior
2.) historical data MUST be of sufficient size to make analysis valid
3.) Need to review characteristics for both good and bad clients
4.) small business loans must look at both business and PG data
What is Regression Analysis? Correct Ans-1.) "regression to the mean"
2.) identify which combination of attributes best predicts potential problems
3.) Of may attributes, only a few may be meaningful
4.) most predictive attributes might be give more "weight"
How are Credit Scores used in making credit decisions? Correct Ans-1.) higher scores are
typically better an represent lower risk
2.) Appove above a certain score
3.) review scores below cutoff to attempt to broaden the scorecard
4.) Below cutoff approvals can be used to test the model
What is the linear probability modelin Credit Scoring? Correct Ans-Assumes a linear
relationship between probability of default and factors.
