Understanding the Loan Classification System
Understanding loan ratings and classifications is an essential part of being profitable as an independent sales office, or ISO. Brokerage firms typically have their own in-house system for rating files, but these ratings are usually based on the internationally accepted loan classification system. Knowing the system and identifying which of your files are hard to fund can help you find the right servicing brokerage in New York, NY, to support your deal placement efforts. Here are the facts.
Pass and Special Mention
If a loan is rated as pass, it means that the borrowers are expected to be able to pay off the loan in a timely manner, with no real threats to their ability to make payments. This is the top classification for loans, and these loans may be referred to as having an A rating. Deal placement for pass loans is typically very easy. A special mention rating means that the borrowers can currently meet the standards for pass but that there are specific things that could potentially derail loan payments in the future.
Substandard ratings mean that the borrowers may struggle to repay their loans in the future. They may be able to currently meet their loan payments, but they cannot rely on their incomes to do in the long haul. It is possible that borrowers of substandard loans will default on payments because their incomes are not sufficient to service the loan. They may even default on payments if guarantees are in place. These loans may be rated B or C in a brokerage firm’s internal system, and finding lenders can be more challenging.
Doubtful and Loss
Doubtful loans are loans that are issued to borrowers who cannot repay the loan’s principle or interest in full, even if guarantees like collateral are exercised. Loss loans can lead to major losses for the lender, and the borrower may not be able to make repayments even after the lender pursues legal action.