Chapter 6

Loan Receivable and Related Concepts

This section defines key terms related to loan receivables, including transaction costs, origination fees, and impairment.

Loan Receivable: A loan receivable represents the amount of money owed to a lender by a borrower. It is an asset on the lender's balance sheet[__LINK_ICON].

Transaction Costs: These are expenses incurred by the lender in originating and managing a loan. They include both direct and indirect costs[__LINK_ICON].

Direct Origination Costs: These are expenses directly related to the origination of a loan, such as appraisal fees, credit report fees, and legal fees[__LINK_ICON].

Indirect Origination Costs: These are expenses indirectly related to the origination of a loan, such as salaries of loan officers and marketing expenses[__LINK_ICON].

Origination Fees: These are fees charged by the lender to cover the cost of originating a loan. They are typically a percentage of the loan amount[__LINK_ICON].

Effective Interest Rate: This is the actual interest rate paid on a loan, considering the effects of compounding. It is often higher than the nominal interest rate[__LINK_ICON].

Impairment: This refers to a reduction in the value of a loan receivable due to the borrower's inability to repay the loan[__LINK_ICON].

Expected Credit Loss Model: This is a method used to estimate the potential losses from defaults on loans. It considers historical data, current conditions, and reasonable forecasts of future economic conditions[__LINK_ICON].

12 Months Expected Credit Losses: This is an estimate of the credit losses expected to occur within the next 12 months[__LINK_ICON].

Credit Risk: This is the risk that a borrower will default on a loan[__LINK_ICON].

Loss Allowance: This is a reserve set aside by the lender to cover potential credit losses[__LINK_ICON].

Expected Credit Losses: This is an estimate of the total credit losses expected to occur over the life of a loan[__LINK_ICON].

Credit Loss: This is the actual loss incurred by the lender when a borrower defaults on a loan[__LINK_ICON].

Lifetime Expected Credit Losses: This is an estimate of the total credit losses expected to occur over the entire life of a loan[__LINK_ICON].

Individual and Collective Basis

Individual Basis: This refers to the assessment of credit risk for each individual borrower[__LINK_ICON].

Collective Basis: This refers to the assessment of credit risk for a group of borrowers who share similar credit risk characteristics[__LINK_ICON].

Share Credit Risk Characteristics: This refers to a group of borrowers who have similar financial and credit-related attributes[__LINK_ICON].

Probability Weighted Outcome: This is a method used to estimate the expected credit loss by considering the probability of different outcomes, such as default or repayment[__LINK_ICON].

Time Value of Money: This is the concept that money is worth more today than it is in the future due to its potential earning capacity[__LINK_ICON].

Reasonable and Supportable Information: This refers to information that is reliable, relevant, and sufficient to support the estimation of expected credit losses[__LINK_ICON].

Carrying Amount: This is the amount at which a loan receivable is recorded on the lender's balance sheet[__LINK_ICON].

Impairment Loss: This is the amount of loss recognized by the lender when a loan receivable is impaired[__LINK_ICON].

Off Setting: This refers to the process of reducing the carrying amount of a loan receivable by the amount of the impairment loss[__LINK_ICON].

Sale: This refers to the transfer of ownership of a loan receivable from the lender to another party[__LINK_ICON].

Secured Borrowing: This refers to a loan where the borrower provides collateral to secure the loan[__LINK_ICON].

Receivable Financing: This is a method of financing where a lender uses its receivables as collateral to obtain a loan[__LINK_ICON].

Pledge (Hypothecation), Assignment, and Factoring

Pledge (Hypothecation): This is a legal arrangement where the borrower provides collateral to secure a loan without transferring ownership of the collateral to the lender[__LINK_ICON].

Assignment: This is a legal transfer of ownership of a receivable from the lender to another party[__LINK_ICON].

Notification Basis: This is a type of assignment where the borrower is notified that the receivable has been assigned to a new party[__LINK_ICON].

Non-Notification Basis: This is a type of assignment where the borrower is not notified that the receivable has been assigned to a new party[__LINK_ICON].

Equity in the Assigned Receivable: This is the difference between the amount of the receivable and the amount paid by the assignee[__LINK_ICON].

Factoring: This is a type of receivable financing where a company sells its receivables to a factor in exchange for immediate cash[__LINK_ICON].

With Recourse: This is a type of factoring where the factor can seek recourse from the transferor if the borrower defaults on the receivable[__LINK_ICON].

Without Recourse: This is a type of factoring where the factor cannot seek recourse from the transferor if the borrower defaults on the receivable[__LINK_ICON].

Factor: This is a financial institution that purchases receivables from companies[__LINK_ICON].

Transferor: This is the company that sells its receivables to a factor[__LINK_ICON].

Factor's Hold Back: This is a portion of the receivable that is held back by the factor until the receivable is collected[__LINK_ICON].

Receivable from Factor: This is the amount of money owed to the transferor by the factor after the factor's holdback is settled[__LINK_ICON].

Regular Means of Financing: This refers to factoring as a regular source of financing for the transferor[__LINK_ICON].

Casual Basis: This refers to factoring as an occasional source of financing for the transferor[__LINK_ICON].

Settlement of Factor's Holdback: This is the process of releasing the factor's holdback to the transferor after the receivable is collected[__LINK_ICON].

Cost of Factoring: This is the fee charged by the factor for purchasing the receivables[__LINK_ICON].

Securitization: This is the process of converting a pool of assets, such as receivables, into securities that can be traded in the capital markets[__LINK_ICON].

Net Proceeds: This is the amount of money received by the transferor after deducting the factoring fees and other costs[__LINK_ICON].

Dishonored Notes: These are notes receivable that have not been paid by the borrower when due[__LINK_ICON].

Discounting of Notes Receivables: This is the process of selling a note receivable to a financial institution at a discount to its face value[__LINK_ICON].

Discounting of "Own" Note: This is the process of discounting a note receivable that the lender itself has issued[__LINK_ICON].

Loan Receivable Concepts:

• Loan Receivable: Money owed to a lender by a borrower; an asset on the lender's balance sheet.

• Transaction Costs: Expenses incurred by lenders to originate and manage loans, including direct and indirect costs.

  • Direct Origination Costs: Expenses directly related to originating a loan, e.g., appraisal fees.

  • Indirect Origination Costs: Indirect expenses like salaries of loan officers.

• Origination Fees: Fees charged by lenders, typically a percentage of the loan amount.

• Impairment: Reduction in loan value due to borrower's inability to repay.

• Expected Credit Loss Model: Estimation method for potential loan defaults, considering historical data and forecasts.

• Credit Risk: Risk of borrower default on a loan, leading to credit losses, which can be estimated on an individual or collective basis.