How to Complete the Module

Consumer Credit Advice consists of the following sections:

1. Basics of Consumer Credit

I. Why clients need credit
a. Definition of credit
b. Purpose of credit
II. Types of consumer credit
a. Revolving credit terms
b. Consumer loans
2. Credit Application
I. Complete the credit application
1. Conduct client interview
2. Complete credit application
3. Credit Investigation and Assessment
I. Conduct the credit investigation
1. Conduct the credit investigation
2. The 5Cs of credit
II. Conduct the credit investigation assessment
1. Proof of borrower’s income
2. Analyzing credit report
3. Signs of risk
4. Risk management considerations
4. Costs of Borrowing
I. Calculate the costs of borrowing
1. Calculating the costs of borrowing
2. Calculate the monthly payment
3. Reduce the cost of borrowing
5. Finalizing the Offer
I. Recommend credit products
1. Collateral and documentation
2. Presenting the offer
3. Deferred or declined offers
4. Guarantors and co-borrowers
5. Independent legal advice
6. Legal Issues
I. Legislation and compliance
1. Consumer credit regulation
2. privacy
II. Minimizing risk of default
1. Delinquency
2. Debt collection
3. Bankruptcy and credit counselling
Module 1: Consumer Credit Advice

o Why clients need credit

 Definition of credit
 Sources of credit
o Public credit
 Government of Canada
 Provinces of Canada
o Private credit
o Consumer credit
 Purpose of credit
 Convenience
o Advantages
 Credit cards can be used without interest charges when
outstanding amounts are paid in time (unless they are
used to take cash advances)
 The monthly statement provides a convenient summary
of expenses
o Disadvantages
 The convenience of credit encourages some people to
accumulate excessive debt
 The interest rates charged on unpaid balances are often
much higher than on other borrowed funds (although
some credit cards exist with rates similar to consumer
loan rates)
 Convenience may also encourage impulse purchase,
which may further increase debt
 Payment deferral
o Advantages
 The opportunity to have goods or services immediately
can justify the cost of credit
 Credit allows consumers to make reasonable purchases
that exceed their ability to pay in cash. For example,
many people would not be able to afford to buy a car
without access to credit
 Some people find it difficult to save money for a
significant purchase of goods or services. Scheduled
payments of credit impose a discipline to pay for the
purchase
 o Disadvantages
 Purchase cost more because if interest and other
charges. These direct costs vary with the length of time
granted to repay the credit
 A repayment schedule reduces cash flow. For this
reason, credit used to buy goods or services now may
limit the ability to buy goods and services in the future
 Covering income shortfalls
o Advantages
 Personal credit allows clients to meet expenses during
periods of little or no income
o Disadvantages
 Interest must be paid regardless of whether anticipated
income is actually received, as in the case of sales
representative who does not meet target sales
 Debt consolidation
o Advantages
 Combined payments can lower interest costs, and may
lower monthly payments
o Disadvantages
 Individuals with poor personal finances management
skills may consolidate their debts, but may incur
additional debt
 Basics of consumer credit
o Types of consumer credit
 Revolving credit
 Credit cards
o Issuers
 Chartered banks
 Trust companies
 Credit unions
 Caisses populaires
 Department stores
o Terms (benefits)
 A percentage of cash back on purchases
 Travel reward points to purchase airfare or hotel stays
 Retail reward points to purchase catalog or brand-
specific goods
 Travel insurance
 Insurance against loss or damage of purchase goods
o Interest and charges
o Security risks
o Advantages and disadvantages of credit cards
 Advantages
 No interest charged on purchases when
outstanding amounts are paid on time
 Provides a source of emergency funds
 Can be used as secondary identification
 Can be used to establish a good credit history to
obtain a mortgage
 Provides an official credit bureau record that
establishes identity and personal facts such as
birthdates, place of work, address, marital
status, identification
 Disadvantages
 Allows excessive debt to accumulate if not paid
in full each month
 Charges as high rate of interest
 May encourage impulsive purchase and
overspending
 Can lead to bankruptcy
 Puts the client at risk of identity theft
  Charge cards
o Issuers
 American Express and Diners Club
o Terms
o Interest and charges
 Store cards
o Issuers
 Sears, The Bay, The Brick and Canadian Tire
o Terms
o Interest and charges
 Consumer loans
 Lines of credit
o Unsecured lines of credit
o Secured line of credit
 Terms of a line of credit
 Interest and charges of a line of credit
o Home Equity Line of Credit Plan (HELOC)
 Term of a HELOC
 Interest and charges on a HELOC
 Installment loans
o Terms of an installment loan
o Interest and charges on an installment loan
 Fixed-rate loan
 Variable-rate loan
 Other types of consumer loans
o Demand loans
 Terms of a demand loan
 Interest and charges on a demand loan
o Bank account overdraft
 Term of a bank account overdraft
 Interest and charges on a bank account overdraft
o Indirect credit
 Term of indirect credit
 Letter of credit
 Letter of guarantee
 Forward exchange contract
 Interest and charges on indirect credit
o Life insurance loan
 Closed versus open-end loans
 Complete credit application
 Credit application
o Complete the credit application
 How to conduct a client interview
 The application process
 The interview
o Character, stability, credit history, ability to repay, security for
credit (if required)
o Types of questions
 Use closed-ended questions only to get simple facts,
such as the client’s address and phone number
 Use open-ended questions to allow the client to provide
more complete, meaningful answers
 Use probing questions to reveal details and nuanced
information or when you require clarification
 Never use leading questions. These tend to force the
client to provide only what you want to hear, not
necessarily what the client wants to say.
o Tips for the interviewer
 Greet the client in a friendly manner
 Use a respectful, conversational manner
 Do not interrogate the client
 Remain neutral – do not offer opinions or judgments
 Check inconsistencies in the information the client
provides
 Do not ask leading questions
 Do not ask questions about private matters beyond the
scope of the application
 Maintain eye contact
 Listen carefully to be sure you understand the client’s
responses
o Human rights legislation
 Race, national or ethnic origin, religion, age, skin color,
gender, marital status, physical or mental disability,
sexual orientation, convictions for which a pardon has
been granted
 Completing the interview
o Inform the client that you have enough information to assess
the application
o Ask if the client has anything to add
o Do not make a commitment to the client about the final
decision
o Inform the client that a credit investigation and evaluation will
be performed
o Let the client know when to expect a decision on the application
o Let the client know who will be calling about the decision on the
application
o Thank the client for coming to the interview
 Credit investigation and assessment
o Conduct the credit investigation
 Preliminary investigation (due diligence)
o Moves from job to job
o Is always short of cash
o Frequently borrows or refinances
o Has a history of slow payments or bad debt write-offs
o Has multiple credit accounts which are at or near maximum
limits
 Know Your Client (KYC)
 Steps in the preliminary investigation
o Determine intent to repay
o Determine the purpose of the credit
o Determine job stability
o Determine the level of debt
 Mortgage, property tax, car payments, credit cards and
credit limit (5%) – TDSR limit 40%
 The five Cs of credit
 Character
o Character is reflected in the client’s sense of responsibility and
willingness to meet obligations.
 Capacity
o Affordability
o Total Debt Service Ratio (TDSR)
o Income source
o Income stability
 Capital
o The client borrows frequently
o The client has a high TDSR
o The client’s net worth is lower (or marginally higher) than the
credit amount applied for
 Credit
o Credit refers to the client’s use of credit
 Collateral
o Collateral provides security that reduces risk for the institution.
o Conduct the credit assessment
 Proof of borrower’s income
o It is important that you verify all income, and that relevant
documentation is well organized.
 Primary income
o Employment letter
o Verbal confirmation
o Proof of income amount
 A Notice of Assessment is preferred over a T-4 slips, as
it is more difficult to counterfeit.
o Financial statements
 Secondary income
 Self-employed income
o Financial statements
 Balance sheet
 Income and expense statement
 Statement of retained earnings
 Analysing a credit report
 Credit bureau report
o Component of a credit bureau report
 Personal information
 Name, including maiden name and any aliases
or alternatives
 Current and previous addresses
 SIN
 Birth date
 Current and past employers
 Credit bureau score
 Past payment history
o Bankruptcies, late payments, past due
accounts and wage attachments
 Credit amounts owing
o Amounts owed
o Percentage of the outstanding balances
compared to the credit limits
 New amounts history
o Length of time the client has had the
credit
 o Last activity on the credit account

 Types of credit
o Credit cards, retail accounts, mortgage
and line of credit
 Which factors can have an adverse affect on a credit
score?
 A high number of enquiries posted on a credit
file in the past 12 months
 A short history of revolving and non-revolving
accounts
 A large amount owing on accounts
 There is a higher repayment risk for clients
owing larger amounts
 High loan balances in relation to the original
loan amounts
 Inquiries
 Public information
 Derogatory comments, bankruptcies,
judgments, garnishments, lawsuits by collection
agencies
 Trade lines
 Credit ratings codes
o Credit type
 I=installment loan (account with a fixed payment)
 R=Revolving account (open-ended account)
 O=Open account (30-day, 60-day or 90-day account)
o Credit score
 Signs of credit risk
 Signs of risk
o Undisciplined spending habits
o Unstable employment
 Seasonal income
 Self-employed income
 Income from other sources
o Client misrepresentation
o Bad credit history
o Negative net worth
 Risk management considerations
o Knowledge
 o Experience
o Effective communication with the risk management department

 Tips to help manage risk

o Conform closely to credit guidelines at all times
o React quickly and appropriate to changing client situations
o Keep your guard up and trust your instincts
o Do not advance inappropriate credit out of pity for a client
o Verify that all necessary client documentations is in good order
o Be alert for discrepancies and irregularities.
o Investigate all irregularity thoroughly.
o Document all inquiries and aspects of the investigation.
o Resist a client’s insistence on urgent approvals.
o Treat your institution’s money as you would your own.
 Consumer credit fraud
o Due diligence
 Advising in an unstable economic climate
o Refinancing
o Arrears
 Costs of borrowing
o Calculate the costs of borrowing
 Calculate the cost of borrowing
o The effective annual percentage rate (APR) is the rate of interest
the client pays when fees, administrative costs and
compounding are included in the calculation.
 Calculating the cost of interest
o Calculating the cost of a demand loan
 (Amount of principal x Annual rate of interest)/365 x
days in the month
o Calculating the cost of a fixed-rate installment loan
 Calculate the monthly payment
 Touch PV, N, I and FV
 Reduce the cost of borrowing
 Shorten the term of the credit
 Repay the credit on an accelerated bi-weekly schedule
 Make annual lump sum payments on the principal
 Round up monthly payments
 Make small payments whenever possible
 Finalizing the offer
o Recommend credit products
 Collateral and documentation
 Acceptable collateral and documentation
o Promissory note
o Chattel charge
o Negotiable instruments
o Real property
o Assignment
 Assets that are not acceptable as collateral
o RRSP, RRIF
 Presenting the offer
 Steps to present the offer
o Convey the message
o Make a recommendation
o Explain the features and benefits
o Explain the cost of borrowing
o Look for opportunities to add value
o Implement the solution
 Deferred or declined offers
 When the credit application is deferred
 When the credit application is declined
o Disagreements
 How to effectively communicate a credit decline
message
 Tell the client why the application was declined
 Recommend that the client contact the credit
bureau to gain a better understanding of why
they were denied
 Provide the client with options
o Can you find a guarantor?
o Can you make adjustment to re-
establish you credit?
 Help the client devise a plan of action to regain
good credit and establish net worth:
 o Analyze cash flow
o Create a budget plan
o Close down all credit cards but one
o Reduce the spending limit on the
remaining card to $1,000
o Keep the credit card balance as low as
possible
o Never go over your credit limit
o Pay at least the required minimum
amount on the due date of your bills
o Pay down debt more aggressively, if
possible
o Link credit payments to payroll deposits
to impose discipline
o Establish a savings plan build net worth
o Do not make multiple credit
applications
 Tell the client to avoid companies that offer to
fix a bad credit score for a fee. A good credit
report cannot be bought!
 Guarantors and co-borrowers
 Guarantors
 Co-borrowers
 Independent legal advice
 Legal issues
o Legislation and compliance
 Consumer credit regulations
 The Bank Act
o Interest costs
o Prepayment options and costs
o Other costs
 Other Federal Acts
o Criminal code of Canada (section 347)
o Competition Act
o Canadian Human Rights Act
o Bankruptcy and Insolvency Act
o Personal Information and Electronic Document Act (PIPEDA)
 Privacy
 Personal Information Protection and Electronic Document Act (PIPEDA)
o The use of personal information
o Third party disclosure
 Client access to information
o Opinions, judgments, calculating information such as credit
scores
 Client complaints
o CFSO, OSFI
o Minimizing risk of default
 Delinquency
o Accident or illness
o Temporary or permanent loss of job
o Poor management of personal finances
o A negative attitude toward the institution that granted credit
 Early warnings signs of delinquency
o The client requires constant reminders that payment is due
o Payments are always later than due date
o The client does not make payments as promised
o The client requests extensions or asks to make partial payments
 Reasons for delinquency
 Remedies for excessive debt
o Negotiation with creditors
 o Debt consolidation

 Debt collection
o Personal time devoted to the collection function
o Lost opportunities to develop new business of time and effort
diverted to the collection process
o Write-off of principal
 Methods of collection
o Objectives
 To avoid loss for the financial institution
 To preserve a good relationship with the client
o Methods
 Correspondence
 telephone
 Legal restrictions
o Threaten, use profanity or verbally abuse clients
o Cause distress or humiliation to clients or their family members
o Talk to a client’s employer without permission (except to
confirm employment)
o Harass clients with frequent calls
o Mislead clients with documents made to look like official court
documents
o Make any kind of charge that is unrelated to collection of the
debt
 Four steps to effective collection
o Recognize the situation
o Investigate the situation
o Reach a satisfactory arrangement
o Follow up after implementation
 Bankruptcy and credit counselling
 Bankruptcy
o Debts that are not discharged by bankruptcy include the
following:
 Secured debt, such as a mortgage or car loan that is
secured by the asset
 Student loan debt that is less than 10 years old
 Outstanding child or spousal support payments
  Most court-ordered payments such as fines, restitution
payments and damages for physical or sexual assault
 Some government overpayment

o Advantages and disadvantages of bankruptcy

 Advantages
 The client is protected from collection, legal
action and garnishment of wages
 Discharging unsecured debt may free up money
to meet other obligation, such as mortgage
payments
 Disadvantages
 Future earnings or assets may be turned over to
the supervision of a bankruptcy trustee for
disbursement to creditors
 Credit cannot be obtained until
 Alternatives to bankruptcy
o Consumer proposal
o Credit counselling