Question 1

Research has shown that current-year income for an FI is rarely affected by the decision to sell loans from their balance sheet.

Accepted Answer

A) True 
 B)False

Question 2

What are the two basic types of loan sale contracts or mechanisms by which loans can be transferred between seller and buyer?

Accepted Answer

A) Participations and assignments. 
B) Participations and originations. 
C) Syndications and originations. 
D) Transfers and assignments. 
E) Exercise and transfers. 
A) Participations and assignments. 
B) Participations and originations. 
C) Syndications and originations. 
D) Transfers and assignments. 
E) Exercise and transfers.

Question 3

The implementation of BIS capital requirements may be expected to

Accepted Answer

A) increase the downward trend in loan sales because of higher required capital levels. 
B) increase the downward trend in loan sales because of the use of risk adjusted assets. 
C) decrease the downward trend in loan sales because of the use of risk adjusted assets. 
D) decrease the downward trend in loan sales because of higher required capital levels. 
E) Answers C and D only. 
A) increase the downward trend in loan sales because of higher required capital levels. 
B) increase the downward trend in loan sales because of the use of risk adjusted assets. 
C) decrease the downward trend in loan sales because of the use of risk adjusted assets. 
D) decrease the downward trend in loan sales because of higher required capital levels. 
E) Answers C and D only.

Question 4

The sellers of domestic loans and HLT loans include all of the following EXCEPT

Accepted Answer

A) major money center banks. 
B) foreign banks. 
C) U.S.government and its agencies 
D) non-financial companies. 
E) investment banks. 
A) major money center banks. 
B) foreign banks. 
C) U.S.government and its agencies 
D) non-financial companies. 
E) investment banks.

Question 5

Banks and other FIs sell loans because of all of the following EXCEPT

Accepted Answer

A) loan diversification benefits. 
B) reduction in reserve requirements. 
C) lowering of capital costs. 
D) reduction of liquid assets of the institution. 
E) increase in fee income through brokerage functions. 
A) loan diversification benefits. 
B) reduction in reserve requirements. 
C) lowering of capital costs. 
D) reduction of liquid assets of the institution. 
E) increase in fee income through brokerage functions.

Question 6

Some corporate customers that rely on bank loans may see the sale of one of its loan by the bank as an adverse event in the customer-bank relationship.

Accepted Answer

A) True 
 B)False

Question 7

Banks began selling short-term loans only since the passage of the Financial Services Modernization Act in 1999.

Accepted Answer

A) True 
 B)False

Question 8

The Resolution Trust Corporation (RTC), a government agency formed to manage failed S&Ls in the early 1990s, followed a Good Bank/Bad Bank concept in the sale of loans.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is NOT true of loan assignments?

Accepted Answer

A) All rights are transferred on sale. 
B) The loan buyer holds a direct claim on the borrower. 
C) Transfer of U.S.domestic loans is normally associated with a Uniform Commercial Code filing. 
D) Ownership rights are generally much clearer in a loan sale by assignment. 
E) Contract terms are unrestrictive from the seller's perspective. 
A) All rights are transferred on sale. 
B) The loan buyer holds a direct claim on the borrower. 
C) Transfer of U.S.domestic loans is normally associated with a Uniform Commercial Code filing. 
D) Ownership rights are generally much clearer in a loan sale by assignment. 
E) Contract terms are unrestrictive from the seller's perspective.

Question 10

Which of the following is a reason for an FI to sell a residential real estate loan rather than securitize it through GNMA?

Accepted Answer

A) The loan is too large to meet securitization standards. 
B) The loan is not insured by FHA or guaranteed by the VA. 
C) The loan recipient's income cannot be verified. 
D) The loan carries a non-standard adjustable interest rate. 
E) All of the abovE. 
A) The loan is too large to meet securitization standards. 
B) The loan is not insured by FHA or guaranteed by the VA. 
C) The loan recipient's income cannot be verified. 
D) The loan carries a non-standard adjustable interest rate. 
E) All of the abovE.

Question 11

Loan participations are typically sold to correspondent banks because

Accepted Answer

A) they are insiders and can be trusted. 
B) they offer the best prices. 
C) the ongoing relationship offers the greatest monitoring opportunities. 
D) it is a regulatory requirement. 
E) correspondent banks are captive customers. 
A) they are insiders and can be trusted. 
B) they offer the best prices. 
C) the ongoing relationship offers the greatest monitoring opportunities. 
D) it is a regulatory requirement. 
E) correspondent banks are captive customers.

Question 12

Mutual funds are prohibited from purchasing/participating in the FI loan sales market by the SEC.

Accepted Answer

A) True 
 B)False

Question 13

Banks that sell many of their loans

Accepted Answer

A) utilize more of a dealer intermediation approach. 
B) utilize more of a broker intermediation approach. 
C) utilize more of a trader intermediation approach. 
D) utilize more of a market maker intermediation approach. 
E) relinquish some of their roles as financial intermediaries. 
A) utilize more of a dealer intermediation approach. 
B) utilize more of a broker intermediation approach. 
C) utilize more of a trader intermediation approach. 
D) utilize more of a market maker intermediation approach. 
E) relinquish some of their roles as financial intermediaries.

Question 14

Which of the following rely on non-distressed HLT loan purchases as a means of diversifying without the high cost of developing costly nationwide banking networks?

Accepted Answer

A) Bank loan mutual funds. 
B) Credit unions. 
C) Foreign banks. 
D) Investment banks. 
E) Vulture funds. 
A) Bank loan mutual funds. 
B) Credit unions. 
C) Foreign banks. 
D) Investment banks. 
E) Vulture funds.

Question 15

The definition of a highly leveraged transaction (HLT) loan as adopted by U.S. bank regulators in 1989 includes

Accepted Answer

A) doubling the borrower's liabilities which results in a leverage ratio higher than 50 percent. 
B) involving a buyout, acquisition, or recapitalization. 
C) results in a leverage ratio higher than 75 percent. 
D) All of the above. 
E) Only two of the above. 
A) doubling the borrower's liabilities which results in a leverage ratio higher than 50 percent. 
B) involving a buyout, acquisition, or recapitalization. 
C) results in a leverage ratio higher than 75 percent. 
D) All of the above. 
E) Only two of the above.

Question 16

The loan sales market in which an FI originates and sells a short-term loan of a corporation can be considered a close substitute to the issuance of commercial paper.

Accepted Answer

A) True 
 B)False

Question 17

Identify the correct observation.

Accepted Answer

A) Most loan sales are completed in less than 30 days. 
B) Up to 50 percent of loan sales eventually fail to be completed at all. 
C) There is no incentive to renege on a loan sales contract. 
D) The tendency to renege on a loan sales contract decrease as market prices move away from those originally agreed. 
E) Contractual problems, trading frictions, and costs rarely affect loan sales. 
A) Most loan sales are completed in less than 30 days. 
B) Up to 50 percent of loan sales eventually fail to be completed at all. 
C) There is no incentive to renege on a loan sales contract. 
D) The tendency to renege on a loan sales contract decrease as market prices move away from those originally agreed. 
E) Contractual problems, trading frictions, and costs rarely affect loan sales.

Question 18

The definition of a highly leveraged transaction is any transaction that involves a buyout, acquisition or recapitalization.

Accepted Answer

A) True 
 B)False

Question 19

The growth of the commercial paper market has hurt the market for loan sales by

Accepted Answer

A) offering some borrowers alternatives to bank loans. 
B) underpricing the banks that sell loans. 
C) fostering the credit crunch. 
D) adding another regulatory layer since the SEC requires shelf registration of new issues. 
E) increasing moral hazard concerns in the market. 
A) offering some borrowers alternatives to bank loans. 
B) underpricing the banks that sell loans. 
C) fostering the credit crunch. 
D) adding another regulatory layer since the SEC requires shelf registration of new issues. 
E) increasing moral hazard concerns in the market.

Question 20

Assignments of fixed-rate loans typically do not have difficulties in the calculation and transfer of accrued interest.

Accepted Answer

A) True 
 B)False

Exam 25: Loan Sales

Research has shown that current-year income for an FI is rarely affected by the decision to sell loans from their balance sheet.

What are the two basic types of loan sale contracts or mechanisms by which loans can be transferred between seller and buyer?

The implementation of BIS capital requirements may be expected to

The sellers of domestic loans and HLT loans include all of the following EXCEPT

Banks and other FIs sell loans because of all of the following EXCEPT

Some corporate customers that rely on bank loans may see the sale of one of its loan by the bank as an adverse event in the customer-bank relationship.

Banks began selling short-term loans only since the passage of the Financial Services Modernization Act in 1999.

The Resolution Trust Corporation (RTC), a government agency formed to manage failed S&Ls in the early 1990s, followed a Good Bank/Bad Bank concept in the sale of loans.

Which of the following is NOT true of loan assignments?

Which of the following is a reason for an FI to sell a residential real estate loan rather than securitize it through GNMA?

Loan participations are typically sold to correspondent banks because

Mutual funds are prohibited from purchasing/participating in the FI loan sales market by the SEC.

Banks that sell many of their loans

Which of the following rely on non-distressed HLT loan purchases as a means of diversifying without the high cost of developing costly nationwide banking networks?

The definition of a highly leveraged transaction (HLT) loan as adopted by U.S. bank regulators in 1989 includes

The loan sales market in which an FI originates and sells a short-term loan of a corporation can be considered a close substitute to the issuance of commercial paper.

Identify the correct observation.

The definition of a highly leveraged transaction is any transaction that involves a buyout, acquisition or recapitalization.

The growth of the commercial paper market has hurt the market for loan sales by

Assignments of fixed-rate loans typically do not have difficulties in the calculation and transfer of accrued interest.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Securitization

Filters