VSPL-Originations-NHM 003 Credit Basics.pdf

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Module 3 – Credit
Document Classification Internal Use Only
BU Name Originations
Document Number Version Document Owner
VSPL–Originations-NHM 003 1.0
Vice President, Originations
Operations
Reviewed On Review Frequency Next Review Date
7/28/2020 Yearly 7/27/2021
Prepared By Reviewed By Approved By
Sanjo P J – Manager, Training Sundareswaran K – Senior
Vice President, OPEX and
Quality
Effective Date
7/28/2020

Department: Originations Module 3 - Credit
© 2020 VSPL. All rights reserved. Internal Use Only Page 2 of 20
Contents
I. Scope......................................................................................................................................... 3
II. First C of Underwriting - Credit .................................................................................................. 3
III. Documents associated with Credit......................................................................................... 3
A. Borrower Certification & Authorization.................................................................................. 3
B. Credit Report:........................................................................................................................ 4
1. Credit Bureaus ................................................................................................................... 5
2. How to arrive at the Credit Score?...................................................................................... 5
3. Credit Report Date............................................................................................................. 6
4. Validity of a Credit Report:................................................................................................. 7
5. Tradelines .......................................................................................................................... 7
6. Tradeline – Account Types (Is there a need to cover this in-depth for freshers?) ................ 9
i. Mortgage:...................................................................................................................... 9
ii. Revolving account ........................................................................................................ 10
iii. Instalment accounts:.................................................................................................... 10
iv. Education Loans:.......................................................................................................... 10
v. Auto loans:................................................................................................................... 11
vi. Charge/Open Accounts................................................................................................. 12
vii. HELOC ...................................................................................................................... 13
C. Credit Explanation Letters:................................................................................................... 13
1. Credit Inquiries:................................................................................................................ 13
2. Undisclosed Addresses..................................................................................................... 14
3. Late Payments and Derogatory events: ............................................................................ 15
D. Credit Supplement:.............................................................................................................. 15
E. Credit Score Disclosures....................................................................................................... 16
i. Notice to Home Loan Applicant:................................................................................... 17
ii. Your Credit Score and the price you pay for credit:....................................................... 18
IV. Conclusion........................................................................................................................... 19

I. Scope
The scope of this manual is to provide more details about the first “C” of underwriting, which is
“CREDIT”. This module also discusses the various documents in connection with Credit, such as:
Credit Report, Credit Explanation Letter, Credit Supplement and Credit Disclosures.
II. First C of Underwriting - Credit
We are already aware of the following 4 C’s of underwriting:
- Credit
- Capital
- Capacity
- Collateral
The goal of credit verification is to assess the borrower’s credit history. This is verified by requesting
a credit report. In order to request for a credit report of the borrower, the borrower needs to sign
the “Credit Request Authorization Form”.
The credit score ranges from 300 to 850. Any score above 670 is considered a good one. The credit
scores for those who have missed their credit card payments or those who have defaulted on their
home loan EMIs is going to be much lower than the qualifying score of 670.
III. Documents associated with Credit
A. Borrower Certification & Authorization
This document has two sections. The first one is the “Certification” section. On this section, the
borrower is certifying that all the information given on the loan application (1003) is true to his
knowledge. The second section is called the “Authorization” section. In this section, the borrower
is giving authorization tothelender to access borrower’s confidential information such as: income,
assets, credit score, etc.

B. Credit Report:
A Credit Report is a document that provides a complete Credit history of the Borrower including
but not limited to Credit Scores, active and closed liabilities, liability types, current and prior
employments and residential addresses and Public Records and / or derogatory events (such as
bankruptcy, foreclosure, etc.).

1. Credit Bureaus
The credit report is sometimes called as “Tri-merged Credit Report” as the information listed
on a Credit Report comes from three Credit Bureaus:
a. Experian
b. TransUnion
c. Equifax
Each of these Credit Bureaus provide a Credit Score to the Borrower which is a 3 digit
number usually ranging from 500 to 850. Thus, a typical Credit Report would reflect 3 credit
scores for a Borrower.
2. How to arrive at the Credit Score?
As mentioned above, the credit report will show three scores for the borrower. The median
score from these three will be considered as the credit score of the borrower. In order to
arrive at the median score, the credit scores have to be arranged in ascending order first and
the middle value taken as the credit score.
Example 1: In the above example, the three scores are 681, 679 & 715. First of all these have
to be arranged in the ascending order (smallest to largest), which will be 679, 681 & 715.
Now, the middle score will be taken as the credit score. So, in this case the middle score,
which is 681 is the credit score for this borrower.
Example 2: Let us now take an example where two scores are the same for a borrower –
715, 681 & 681. In this case as well, the scores have to be first of all arranged in the
ascending order – 681, 681 & 715. So, the middle score which 681 will be the credit score.
So, if two credit bureaus give the same scores to a borrower, that score will be the credit
score.
Example 3: What about scenarios, where we have two borrowers. How do we arrive at a
credit score for the file?
- Step 1: Arrive at the credit scores of each of these borrowers, following the method
suggested above.

- Step 2: Consider the lower among these two scores as the credit score for that particular
transaction.
In the above example, the credit score for Trevor Wilson is 681 and the credit score for Sara
Wilson is 693. Hence, the credit score for the file will be the lower of these two scores,
which is 681.
3. Credit Report Date
The credit report date would be mentioned on the credit report as “Date
Completed”/”Released On”, etc. The credit report is usually valid only for 120 days
from this date.

4. Validity of a Credit Report:
A credit report is valid for 120 days from the Credit Report Date. This means the loan
has to close (Closing Date or Note Date) within 120 days of the Credit Report
received date. If it does not, we need to pull a new Credit Report for the Borrower.
Since it is a chargeable document, Lenders try to close the loan before it becomes
invalid.
5. Tradelines
Liabilities described in detail on a Credit Report are also referred to as ‘Tradelines’.
The common types of liabilities seen on a Credit Report are as follows:
i. Mortgage
ii. Revolving
iii. Instalment
iv. Education Loan
v. Auto Loans
vi. Charge Accounts / Open accounts
vii. HELOC

The following information is captured for each tradeline.
i. ECOA (Equal Credit Opportunity Act) Codes – These indicate the relationship
of the borrower to a particular account. The common codes are:
- B : Borrower
- C : Co-Borrower
- J : Joint
- U : Undesignated
- A : Authorized User
- P : Participant
- S : Co-Signer
ii. Creditor - This gives the names of the bank who has given the credit, along
with the account number of the borrower.
iii. Date Reported –
iv. Date Opened – This is the date on which the credit was opened. If the
account type is a mortgage, it refers to the date when the mortgage was
opened.
v. DLA (Date of Last Activity) – This is the month in which the borrower made
the last EMI payment as per the records of the credit agencies. This usually
reflects the nearest month to the credit report date.
vi. High Credit or Limit – For a Mortgage or student loan or auto loan this is the
loan amount that the borrower got as credit. For revolving accounts, it is the
credit limit on the Credit card.
vii. Account Type – This is the account type. The various account types are:
Mortgage, Installment, Revolving, Auto, Charge account, Open account, etc.
viii. Balance – This is the balance principal amount remaining on the loan
account as of the credit report date. For revolving accounts, it mentions the
amount of credit limit used by the borrower.

ix. Terms – This is the loan term mentioned in terms of number of months. So,
for a 30 years loan, this will reflect as 360.
x. Past Due –
xi. Months Reviewed – This is the number of months for which the credit
reporting agencies have tracked this loan or the agencies have data for this
loan.
xii. Payment – This mentions the monthly EMI payment for this specific
tradeline item.
xiii. 30/60/90 – These are the number of late payments made on a particular
tradeline item. If there is a “1” mentioned under 60, it means that the
borrower made payment 60 days late once on this account. This section will
also mention the dates when this late payment happened.
xiv. Status – This mentions the status of this loan. Is it closed or still active? For
example, if the status of the account shows “Current” – it means that the
borrower is paying everything on time (there are no late payments).
6. Tradeline – Account Types (Is there a need to cover this in-depth for freshers?)
Here is a brief note on the various account types reflecting on a credit report.
i. Mortgage:
A Mortgage account is a loan taken against the Borrower’s property. Most
Lenders will not approve a loan to a Borrower, if the Borrower has had a late
payment on a Mortgage account in the last 24 months. For this, the Date of Last
Activity (DLA) reflecting on the Credit Report for a Mortgage Tradeline must be
recent. If it is back dated (by how many months?) as compared to the Credit
Report date, we are required to pull a Credit Supplement for the Mortgage
account reflecting recent transaction history. This is done in order to verify if
there have been any recent late payments on the Mortgage account.

ii. Revolving account
Revolving accounts are nothing but Credit Card accounts owned by the
Borrower. Revolving account is always considered in liability reconciliation for a
Borrower irrespective of the outstanding balance. If a Revolving account on the
Credit Report only reflects the total outstanding balance; however, does not
reflect the monthly payment, we need to consider 5% of the outstanding balance
as the monthly payment for liability reconciliation.
In the above example of a revolving account, the balance amount is $293 and
the monthly amount is $30. If in case the monthly amount was not mentioned,
we would arrive at the monthly amount by taking 5% of $293, which is $14.65.
iii. Instalment accounts:
Instalment accounts are usually short term loans of 5 to 7 years with a fixed
monthly payment. These loans close on their own when the loan term comes to
an end. If an Instalment account has less than 10 payments remaining to be paid,
it need not be considered into Borrower’s monthly liabilities.
Examples for instalment accounts are: Mobile phones purchased through EMI
option, Smart TV purchased through EMI option, etc.
In the above example, the outstanding balance on this tradeline is $44,916 and
the monthly payment is $903. In order to calculate the number of months
remaining on this loan, divide the outstanding balance with the monthly amount.
In this case we need to divide ($44,916/$903), this will give us 49.74 which
should be taken as 50 months. Since, more than 10 payments are remaining on
this account, this account should be considered for liability calculation.
iv. Education Loans:
These are loans taken by Borrowers for Education purpose and usually have a
deferred payment plan i.e. the loan payments usually do not start until the

Borrower completes his education and begins employment. Education Loans are
in fact a type of Instalment Loans. If the credit report does not provide a monthly
payment for the student loan, or if the credit report shows $0 as the monthly
payment, we must determine the qualifying monthly payment using one of the
options below.
i. If the borrower is on an income-driven payment plan, we may
obtain student loan documentation to verify the actual monthly
payment is $0. We may then qualify the borrower with a $0
payment.
ii. For deferred loans or loans in forbearance, we may calculate
- a payment equal to 1% of the outstanding student loan balance
(even if this amount is lower than the actual fully amortizing
payment), or
- a fully amortizing payment using the documented loan
repayment terms.
v. Auto loans:
Auto loans or Vehicle loans are also a type of Instalment Loans in which the
collateral is the Borrower’s Vehicle. There could be two categories in auto Loans:
a. Auto Loan – This is the usual vehicle loan that we have in India. We take a
loan to purchase a vehicle (bike, car, etc.) and we make repayments
through monthly EMIs. Once the loan term is over, the borrower becomes
the complete owner of the vehicle. For Auto loans, we follow the guideline
for an instalment account – ie, if less than 10 months are remaining, we do
not consider that account.
b. Auto Lease – Lease is basically the concept of leasing out the vehicle from
a Company that owns the vehicle. The borrower continues to pay the lease
amount every month, until he/she uses the vehicle. Once the lease period
is over or once the borrower stops paying the lease amount, the vehicle is
returned to the Company that owns it. The comments section of the credit
line will specify if a credit line is an auto lease or not. For Auto Lease, we
need to consider the balance and monthly payment as per the credit
report, irrespective of the number of months remaining.

vi. Charge/Open Accounts
Charge accounts, also called as Open accounts or 30 day accounts are accounts
which operate in a way similar to a Credit Card with the exception that the
Borrower needs to pay the complete outstanding balance at the end of the
month i.e. 30 days in a Charge Account. In a Credit Card or a Revolving account,
the Borrower is allowed to make a minimum payment instead of the complete
outstanding balance. Usually, if the Borrower has sufficient assets to cover the
existing balance of the Charge account, it is excluded from Borrower’s liabilities.
Mostly these open accounts are the Store cards issued by companies such as
AmEx. Customers can used this card for shopping at stores like Amazon,
Walmart, etc.

In the above example, notice that the Credit Limit and the balance on two of
these open accounts are the same (although the account numbers are different).
These are cases wherein the wife/husband is sharing another’s credit limit. Amex
will issue them two separate cards, but the purchases made on each of these
cards will be tagged to the account holder’s credit limit.
vii. HELOC
In order to understand a HELOC (Home Equity Line of Credit), we need to first
understand what equity is. Imagine that a borrower bought a property worth
$50,000 by taking a loan of $40,000. Now, the bank has an equity of $40,000 on
the property and the borrower’s equity is $10,000. A second loan taken against
this $10,000 is called a HELOC.
A HELOC (Home Equity Line of Credit) is a combination of a Mortgage and a
Revolving account. It is basically a Line of Credit provided to the Borrower
against the Borrower’s equity in the property as Collateral. So, unlike a Credit
Card which is an Unsecured Product, a HELOC is a Secured product, which also
explains why the Credit Limit given to the Borrower in a HELOC is much larger as
compared to a Credit Card.
C. Credit Explanation Letters:
The Borrower may be required to provide a reasonable and acceptable explanation for
red flags noticed on the Borrower’s Credit Report including but not limited to Credit
Inquiries, Undisclosed Addresses, Late Payments, Public Records, etc.
1. Credit Inquiries:
Credit Inquiries reflecting on Borrower’s Credit Report are the Borrower’s attempts
on obtaining credit from Lenders. However, a Credit Inquiry does not always
indicate that the Borrower has obtained a new Credit. Many a times, the Borrower
does not go ahead with the application for the credit.
Typically, it takes about 90 days for a new loan obtained by the Borrower to reflect on the
Borrower’s Credit Report. For this very reason, it becomes necessary to question all recent
Credit Inquiries reflecting on Borrower’s Credit Report in order to find out if any of those
Credit Inquiries resulted in a new Liability. Most Lenders require Borrower’s explanation for
Credit Inquiries which are less than 90 days old from the Credit Report date. However, some
Lenders follow a more stringent process and require explanation for all inquiries within 120
days of the Credit Report date.

2. Undisclosed Addresses
The Borrower is required to provide an explanation for any undisclosed address reflecting on
the Credit Report within the past 24 months, calculated from the application date with
respect to the current ownership of the property.
This is primarily because a residential property is usually associated with a high monthly
obligation when compared to all other types of accounts. In addition to this, the Borrower is
also required to pay Taxes, Insurance and other charges such as HOA fees, Mortgage
Insurance etc. for residential properties.

3. Late Payments and Derogatory events:
Late payments and Derogatory events (foreclosures, bankruptcies, etc.) not only
affect the Borrower’s Credit Score but also helps a prospective Lender to decide if
the Borrower is Credit worthy. Late payments on a mortgage is an indication that
the borrower is careless about the EMI payments towards his home. So, an
Underwriter will scrutinise the credit report for any of such events. If a late payment
is mentioned in the credit report, the comments section will give details about when
this late payment occurred.
The Borrower needs to provide a letter of explanation for excessive late payments
and Public Records in the last two years calculated from Credit Report date
backwards. The explanation provided by the Borrower should be reasonable and
should not indicate Borrower’s lack of regards for Financial Management.
D. Credit Supplement:
A Credit Supplement is a shorter version of a Credit Report and usually focuses on one or
two liabilities or tradelines. It does not provide Credit Scores of the Borrower and is
ordered if the original Credit Report does not provide accurate or complete details for a
particular loan or tradeline. For example: if the DLA for a tradeline is not recent, the
lender will request for a credit supplement just for that tradeline.

E. Credit Score Disclosures
The lender sends Credit disclosures to the borrowers along with the credit report. These
disclosures contain instructions on how to read the credit report and what their scores mean to
the lender. The borrower has to sign and acknowledge the receipt of disclosure.

i. Notice to Home Loan Applicant:

ii. Your Credit Score and the price you pay for credit:

IV. Conclusion
In this module, we went over the first C of underwriting which is “Credit”. We looked at the reason
behind ordering a credit report and the important information that need to be verified on it. We also
went over the types of accounts that appears in the tradeline section of the credit report and various
other sections such as Inquiries, Public Records, etc. We also briefly looked at documents such as
Credit Explanation Letter, Credit Supplement and Credit Disclosures.

Document Change Tracker
SI
#
Date
Versio
n
Change Description
Page
Numbers
Done By &
Designation
Approved By &
Designation
1 11/27/2017 1.0
Document initially
created
All
Preethi S - Lead,
Process training
Vishwanath K –
Vice President
2 7/28/2020 1.1
Revamped the
Module in entirety
All
Sanjo P J –
Manager,
Training

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