LFA Summit 2014: Reading Critical Underwriting Documents

Xizi (Daisy) Yuan ’17 Discusses Information in Credit Reports, Pay Stubs and Bank Statements Used in Standard Loan Applications

Two years ago, the students of the Haverford Microfinance Consulting club (HMFC) pivoted toward a focus on financial access issues here in the US and began considering the possibility of providing financial services to the local Philadelphia community. The development of this strategic direction has been facilitated by their engagement with Lend For America, an organization devoted to support campus microfinance organizations.

In November 2014, MI3 supported 5 students from HMFC to travel to San Fransisco for the annual Lend for America Summit to help the group in its efforts to provide funding for local entrepreneurs as a Trustee with Kiva Zip.

Summit participants included student microfinance groups from campuses across the US. The 5 students attending were Exec Dir Kayoung Lee (’16), Com Dir Jenna Kowalski (’17), Xizi (Daisy) Yuan (’17), Sitao Guo (’18) and Siyan Wang (’17).

Below Xizi (Daisy) Yuan ’17 discusses what information can be gleaned from credit reports and bank statements to better assess clients ability and willingness to pay back a loan.

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In our work with Kiva Zip to underwrite a small loan, we will need to evaluate a client’s current financial status. Besides application and dialogues with the client, three official documents, credit report, pay stubs and bank statements are usually taken into consideration as an objective and quantitative measurement of the business income.

(Kiva Zip’s focus is on character loans and Trustees are not required or expected to access potential client’s credit reports. However, it is important to understand standard practices in the field, their advantages and disadvantages – Prof Mudd)

Credit Reports:

Credit reports give MFIs a general idea of the client’s past borrowing behavior. A credit report consists of 4 components,

  • personal information;
  • tradelines which is categorized into revolving, mortgage and installment accounts;
  • public records in terms of civil judgment, bankruptcy, tax lien, collections and inquiries;
  • and FICO scores.

All 4 components are provided to assess the client’s credit history in a more comprehensive manner. The most commonly used websites to pull credit reports from are Credit KarmaCredit Builders Alliance and Annual Credit Report. Potential online resources such as sample dispute letters and Bankitis can be utilized to help clients remove errors.

Things to keep in mind when reading a credit report:
– The credit report gives you the numbers; the client gives you the context. Use the credit report as a framework for questions for the potential client.
– Make sure you can find each account in the Credit Summary within the credit report.

Pay Stubs:

Pay stubs are one of the most critical documents to calculate net monthly income using two methods: YTD Average and Pay Period Gross-Up.

YTD Average: Considered to be the most accurate method. It is how much a client has taken home on average over the course of the year.

Pay Period Gross-Up: Extrapolates how much would be earned if the same paycheck was earned every pay period. Of course, it is important to check whether the pay period is weekly, bi-weekly, monthly or bi-monthly. Pay period is not explicitly stated on pay stubs but clues can be found from the method of payment (hourly or salary) and by using www.paycheckcity.com.

Bank Statement:

Is used for to get information on business sales or global household cash flow, but is not as helpful for tracking expenses. When looking at a bank statement, focus on beginning balance, ending balance and average balance. Average balance is the most important. However, most major banks only show average balances for business accounts while most of our potential clients own personal accounts only and this will need to be calculated.

– Daisy Yuan ’17

 

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