The 4 C's

[DaleGG]

Hi

I heard a banker talk some time ago about the fact that most banks look at 4 different C's when assessing a loan:

If I remember correctly, those C's were something like:

Contract
Credit worthiness
Capacity to pay
Character

The first three are pretty straight forward but what sort of things do you do to show the bank about your character?

Do you provide your resume?
Do you provide a copy of things like articles on you in magazines (quite a few forumites have been showcased)?

Perhaps those of us more experienced can share some insights for anyone just starting out?

For what it is worth, I provide a business plan and my wealth plans along with everything else.

Have fun
Dale

 

[willy1111]

Could be more to do with how stable you are as a risk, ie how long you have been in employment, how long you have lived at your current address.

Most bank's want to know your previous jobs/addresses if your current ones are less than 3 years.

 

[redwing]

I'd be interested if the Brokers here have found that a client supplying such data makes a difference in securing the loan; or is it only when you're representing yourself and talking to the bank direct that it assists?

 

[dave99]

Hi Dale,

There a lots of versions of the 4 Cs, but the most common are collateral, creditworthiness, capacity and character. Others include capital and cashflow.

Character to the bank means that you have a history of meeting your financial obligations, integrity in business dealings and obeying the law. That is, are you the "type" of person who will always repay debts, or the "type" of person who will disappear overseas like Christopher Skase!

It is hard to assess - in the past, an interview would form part of this assessment, although since credit has loosened in the last 20 years, assessment of this "C" for housing loans has become very minimal. For other loans where one or more of the other Cs are reduced (e.g. poor credit, unsecured loan, or business loan where capacity is not as certain), character becomes more important.

To show good character you could provide:
- Personal references, preferably from a person able to sign a stat dec, not from a family member or close friend.
- Letters of recommendation from employers (if applicable).
- Letters of recommendation from those you have financial dealings with, such as suppliers, clients, business partners.
- History of your education & training, employment and business experience.
- History of your past and current personal or business debts and how they were/are managed.
- Details of your personal net worth, and for a business loan, the amount of equity you have personally invested in the business.

Hope this helps.

Cheers - Dave99

 

[alexlee]

I've never provided anything in that list to support character other than my current employment, and my job history is pretty weird since I'm working in one country but my old job would be in yet another country. I once quit a contract role in London and went to Qld to apply for a loan. Broker checked my job reference and said 'hey, you no longer work for those guys'. Somehow he managed to get my loan approved, and I managed to get a loan while unemployed. Dodgy? Yes. But I've never missed a payment and don't intend to, so the bank makes a profit out of me.

There is the criteria that bankers SAY they lend on, and what they do in real life. Just like corporate mission statements. There are always people who are willing / able to bend those rules. Dodgy brokers and bankers do to to their customers' detriment. Good brokers and bankers do it to push a client's profitable investment over the line. It really depends on the investor. I mean, a clueless home buyer may be dudded by a dodgy broker, but an experienced investor will use such a broker to get their project over the line. It's about motive and objective on both sides, not the method.

Per my philosophy: play the game as the rules truly are, not what the rulebook says they are when reality doesn't match, and certainly not by the rules as you think they should be given your moral / ethical leanings.
Alex

 

[grossreal]

hi all
interesting as I am in alexlee camp on this.
you should give the lender the information that the lender requires not information you think the lender wants.
in some cases information overload does not help.
the lenders have a list of boxes to tick from credit and you just need those ticking so the less information for me is better.
I give them tax returns and projected returns and cashflow excel sheets.
they only want to know that you are not men of straw
so they need to know you can complete and service the loan.
a broker will tell you what they want if you use one and yes there are lots of brokers that have different motives,
you have to find the one that has the same montive as you.
finance is the most tricky part of any project or purchase and there are so many variables that there is no one size fits all.

 

[jahn]

Hi DaleGG
By showing your wealth plan, that would show that you/your character is capable of putting it all together, planing, organising, be prepared, reliable, and with a track record etc
My wealth plan on the other hand would not reflect as well on my character, but then again, I reckon I would get the loan
I still remember the first loan I applied for(small and MANY many years ago) I didn't get because up to that stage, I thought buying without credit was the right way to go, so had no "history" for them to look at, so no go. I guess to a certain extent, I had no Character back then.
jahn

 

[Peter_Tersteeg]

Contract is not one of the 'C's of lending. They are:

Character - The individual's character is assessed to determine the likelihood that they will, providing their 'capacity' allows, meet repayment obligations over the term of the loan. Evidence may include previous loan history, credit agency report and savings history.+

Capacity - Financial ability to repay the loan.

Capital - Applicants financial strenth, ie. their assets compared to their liabilities. The larger the deposit, the more likely you'll get the loan.

Collateral - The security property. Risk considerations involve assessing if the loan balance could be easily realised through the sale of the property.

Conditions - the 5th 'C' refers to conditions which may affect the individuals' commitment or ability to repay the loan including job security, relationship stability, family issues and dependants.

 

[Corsa]

I once quit a contract role in London and went to Qld to apply for a loan. Broker checked my job reference and said 'hey, you no longer work for those guys'. Somehow he managed to get my loan approved, and I managed to get a loan while unemployed. Dodgy? Yes.

......

Per my philosophy: play the game as the rules truly are, not what the rulebook says they are when reality doesn't match, and certainly not by the rules as you think they should be given your moral / ethical leanings.
Alex

With all due respect, this is what I would term lying or at least bending the truth to get what you want. Its irrelevant that you could and always would pay the loan.

You mention playing by the rules as they truly are and not what the rule book says. This tells me you only play by the rules...if and when they suit you.

So to answer Dales question - Character, in my opinion, is about conducting yourself with integrity and honesty. In addition, demonstrating to the bank how you plan on mitigating risks both to your project and to the bank supplying you with finance for your project in order to mutually protect interests.

And doing this consistently and always over time and many investing deals - no matter what - is what distinguishes those of good character and those of a character that perhaps the bank and others dont want to deal with.

Best Wishes

Corsa

 

[alexlee]

With all due respect, this is what I would term lying or at least bending the truth to get what you want. Its irrelevant that you could and always would pay the loan.

You mention playing by the rules as they truly are and not what the rule book says. This tells me you only play by the rules...if and when they suit you.

So to answer Dales question - Character, in my opinion, is about conducting yourself with integrity and honesty. In addition, demonstrating to the bank how you plan on mitigating risks both to your project and to the bank supplying you with finance for your project in order to mutually protect interests.

And doing this consistently and always over time and many investing deals - no matter what - is what distinguishes those of good character and those of a character that perhaps the bank and others dont want to deal with.

Yes, and yes. Absolutely no offence taken, and I agree with you. I said what I had to in order to get what I wanted from the banks in that case. I'll do it again to get the finance that I want.

The thread was about what criteria banks lend money to people on. I dispute the idea that proof of character and integrity affects whether you get loans or not in the vast majority of cases. The rule book doesn't actually contain a lot of the rules people think are on it. Application of the rules depends on the person. That's the way society works. Different people play by different rules. Me going for a loan at ANZ is not the same as a big company CEO who plays golf with ANZ CEO John MacFarlane going for a loan at ANZ.

I don't believe that showing a bank manager your business plan to mitigate the risk will help you in most cases. It's not their own money on the line. The days of personal banking are over, by and large. If the banks are going to reduce me to a number and do business on objective criteria to generate more volume using less staff, then I'm going to play THEIR rules against them to achieve my goals.

Sometimes investments fail despite the best laid plans, and a bank manager cannot justify a loan failure with 'but his plan was sound' especially with something as generic as a mortgage. However, they CAN justify a loan loss if they followed the bank's objective criteria. Form over substance, in other words. THAT's the real rule book.

I like to think I have character and integrity towards those I trust, respect and love. As a result, I won't like to partners, friends or family.

Banks, on the other hand, are a dime a dozen, and as long as I keep up my payments it has no effect on my credit rating as to whether I lied on my application or not (law, and bank rules). Do false claims on a loan application appear on my credit report? My opinion: to a bank in the vast majority of cases the character of the borrower means nothing. It's all about the numbers and how you present them. The existence of low-doc and no-doc loans (where the borrower nominates their own income without verification) supports my theory.
Alex

 

[dave99]

I dispute the idea that proof of character and integrity affects whether you get loans or not in the vast majority of cases.
...
The days of personal banking are over, by and large.
...
it has no effect on my credit rating as to whether I lied on my application or not (law, and bank rules).
...
The existence of low-doc and no-doc loans (where the borrower nominates their own income without verification) supports my theory.

Hi Alex,

I believe your thinking is correct at the moment. This is because credit for housing loans is very loose - probably the loosest it has ever been. Character assessment is pretty much non-existent for personal housing loans.

But credit could easily tighten in the future, if there is a significant downturn in the economy. If this occurs, lo and nodoc may be withdrawn from the market and interviews or requirement for a previous relationship may return as banks try to stabilise their loan books.

Also, if you lied on your application, you are technically in default and the bank can call in your loan at any time if they see a benefit in doing so. It is in your loan contract. Something to keep in mind.

- Dave99

 

[Corsa]

Utilising some of the guidance that PT_Bear has included in his post including that the C's consist of:

1. Capacity to service
2. Capital to contribute
3. Collateral to provide
4. Conditions
5. Character

The first three are relatively objective, ie the bank can assess against some clear cut criteria (is DSR < 40% of Salary is Capital Less than X%), whereas Conditions and Character are more subjective - that is whilst guidelines would exist it - it is not as clear cut and is subject to some interpretation.

I dont work in a bank but I am just surmising that where a loan applicant is close to not meeting on of the first 3 criteria or even may not meet the criteria - aspect like conditions (job security, relationship etc) and character (ie strong financial history, good credit etc) may then sway the application if they are all okay as well.

So Alexlee comment

I dispute the idea that proof of character and integrity affects whether you get loans or not in the vast majority of cases. The rule book doesn't actually contain a lot of the rules people think are on it.

I guess we may need to hear from somone who is a lender for a bank to tell us what happens in real life. Because I believe that proof of character and integrity may effect whether you get loans approved or not.

Additionally, where Alexlee points out that the existence of low-doc and no-doc loans (where the borrower nominates their own income without verification) supports his theory. Alexlee if you provided details of your income for a low doc loan then they wouldnt need to ring your employer to verify the details you have provided. They did this because you were not applying for a low doc you must have been applying for a full doc and you were not telling the truth in the process.

Of course you like to think of yourself as having a strong character and integrity towards those you trust and respect and wont lie to these people in your life.

But from what you are suggesting, it is okay to lie to banks (or dime a dozen people you transact with) as long as you keep up your payments. In my book, this thinking is an extension of the thinking that someone who steals from a bank trust account - "it wont hurt - its just a faceless bank account and I will pay it back...."

When you do sign a loan application, you actually sign it that the details you have provided are true and in your case you are saying it is fine to lie and then sign a statement stating it is true...

Whatever the case, its your life and your loan applications and these are just my opinions - but personally I dont think that these actions are actions of integrity and I dont agree with it. And moreso, I dont agree for the young or new investors on the forum thinking it is okay to lie on a loan application to get your loan applications through.

Best wishes and respect

Corsa

 

[Baloo]

In Singapore, they call them the Five Cs:

1 Cash
2 Car
3 Credit Card
4 Condominium
5 Country Club

 

[dave99]

LOL Baloo