Describes one of the most beneficial lessons you can have when it comes to the debtor/creditor relationship.

Dodd-Frank Wall Street Reform (Ch. 25) – Business Law I – BUL 2241

Credit matters. In our society today, the vast majority of transactions (from the small purchases by consumers to the mega purchases involving industrial goods) typically involve credit financing. In general, debtors want plentiful and inexpensive access to capital, and creditors want the ability to generate a reasonable return based upon the risks they are taking with their capital.

The chart above simply describes one of the most beneficial lessons you can have when it comes to the debtor/creditor relationship. In any situation where a creditor is making a judgment about lending money to a debtor, they should run through the 5 “C’s” of credit in order to make an underwriting decision. Creditors which have the discipline to run through the 5 “C’s”, in my experience, are the most profitable and have the lowest default rates. Debtor’s who know and manage their 5 “C’s” can reduce their cost of debt, increase access and achieve more favorable terms.

For example, during the financial sub-prime mortgage crisis in 2008, banks were underwriting borrowers without income verification. That means they were essentially ignoring the CAPACITY (the 2nd “C”) of the borrower (and probably a few others as well).

If you were in a position to underwrite debt, which of the following “C’s” above do you think are the most important and in what order? Explain.

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