The Loan Underwriting Process Banking and Financial Services Finance Lesson Plan
Performance Objective Students will understand the procedures involved in the underwriting process. Specific Objectives  Understand why underwriting is necessary.  Describe the credit approval process.  Understand the loan application and approval process. Terms  Underwriting– the process of assessing a customer’s eligibility for credit.  Collateral– assets or other securities that are considered when applying for credit.  Capacity– items considered when applying for credit regarding ability to pay, such as income.  Credit– buy now, pay later.  Subprime interest rates– higher interest rates due to a risky borrower.  FICO score– a score used to measure a borrower’s creditworthiness. A measure of borrower credit risk commonly used by creditors, including mortgage loan originators. The score, developed by Fair Isaac Corporation, is based on applicants' credit history and how much they use credit. Expressed as a number between 300 and 850, the score determines not only whether the loan is approved, but also what types of terms are offered by the lender. All three national credit bureau (Equifax, Experian, and TransUnion) now report FICO scores.  Creditworthiness– ability to repay a loan.  Revolving credit– credit, such as credit card, with a limit that the borrower can access as needed.  Installment credit– a set payment each month, such as with a car payment. Time When taught as written, this lesson should take approximately three to four days to teach. Preparation
TEKS Correlations This lesson, as published, correlates to the following TEKS. Any changes/alterations to the activities may result in the elimination of any or all of the TEKS listed. 130.163 (c) Knowledge and Skills Copyright © Texas Education Agency, 2014. All rights reserved.
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(5) The student monitors, plans, and controls the day‐to‐day activities within a banking organization in order to ensure secure operations. The student is expected to: (D) underwrite loan applications to determine credit worthiness of customers, including the loan application generating process, credit analysis, and factors affecting loan pricing and structuring. Interdisciplinary Correlations English‐English I  110.31 (b) (1) Reading/Vocabulary Development. Students understand new vocabulary and use it when reading and writing.  110.3 (b) (11) Reading/Comprehension of informational text/procedural texts. Students understand how to glean and use information in procedural texts and documents. Math‐Algebra I  111.32(b) (1) (C) Interpret and make decisions, predictions, and critical judgments from functional relationships. Occupational Correlation (O*Net – www.onetonline.org/) Job Title: Loan Officer O*Net Number: 13‐2072.00 Reported Job Titles: Mortgage Loan Officer, Commercial Loan Officer, Mortgage Loan Originator Tasks 
Analyze applicants' financial status, credit, and property evaluations to determine feasibility of granting loans. 
Obtain and compile copies of loan applicants' credit histories, corporate financial statements, and other financial information. 
Meet with applicants to obtain information for loan applications and to answer questions about the process Soft Skills  Deductive reasoning  Written expression  Oral expression Accommodations for Learning Differences It is important that lessons accommodate the needs of every learner. These lessons may be modified to accommodate your students with learning differences by referring to the files found on the Special Populations page of this website. Copyright © Texas Education Agency, 2014. All rights reserved.
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Preparation  Review and familiarize yourself with the terminology and website links  Have materials and websites ready prior to the start of the lesson. References  http://files.consumerfinance.gov/f/201304_cfpb_compliance‐guide_atr‐qm‐rule.pdf  https://takechargetoday.arizona.edu/news‐headline‐video Banking & Financial Systems. (2013). N.p.: Goodheart‐Willcox Publisher. 
Instructional Aids
 Textbook  Lesson Presentation  Instructor Computer/Projection Unit  Websites Introduction
The main purposes of this lesson are to help students understand  the purpose of underwriting when applying for a loan;  the importance of a credit analysis; and  the loan process. Ask students if they have seen any commercials advertising credit report websites. Ask students if they knew that credit is reviewed for many purposes. Copyright © Texas Education Agency, 2014. All rights reserved.
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Outline
I. II. III. What is underwriting? A. A process that a lending institution uses to determine if a customer is eligible for its products or services B. Loose, or lax, underwriting contributed to the 2008 recession C. Ability‐to‐Repay rule 1. Adopted by the Consumer Finance Protection Bureau 2. Includes provisions from the Dodd‐Frank Act of 2010 3. Includes requirements that lenders must follow when making loans that consider in detail the borrower’s ability to repay a loan Purposes for underwriting A. Underwriting tries to predict a borrower or customer’s reliability B. Many services require the underwriting process:  credit cards  mortgage  insurance  business financing  renting property or furniture When a bank is going to decide if it is going to extend someone credit and approve a mortgage loan, it wants to make sure its invested is protected. So it will evaluate many things. Discuss if students are familiar with the financial crisis of 2008. Talk with them about what is called the “Subprime Mortgage Crisis.” This was a time where very risky loans were made to borrowers who, under standards of decades before, would not have been approved for a loan, were approved, but with higher interest rates than credit‐worthy borrowers. Ask students if they can guess what happened after that. Credit process A. Application B. Documentation C. Processing Multiple Intelligences Guide Existentialist
Interpersonal
Intrapersonal
Kinesthetic/
Bodily
Logical/
Mathematical
Musical/Rhythmic
Naturalist
Verbal/Linguistic
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Visual/Spatial
VIII. IX. X. D. New credit– have you recently obtained a lot of credit and are you applying for more? E. Types of credit– is it mostly revolving as with credit cards, or installment loans as with a car payment? Business credit approval A. Balance sheet– looking at a company’s assets B. Cash flow– money coming in and going out of a business C. Collateral– buildings, equipment, intellectual property, and other forms of capital D. Debt ratios– compare debt to income or assets Debt ratios A. Debt‐to‐income = liabilities/assets B. Debt‐service‐coverage = amount of debt payments/income C. Loan‐to‐value = loan amount/appraised value of property Credit approval A. If accepted . . . get better interest rates B. If accepted conditionally . . . maybe subprime rates for a risky customer C. If rejected . . . see why denied and get a copy of credit report
Businesses do not have a credit score but there are other ways their credit can be analyzed. Ask students if they have heard of major corporations that have filed bankruptcy. This is one of the reasons that businesses need to have good credit as well. The public is more likely to trust a creditworthy company and give it business. Multiple Intelligences Guide Existentialist
Interpersonal
Intrapersonal
Kinesthetic/
Bodily
Logical/
Mathematical
Musical/Rhythmic
Naturalist
Verbal/Linguistic
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Visual/Spatial
Application
Guided Practice Show students how to search for sample credit reports. Go over the sections with them and explain what they mean. For example, in the inquiry section, explain the difference between the ones that the consumer requested or the ones that were not requested by the consumer. Demonstrate how calculations would be made for several items, such as the percentage of credit used (the outstanding balance / the credit limit). Independent Practice Students will conduct research as to the effect of a borrower’s credit score on the underwriting process. They can research underwriting guidelines. They will write a short summary on what they discover in their research. Summary
Review Ask students the following questions on exit tickets. Question #1: What is the Ability‐to‐Repay rule? Answer #1: A provision of the Dodd‐Frank Act of 2010, which requires lenders to follow strict guidelines in considering a borrower’s ability to repay a loan before it is approved. Question #2: What are the 4 C’s of credit? Answer #2: Character, cash (capital), collateral, capacity Question #3: What is a FICO score? Answer #3: A numeric representation of a person’s creditworthiness by the Fair Isaac Corporation. Question #4: What are the components of a credit score? Answer #4: Payment history, amount owed, length of credit history, new credit, and types of credit Question #5: Which component of credit counts the most on a FICO score? Answer #5: The payment history represents 35%. Evaluation
Informal Assessment Any and all of the following can be used as informal assessments.  Exit tickets with vocabulary  Pair‐share activities  Class discussion and participation Copyright © Texas Education Agency, 2014. All rights reserved.
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Formal Assessment The following can be considered a formal evaluation:  Loan Underwriter Career Assignment #1 – Students are to create a Venn diagram with two interlocking circles (large enough to fit quite a bit of information). Go to www.bls.gov, click on Publications, Occupational Outlook Handbook, then search for Loan Officer. In one circle the following sections should be included, with at least two items for each section: 1) what they do, 2) work environment, 3) how to become one, and 4) pay. Next, conduct Internet research to locate Loan Officer jobs. Decide on one, and type (or write) the information for that job in the other circle. There should be at least a few terms or phrases that are the same, or similar to, what is stated on the bls.gov site. Type or write the similar phrases in the middle of the two circles where they overlap.  News Headline Assignment #2 – Divide students into groups of three to four, depending upon the class size. The teacher should print out several articles (researched online ahead of time)—enough for the number of groups to each receive one. Assign each group the news article related to credit reports or credit scores, or let them choose one. Have the students affix the article to a flipchart paper or poster, and then have them each make notes about the important points in their article. They can then create a presentation demonstrating the knowledge they gained from their article. You can show the video from the fefe.arizona.edu website to give the students an idea of how to start.  Credit Report Analysis Assignment #3 – Students will conduct Internet research to locate images of credit reports and select one. Using the percent breakdown of the FICO score components, students are to calculate the percentages of each component using the image that they selected and assign a credit score for their sample, ranging from 300‐850, with 850 being the highest. They are to print their sample. They will also write a short summary that includes their score, the percentages they calculated, and their justification for the score they assigned. The summary can take any form, whether it is typed or handwritten. Enrichment
Extension Have students interview a loan officer or underwriter at a bank. Ask what the most important qualification is regarding their own experience on the job. Ask them what they feel the most important qualification is when applying for a loan. Then ask them to summarize the steps involved in applying for a loan. Summarize your findings in a short report. Copyright © Texas Education Agency, 2014. All rights reserved.
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The Loan Underwriting Process Loan Underwriter Career Assignment # 1 Student Name: __________________________________________________________ CATEGORY 20 15 8 1 Required Elements The diagram All required All but one of Several includes all elements are the required required required included on the elements are elements were elements as diagram. included on the missing. well as diagram. additional information. Did not use Use of Class Time Used time well Used time well Used some of class time to during each during each the time well class period. focus on the class period. during each project. Focused on Usually focused class period. getting the on getting the There was some project done. project done. focus on getting the project done. Knowledge Gained Student can Student can Student can Student accurately accurately accurately appears to have answer all answer most insufficient answer about questions knowledge questions 75% of about the facts related to facts related to facts questions in the diagram. in the diagram. related to facts used in the in the diagram. diagram. Content – Accuracy At least seven Five to six Three to four Less than three accurate facts accurate facts accurate facts accurate facts are displayed are displayed are displayed are displayed on the diagram. on the diagram. on the diagram. on the diagram. Grammar There are no grammatical mistakes on the diagram. There is one grammatical mistake on the diagram. There are two grammatical mistakes on the diagram. There are more than two grammatical mistakes on the diagram. Maximum Points Possible: 100 Student Points: ___________ Copyright © Texas Education Agency, 2014. All rights reserved.
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The Loan Underwriting Process News Headline Assignment #2 Student Name _______________________ CATEGORY 20 15 Collaboration with Almost always Usually listens to, shares with, Peers listens to, and supports shares with, the efforts of and supports others in the the efforts of group. others in the group. 8 Often listens to, shares with, and supports the efforts of others in the group (but sometimes is not a good team member). Stays on topic some (89%‐
75%) of the time. 1 Rarely listens to, shares with, and supports the efforts of others in the group. Often is not a good team member. Does not seem to understand the topic very well. Stays on Topic Stays on topic all (100%) of the time. Stays on topic most (99‐90%) of the time. Content Shows a full understanding of the topic. Shows a good understanding of the topic. Shows a good understanding of parts of the topic. Listens intently but has one distracting noise or movement. Sometimes does not appear to be listening but is not distracting. It was hard to tell what the topic was. Sometimes does not appear to be listening and makes distracting noises or movements. Comprehension Student is able Student is able Student is able Student is to accurately to accurately to accurately unable to answer almost answer most answer a few accurately all questions questions answer questions posed by questions posed by posed by classmates posed by classmates classmates about the topic. about the topic. about the topic. classmates about the topic. Maximum Points Possible: 100 Listens to Other Presentations Listens intently. Does not make distracting noises or movements. Student Points: ___________ Copyright © Texas Education Agency, 2014. All rights reserved.
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The Loan Underwriting Process Credit Report Analysis Assignment #3 Student Name _______________________ CATEGORY 20 Knowledge Gained Student can accurately answer all questions related to facts in the document and processes used to create the credit score. Content ‐ Accuracy Use of Class Time Attractiveness Required Elements 15 Student can accurately answer most questions related to facts in the document and processes used to create the credit score. 8 Student can accurately answer about 75% of questions related to facts in the document and processes used to create the credit score. Four accurate Three accurate At least five percentages percentages accurate percentages are are displayed are displayed displayed on on the on the the document. document. document. Used time well Used time well Used some of during each during each the time well class period. class period. during each Focused on Usually focused class period. getting the on getting the There was project done. project done. some focus on getting the project done. The document The document The document is exceptionally is attractive in is acceptably attractive in terms of attractive, terms of design, design, layout, though it may layout, and and neatness. be a bit messy. neatness. All but one of The document All required elements are the required includes all included on the elements are required document. included on the elements as well as document. additional information. 1 Student appears to have insufficient knowledge about the facts or processes used in the credit score. Less than three accurate percentages are displayed on the documents. Did not use class time to focus on the project. The document is distractingly messy or very poorly designed. It is not attractive. Several required elements were missing. Maximum Points Possible: 100 Student Points: ___________ Copyright © Texas Education Agency, 2014. All rights reserved.
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