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what is a listing agreement | a listing agreement is a contract under which a property owner as principal authorizes a real estate broker as agent to find a buyer for the property on the owner s terms in exchange for this service the owner pays a commission less commonly the term listing agreement also refers to a contract made between a security issuer e g a public company and the financial exchange that hosts the issue examples of exchanges include the new york stock exchange nyse the tokyo stock exchange tse and the london stock exchange lse | |
how a listing agreement works | a listing agreement authorizes the broker to represent the seller and their property to third parties the listing agreement is an employment contract rather than a real estate contract the broker is hired to represent the seller but no property is transferred between the two under the provisions of real estate license laws only a broker can act as an agent to list sell or rent another person s real estate in most states listing agreements must be written because the same considerations arise in almost all real estate transactions most listing agreements require similar information starting with a description of the property the description typically includes a list of personal property that will be left with the property when it s sold as well as a list of personal property the seller expects to remove for example appliances and window treatments the listing agreement also specifies the listing price broker s duties seller s duties broker s compensation terms for mediation an automatic termination date and any additional terms and conditions though listing agreements are legally binding it s possible to terminate the contract in certain situations for example if the broker does nothing to market the property in addition the listing agreement will be terminated if the property is destroyed e g by a fire or natural disaster or upon the death bankruptcy or insanity of either the broker or seller 1types of listing agreementswith an open listing a seller retains the right to employ any number of brokers as agents it s a nonexclusive type of listing and the seller is obligated to pay a commission only to the broker who successfully finds a ready willing and able buyer the seller retains the right to sell the property independently without any obligation to pay a commission the multiple listing service mls is a shared database established by cooperating real estate brokers to provide data about properties for sale mls allows brokers to see one another s listings of properties for sale with the goal of connecting homebuyers to sellers under this arrangement both the listing and selling broker benefit by consolidating and sharing information and by sharing commissions with an exclusive agency listing one broker is authorized to act as the exclusive agent for the seller the seller retains the right to sell the property without obligation to the broker however the seller is obligated to pay a commission to the broker if the broker is the procuring cause of the sale an exclusive right to sell listing is the most commonly used contract with this type of listing agreement one broker is appointed the sole seller s agent and has exclusive authorization to represent the property the broker receives a commission no matter who sells the property while the listing agreement is in effect | |
what are listing requirements | listing requirements comprise the various criteria and minimum standards established by stock exchanges such as the new york stock exchange nyse that companies must meet to list their shares for trading a company will be allowed to list shares for trading only if it meets initial as well as ongoing requirements companies that do not meet listing requirements on major exchanges may be able to offer their shares for trading over the counter otc understanding listing requirementslisting requirements are a set of conditions which a firm must meet before listing a security on one of the organized stock exchanges such as the nyse the nasdaq the london stock exchange or the tokyo stock exchange the requirements typically include a certain size and market share of the security to be listed the underlying financial viability of the issuing firm is also a criterion exchanges establish these standards as a means of maintaining their own integrity reputation and visibility | |
when firms request listings they have to prove to an exchange that they meet the listing requirements the high visibility and liquidity that a listing supports is strong incentive for a company to meet listing requirements | once a security is listed the issuing firm usually must maintain a set of related but less stringent trading requirements otherwise the company faces delisting while no legal penalty is involved being delisted can mean huge consequences for a company because its stock won t be traded on the exchange firms can cross list a security on more than one exchange and often do listing requirements are not barriers to trading altogether as firms are always free to trade securities over the counter however otc trading does not provide anywhere near the liquidity regulatory oversight prestige or visibility as trading on one of the major stock exchanges provides nasdaq s u s exchange had 3 767 companies listed as of january 2022 canada s tmx exchange and the new york stock exchange followed with 3 546 companies and 2 529 companies respectively 1listing requirements in practicelisting requirements vary by exchange but there are certain metrics which are almost always included the two most important categories of requirements deal with the size of the firm as defined by annual income or market capitalization and the liquidity of the shares a certain number of shares must already have been issued for example the nyse requires firms to already have 1 1 million publicly traded shares outstanding with a collective market value of at least 40 million 100 million for worldwide trading 2the nasdaq requires firms to already have 1 25 million publicly traded shares with a collective market value of 45 million both the nyse and the nasdaq require a minimum security listing price of 4 per share 3usually an initial listing fee as well as yearly listing fees are required the annual fees can scale up depending on the number of shares being traded and can total hundreds of thousands of dollars nasdaq fees are considerably lower than those of the nyse this lower cost has made the nasdaq a more popular choice of exchange for newer or smaller firms can a company be delisted yes if companies fail to pay annual fees or they can no longer meet the financial and liquidity requirements of an exchange they can be delisted also if share prices drop below a certain minimum a company can be delisted once delisted from a particular exchange investors won t be able to trade a company s stock on that exchange | |
what listing requirements does nasdaq have | nasdaq has three different tiers of listings nasdaq global select market nasdaq global market and nasdaq capital market each tier has its specific listing requirements in the instance of an ipo all companies must have 1 25 million shares outstanding and 2200 total shareholders or 450 shareholders with 100 shares each the market value of unrestricted publicly held shares or publicly held shares and shareholder equity must be at least 45 million 3 companies must meet one of four possible financial standards as well these involve earnings cash flow and capitalization capitalization and revenue or assets and equity 4 | |
what are the largest stock exchanges | by market capitalization the largest stock exchanges are the new york stock exchange and the nasdaq both are located in the new york as of march 2022 the combined value of shares listed on both exchanges reached over 36 trillion 5 | |
what is a living trust | a living trust is a legal arrangement established by an individual the grantor during their lifetime to protect their assets and direct their distribution after the grantor s death it is an estate planning tool that can help family members and beneficiaries avoid a lengthy public complex and sometimes costly probate process a living trust takes the form of a legal document the document lays out the terms of the trust and the assets that the grantor assigns to it a trustee is designated by the grantor as the individual or entity who at a certain point will control those assets for the benefit of the beneficiaries | |
how living trusts work | living trusts are significant in that they allow a trustee to manage the assets in the trust and transfer them to beneficiaries after the grantor s death they begin with the establishment of a trust instrument during the lifetime of the grantor this is a legal document that lays out the rules and provisions of the trust due to their importance and potential complexity those arranging for a living trust often work with experienced estate planning professionals to ensure a proper setup once the living trust is created the grantor decides what assets should be in it and then transfers the title of those assets to the trust living trusts are managed by a trustee who typically has a fiduciary duty to manage the trust prudently and in the best interests of the trust s beneficiaries beneficiaries are designated by the grantor when they create the living trust upon the death of the grantor these assets flow to the beneficiaries according to the grantor s wishes as outlined in the trust agreement a living trust itself can be named the beneficiary of certain assets that would otherwise flow directly to the named beneficiary regardless of what is stated in a will unlike a will a living trust takes effect while the grantor is living the trust does not have to go through probate for assets to reach the intended beneficiaries when the grantor dies or becomes incapacitated 1assets must be assigned to a living trust to be covered by its terms that means they are re titled to indicate ownership by the trust the types of assets that can be assigned to or fund a trust include real estate land commercial property homes financial accounts personal property such as jewelry artwork antiques and business interests specific financial accounts and items can include you shouldn t put a 401 k or ira in a living trust that s because if you change the title or ownership structure of e g your employer sponsored retirement plan the irs will see it as an early withdrawal that means you d owe taxes on the amount in your account in the year that the assignment takes place if you re less than 59 1 2 you ll also have to pay a 10 penalty for the early withdrawal types of living truststhe two primary types of living trusts are revocable and irrevocable a revocable living trust is the most common type of living trust it is a trust whereby the person who creates it the grantor maintains control over the assets placed within the trust at the creation of the trust the grantor can designate themself as the trustee they have the power to change and amend trust rules at any time they re free to change beneficiaries change trustees remove assets or terminate the trust revocable living trusts are often used to protect the assets of the grantor should they become ill or otherwise unable to control them in this situation the successor trustee will make decisions for the grantor revocable living trusts often become irrevocable upon the creator s death 1taxes owed on assets in a living revocable trust are still paid by the grantor while living however tax rates don t increase just because assets are placed within the trust 3with an irrevocable living trust the trust itself owns the assets and the grantor can t designate themself as the trustee thus the grantor relinquishes certain rights of control over the trust the trustee effectively becomes the legal owner 4once an irrevocable living trust is created the named beneficiaries are set and the grantor can do little to amend that agreement in fact trust provisions can only be changed in certain specific situations such changes may even require the approval of the courts in addition you can never take back the assets assigned to an irrevocable living trust 5there are benefits to having an irrevocable living trust for one it protects the assets within it from lawsuits and creditors that makes them particularly useful to professionals who may be vulnerable to litigation such as doctors or attorneys also the grantor can reduce their taxable estate because the trust and not they owns the assets in addition the assets aren t taken into account where eligibility and costs for government programs such as medicare and medicaid are concerned 6individuals may find it useful to have both a living trust and a will because for the most part they perform different functions moreover a living trust goes into effect as soon as it s created and serves to protect the assets it holds while a person is living a will goes into effect when a person passes away advantages and disadvantages of a living trusta living trust is a powerful estate planning tool that allows you to maintain control over your assets while living and make the disposition of your estate an easier matter for your family after your death as with most things while it has its advantages it has some disadvantages as well living trust vs willa living trust allows you to name beneficiaries and appoint a trustee to manage and distribute trust assets after your death in turn it allows your family to avoid the intrusion of probate for property distributed by the trust and other matters related to your estate some individuals establish living trusts simply to avoid probate however they can be more complicated and costly to create than a will also they require a notary public a living trust cannot designate an executor for a will or name guardians for minor children therefore individuals with living trusts usually draw up a will too a living trust takes effect immediately once created and signed and results in you being able to manage control and protect your assets throughout your lifetime it also means that this control via your instructions in the living trust document will extend beyond your death to the distribution of the assets to your beneficiaries 1a will is a legal document that names an executor to carry out your wishes after you re gone it directs how your assets should be distributed by the executor it also designates guardians for minor children and includes instructions for other things such as the payment of debts and taxes debt forgiveness and funeral arrangements the handling of a will including the distribution of assets involves the court supervised process of probate probate is known to take a great deal of time and potentially to be expensive what s more matters relating to a will become public once a probate court is involved a will is not a complicated document to create and thus is less costly than a living trust it requires a witness to your signature but no notary public it takes effect upon death or incapacitation 7 | |
how to create a living trust | normally it s a smart idea to obtain the assistance of an estate lawyer to establish a living will however here s a general idea of the steps you ll take to create one | |
is a living will the same as a living trust | no a living will is a directive written by an individual granting power of attorney and other rights to a trusted other if that individual becomes incapacitated or loses the ability to communicate a living or intervivos trust establishes a legal entity the trust which holds assets that can be distributed without probate to beneficiaries after one s death | |
how much does a living trust cost | establishing a living trust usually requires an attorney depending on the attorney and the complexities of your living trust it will cost between 1 100 to 1 500 for an individual and 1 700 and 2 500 for a couple you can cut down on these costs by creating one yourself or using an online service such as legalzoom 8 | |
what are some disadvantages of living trusts | the downsides of trusts aside from their cost will depend on whether it is a revocable or irrevocable trust each of which serves its own purpose a revocable trust is not sheltered from tax authorities or creditors which limits its usefulness as a way to protect assets while one is still alive an irrevocable trust involves forfeiting all ownership and control of the assets put inside of it along with very little flexibility in how the trust can be directed after it is established the bottom linea living trust can be a very important legal arrangement for people with assets that they wish to control and protect during their lifetimes and beyond normally it provides those who establish and fund them the grantors the power to control and benefit from their assets while living and direct how they should be distributed once they ve passed away living trusts normally bypass the time consuming costly probate process and facilitate the smooth transfer of assets to beneficiaries | |
what is a living wage | the term living wage refers to a theoretical income level that allows individuals or families to afford adequate shelter food and other life necessities the goal of a living wage is to allow employees to earn enough income for a satisfactory standard of living and prevent them from falling into poverty economists suggest that it should be enough to ensure that no more than 30 of this income gets spent on housing 1living wages are often substantially higher than the legal minimum wage | |
what constitutes a living wage can vary slightly depending on who s defining it some 60 plus definitions and descriptions of the term exist according to the global living wage coalition despite some deviations the organization found certain common themes when comparing how it s defined in human rights declarations by non governmental organizations ngos and others 2 | the consensus is that a living wage provides individuals with enough income to support themselves without falling below the federal poverty line fpl it gives workers and their families the means to maintain a decent standard of living so they can afford the idea of a living wage isn t new but it became a hot topic following the great recession the economic crisis highlighted the fact that some individuals just can t afford to make ends meet some experts believe that people who don t earn a living wage face challenges such as having to work more than one job pulling their children out of school and succumbing to unexpected health issues that they can t afford to address 3the living wage in the united states was 25 02 per hour in 2022 or 104 077 70 per year before taxes according to research from mit this annual figure is based on a family of four with two working adults each adult would have to work 52 weeks a year earning 52 038 85 or 25 02 for a 40 hour workweek that s an increase from 24 16 or 100 498 60 per year in 2021 4these figures can vary by family size and the cost of living in a particular city or location history of the living wagethe movement for a reasonable living wage is hardly new boston ship carpenters came together in 1675 to demand higher pay the american federation of labor founded in 1886 proposed a general living wage that adequately supported a family and maintained a standard of living higher than the 19th century european urban working class 5congress passed the fair labor standards act flsa in 1938 which established the first national minimum wage of 0 25 hour 6 the passage of the law marked a turning point for the labor movement in the united states in 1968 the federal minimum wage was set at 1 60 an hour about 14 23 per hour in 2023 dollars but unfortunately it slowly declined after the late 1960s due to inflation 78the federal minimum wage rose to 7 25 in 2009 where it remains in 2024 79 many states cities and municipalities have minimum wages higher than the federal minimum wage 10 these minimum hourly rates increased in 22 states in 2024 for as many as 9 9 million workers 11 california and areas of new york city increased their minimum wages for nonexempt workers from 15 50 and 15 respectively to 16 per hour 1213the minimum wage movement is aimed at establishing a living wage living wage vs minimum wagea living wage can t be confused with a minimum wage which is the least amount of money a worker can earn as mandated by law many experts argue that the federal minimum wage should be increased to align with a living wage they point out that the minimum wage doesn t provide enough income to survive because it doesn t rise with inflation the minimum wage can only increase with congressional action the minimum wage dollar amount has risen since its introduction by president franklin delano roosevelt in 1938 but the constant dollar amount which accounts for the effects of inflation has decreased for american households since 1968 the federal minimum wage of 7 25 per hour has remained at that level since 2009 it hasn t kept up with the cost of living since the late 1960s the federal minimum wage was 1 60 per hour in 1968 but it had an inflation adjusted value of about 14 23 per hour 78 most states have their own minimum wage laws to try and align it more closely with a living wage but it s actually below the federal minimum wage in some states 10 the federal minimum applies when this occurs 9the u s house of representatives passed an amended version of the raise the wage act in 2019 that would have gradually increased the federal minimum wage to 15 by 2025 14 the bill died in the senate but the debate about whether to lift the minimum wage rages on several states and cities nonetheless raised the local minimum wage and several companies have done so voluntarily 10the table below indicates the rates for 2023 and 2024 for the 22 states that raised their rates in 2024 11living wage and poverty levelspoverty in the u s may have something to do with the lack of a living wage in all states at least to an extent the raise the wage act of 2021 an updated version from 2019 that was introduced in january 2021 could potentially help reduce or eliminate low wages that don t lift families and individuals out of poverty the bill aims to increase the federal minimum wage over five years for regular employees along with those who receive tips and new workers under the age of 20 15the federal minimum wage of 7 25 an hour isn t enough to raise a family of four above the federal poverty level 31 200 in 2024 16 working and earning the federal minimum wage isn t enough to get out of poverty for families and not enough money to be classified as a living wage advantages and disadvantages of the living wageliving wages are very controversial the ideas surrounding them and their effects on the economy are hotly debated supporters of a living wage argue that paying employees higher salaries benefits corporations as a whole they claim that employees who earn a living wage end up being more satisfied which helps to reduce staff turnover another advantage to living wages is that they reduce corporate costs associated with recruitment and training proponents of living wages point out that higher wages improve employee morale and this can often lead to higher productivity this in turn allows companies to benefit from increased worker output 3some critics suggest leaders should scrap the idea of living wages altogether naysayers believe that implementing a living wage establishes a wage floor and this harms the economy by hurting companies especially small businesses that can t afford to raise salaries companies may reduce the number of employees hired if they re forced to pay increased wages this creates higher unemployment resulting in a deadweight loss people who would work for less than a living wage are no longer offered employment 17benefits corporationsboosts employee satisfactionreduces corporate turnoverlowers recruitment and training costscreates wage floorsharms economyreduces hiringincreases unemployment through deadweight losscalculating the living wageearning a living wage means that you can pay necessary costs including shelter food healthcare childcare taxes and transportation a living wage may be different depending on your circumstances including the state and town in which you live mit created a living wage calculator in 2004 that s updated in the first quarter of every year this online calculator provides the living wage minimum wage and poverty wage for 50 states plus counties and the district of columbia first plug in the state then choose from a list of counties the calculator shows the wages for individuals couples one or both working and families with up to three children 18alternatives to a living wageone alternative to a living wage could be a liveable federal minimum wage that allows individuals and families to earn enough to pay for basic necessities and medical care another alternative is a universal basic income from the federal government that covers basic living costs various plans address universal income from only giving money to those earning below the poverty line to paying every citizen a certain amount of money the u s doesn t offer this type of income as of 2024 but some might suggest that president biden s 1 9 trillion american rescue plan was a step in this direction 19 families who qualified received government issued cash benefits for each child in july 2021 but the program lasted only for 2021 20 | |
what is the living wage in the u s | the living wage in the united states was 25 02 per hour in 2022 or 104 077 70 per year before taxes based on a family of four with two working adults and two children 4 this varies by state however the highest livable wage was for massachusetts in 2024 at a total of 128 086 mississippi had the lowest living wage at a total of 80 766 new york s livable wage was 113 131 while california texas and wisconsin had living wages of 117 478 89 045 and 96 283 respectively 21 | |
is 15 an hour considered a livable wage | raising the federal minimum wage to 15 an hour from the current 7 25 an hour still doesn t provide a livable wage to many low income adults and families in certain locations earning 15 an hour at a full time job would equate to approximately 31 200 before taxes this increase would still not meet a livable wage in most states 21 | |
what is the difference between a living wage and a minimum wage | a minimum wage is the least amount a worker can be paid hourly as determined by law paying an individual below the minimum wage is illegal a living wage is the amount an individual or family would have to earn to avoid living in poverty this amount is usually higher than the minimum wage and it s not mandated by law the bottom linea living wage is a hypothetical level of income that s meant to show how much money is necessary for people to afford things like food and shelter this number depends on certain economic factors including inflation and the cost of living in an individual s area there s no concrete number because it can vary based on who s calculating it the consensus is that it should be enough to help keep people out of poverty however | |
what is a living will | a living will also known as an advance directive is a legal document that specifies the type of medical care that an individual does or does not want in the event they are unable to communicate their wishes in the case of an unconscious person who suffers from a terminal illness or a life threatening injury doctors and hospitals consult the living will to determine whether or not the patient wants life sustaining treatment such as assisted breathing or tube feeding in the absence of a living will decisions about medical care become the responsibility of the spouse family members or other third parties these individuals may be unaware of the patient s desires or they may not wish to follow the patient s unwritten verbal directives understanding a living willliving wills and advance directives come into play only when one faces a life threatening condition and is unable to communicate their desires for treatment doctors don t consult the wills for standard medical care that doesn t involve life threatening situations every state provides for the drafting of a living will although some states call the document a medical directive or a health care proxy some states let you prepare a detailed customized living will while others require you to fill out a standardized form | |
what is included in a living will | a living will addresses many of the medical procedures common in life threatening situations such as resuscitation via electric shock ventilation and dialysis one can choose to allow some of these procedures or none of them one can also indicate whether they wish to donate organs and tissues after death even if the patient refuses life sustaining care they can express the desire to receive pain medication throughout their final hours people who reside or spend a lot of time in another state should ensure that their living will is valid in both places as rules vary per state in most states one can extend the living will to cover situations where there is no brain activity or where doctors expect them to remain unconscious for the rest of their life even if a terminal illness or life threatening injury isn t present because these situations can occur to any person at any age it s a good idea for all adults to have a living will | |
how to make a living will | before making a living will it s best to understand that it will not serve as a last will and testament whereby property and personal effects are allocated to others upon death a living will stipulates the type and levels of medical care one receives if incapacitated and for how long the living will details the goals and wishes of a person in the event they can no longer care or make decisions for themselves when creating a will consider how you want to integrate your personal or religious beliefs into the care received it might be helpful to segment the living will into categories of care you could first identify the circumstances in which care should be extended to preserve life and what types of life saving or preserving care such as blood transfusions and dialysis should be administered include a category to address whether you want care if you are in a vegetative or unconscious state indicate where you want to receive medical care nursing home at home or in some other facility you can also request how nutrition will be provided whether it be given intravenously by mouth or withheld another category to consider is pain management indicate the types and levels of treatment to manage pain you can further break down this category into life sustaining pain management and pain management in lieu of life sustaining care if you have family or friends who will be responsible for overseeing your care discuss your plans with them it might be helpful to include them in the decision making process as they might have insight into areas otherwise overlooked when planning alone lastly enlist the help of a professional such as an estate planner or attorney these experts can help you make decisions for the best possible outcomes healthcare proxyin addition to the living will one can select a health care proxy who is allowed to make decisions if they are incapable of making those choices some states call this individual a healthcare power of attorney living wills cover many medical decisions but a health care proxy can consult with the doctor on other issues that may arise | |
when facing the loss of a loved one families often disagree over treatment so having a healthcare proxy reduces confusion over one s final wishes one should discuss wishes with the proxy before naming this person and be sure the proxy is willing to follow through with their desires | living will vs living trustalthough a living will and a living trust are commonly referred to in estate planning they are different a living will involves how the subject person will be cared for if in a compromised or incapacitated state this medical directive terminates upon the death of that person a living trust deals with the property and assets of an incapacitated person the trust essentially becomes the new owner of the assets under the living trust agreement a trustee or the person or persons responsible for managing the assets is identified just as a living will deals with a living person a living trust deals with the assets of a living person they both are executed when the initiator lacks the capacity to make decisions for themselves | |
do i lose control of my living will if i appoint a proxy | you will not lose control of your living will while you have the ability or capacity to make decisions if incapacitated the proxy has the legal authority to act on your behalf making decisions about your healthcare review the living will with the proxy to ensure they understand your wishes and agree to enforce them when needed | |
what is the difference between a living will and a last will and testament | a living will addresses the type of medical treatment given to a person who is unable to make those decisions for themselves the living will carries out the expressed wishes regarding the medical care of a person should they become unable to manage their care the last will and testament are the expressed wishes of a person regarding how their assets will be allocated or disposed of upon their death | |
what is a bank s living will | a bank s living will is a legal report filed annually by companies instructing how the business will be liquidated in the event of insolvency 1 banks with at least 50 billion in assets are required to file a living will with regulators | |
what is an llc operating agreement | an llc operating agreement is a document that customizes the terms of a limited liability company according to the specific needs of its members it also outlines the financial and functional decision making in a structured manner it is similar to articles of incorporation that govern the operations of a corporation although writing an operating agreement is not a mandatory requirement for most states it is nonetheless considered a crucial document that should be included when setting up a limited liability company the document once signed by each member owner acts as a binding set of rules for them to adhere to the agreement is drafted to allow owners to govern the internal operations according to their own rules and specifications the absence of an operating agreement means that your business has to be run according to the default rules of your state | |
how llc operating agreements work | an llc is a type of u s business entity that is easy to form and simple to manage and importantly limits the liability of owners since an llc is a hybrid of a partnership and corporation it provides the twin benefit of pass through taxation with limited liability 1to take full advantage of having an llc you should go one step further and write an operating agreement during the startup process many tend to overlook this crucial document since it is not a mandatory requirement in many states only a few states specify the need to register an operating agreement when creating an llc the operating agreement is thus a document that spells out the terms of a limited liability company llc according to the members it sets forth the path for the business to follow and brings in more clarity in operations and management a typical llc operating agreement is a 10 to 20 page contract document which sets up guidelines and rules for the llc in states such as california missouri and new york it is mandatory to include this document during the incorporation process 234 while most other states do not insist on including it it is always considered wise to draft an operating agreement as it protects the status of a company comes in handy in times of misunderstandings and helps in carrying out the business according to the rules set by the members businesses that do not sign an operating agreement fall under the default rules outlined by the states in such a case the rules imposed by the state will be very general in nature and may not be right for every business for example in the absence of an operating agreement some states may stipulate that all profits in an llc are shared equally by each partner regardless of each party s capital contribution an agreement can also protect partners from any personal liability if it appears they are operating as a sole proprietorship or a partnership an operating agreement once signed should be kept safely as an important record of the business benefits of an llc operating agreementeven if a business venture only has a single owner employee it can still be beneficial to codify the relationship with an llc operating agreement having an operating agreement establishes a legal boundary between the llc and the owner so that the owner is not held accountable for the llc s debts or liabilities otherwise creditors to the llc may pursue the owner s personal assets an operating agreement also allows the owner to codify the rules of succession for their business as well as governance procedures such as meetings and voting without an operating agreement ownership of the business is handled according to the state s default llc rules | |
what to include in an llc operating agreement | there are many issues that must be covered in the llc operating agreement the general format of the document includes the following llc operating agreements should also outline the specific definitions of terms used in the agreement as well as list the purpose of the business a statement of its intent to form how it will handle new members how it chooses to be taxed how long it intends to operate and where it is located just as one size doesn t fit all the state default llc rules don t suit all the best way to counter this problem is by writing an operating agreement which gives freedom protection and control to your business though it s best to include an operating agreement in the initial stages if you have missed on that it s never too late to put it in place provided all members agree to it the document can also be modified at a later stage with the guidance and help of an attorney if i have an llc operating agreement do i need a business plan there s no legal requirement for an llc to have a written business plan but there are still clear advantages to having one a well structured business plan is an important tool to set out the goals and values of an enterprise and provides an objective way of assessing whether or not those goals are being met | |
does an llc have shares of stock like a corporation | no while it is sometimes common to describe llc membership as a share this is not the same as stock units in a corporation while members of an llc have the right to share profits and make decisions concerning their company an llc cannot raise money by issuing stock shares | |
what is the difference between a partnership and an llc | a partnership is a comparatively simple vehicle for business relationships unlike an llc there is no requirement for formal paperwork a partnership is considered to have formed whenever two or more partners go into business together also unlike an llc partners may be held personally liable for the partnership s business obligations meaning that creditors may seek repayment from the personal assets of individual partners in contrast the members of an llc are legally distinct from their business organization can an llc operating agreement be amended yes llc operating agreements can generally be amended but the procedures for doing so will vary in most cases the process of amending an operating agreement should be spelled out in the agreement itself some llcs might specify that they can only be amended by a unanimous vote of the members or that they can only be amended in the fourth quarter of the year it is even possible for an llc to have an operating agreement that cannot be amended if it is not clearly stated the process for amending an operating agreement is determined by the default rules for llcs in that state | |
does a single member llc need an operating agreement | a handful of states require all llc s to have an operating agreement even if they have only one member these include new york missouri and california in the other states it is not required but it is strongly encouraged since they can protect the members from problems that the llc may encounter | |
what is lloyd s of london | lloyd s of london often referred to today simply as lloyd s is an insurance and reinsurance marketplace its members operate as syndicates to provide insurance coverage for businesses organizations and individuals the syndicates specialize in different types of risks and each syndicate decides which risks to insure the main purpose of lloyd s is to facilitate transactions between insurance buyers and sellers understanding lloyd s of londonlloyd s is not an insurance company rather it is a corporate body governed by the lloyd s act of 1871 and subsequent acts of the british parliament it operates as a partially mutualized marketplace consisting of multiple financial backers grouped into syndicates which pool and spread risks these underwriters or members include both companies and private individuals the latter of which are known as names in essence lloyd s is a marketplace where buyers of insurance and sellers of insurance can conduct business the market also includes brokers who help match buyers and sellers and managing agents who run syndicates on a day to day basis key players at lloyd s of londonthere are five main groups in the lloyd s marketplace they are syndicates insurance buyers brokers managing agents and coverholders the central players at lloyd s syndicates can consist of companies or individuals the syndicates function basically as insurance companies that offer a specific type of insurance more than one syndicate can participate in an insurance contract thereby spreading the risk among multiple syndicates insurance buyers are obviously enough individuals or companies wishing to purchase insurance many times if a traditional insurance company is unwilling to provide the type or amount of coverage that a buyer wants perhaps for a particularly risky business they can find willing insurance sellers among the syndicates at lloyd s as with other kinds of brokers the brokers at lloyd s act as go betweens for the insurance buyers and the syndicates helping match the buyer to the appropriate syndicate brokers at lloyd s must be approved by the corporation of lloyd s to be allowed to do business in the marketplace the managing agents work for the syndicates and run their daily operations for example they are responsible for hiring and overseeing all essential staff such as underwriters and accountants coverholders are companies that managing agents authorize to enter into insurance contracts to be underwritten by the syndicates coverholders allow lloyd s to operate globally without having to set up shop in many locations as of mid 2024 lloyd s had 77 syndicates more than 380 brokers and 3 434 coverholder locations collectively lloyd s had more than 200 lines of business and wrote 46 7 billion of gross premiums 1although lloyd s of london is not an insurance company lloyd s europe and lloyd s china which are parts of lloyd s of london operate as insurance companies lloyd s europe is a fully operational capitalized insurance company authorized and regulated by the national bank of belgium and regulated by the financial services and markets authority lloyd s europe is licensed to write nonlife risks across the european economic area monaco and the united kingdom 2lloyd s china can conduct nonlife insurance and reinsurance business inside china and international reinsurance as well 3lloyd s of london historywith its roots in marine insurance lloyd s was founded by edward lloyd at his coffeehouse on london s tower street in 1688 the establishment was popular with sailors shipowners and merchants and lloyd catered to them with reliable shipping news lloyd s coffeehouse soon became known as a good place to purchase insurance to cover ships and their cargoes against the perils of the seas the shop was also frequented by mariners involved in the slave trade lloyd s obtained a monopoly on maritime insurance related to the slave trade and maintained it until the early 19th century the lloyd s website offers an apology for that role saying in part we are deeply sorry for the lloyd s market s participation in the transatlantic slave trade it is part of our shared history that caused enormous suffering and continues to have a negative impact on black and ethnically diverse communities today 4the original lloyd s act gave the business a sound legal footing the lloyd s act of 1911 set out the organization s objectives which includes the promotion of its members interests and the collection and dissemination of information today lloyd s has its headquarters on lime street in a landmark building that opened in 1986 5 | |
what is underwriting | underwriting refers to taking on risk in return for a fee part of the underwriting process is assessing the risk involved and setting the fee accordingly | |
what is reinsurance | reinsurance is a way that insurance companies protect themselves from risk by for example transferring a portion of their portfolio to other insurers in exchange for a share of the premiums | |
what is marine insurance | one of the oldest forms of insurance marine insurance can cover ships their cargoes and related risks the hull of the titanic for example was insured for a total of 1 million with multiple lloyd s syndicates taking on portions of the policy 6the bottom linelloyd s of london commonly known as lloyd s is a major marketplace for insurance and reinsurance while not an insurer itself it provides a venue for insurance buyers and its member sellers known as syndicates to do business | |
what is a load | a load is a sales charge or commission charged to an investor when buying or redeeming shares in a mutual fund sales charge commissions can be structured in a number of ways they are determined by the mutual fund company and charged by mutual fund intermediaries in mutual fund transactions common types of sales charges include front end loads and back end loads funds with loads may be contrasted with no load mutual funds | |
how sales loads work | a load is a sales charge that compensates an intermediary for distributing shares of a mutual fund loads vary by share class and are determined by the mutual fund company mutual fund companies structure sales charges by share class they provide a sales charge schedule in the mutual fund s prospectus loads can be front end back end or level front end and back end loads are paid directly to intermediaries by the investor and are not accounted for in the fund s net asset value nav calculations front end loads are typically associated with a share classes this sales charge occurs when the investor buys the fund front end loads can range up to approximately 5 75 investors may opt to pay up front fees for several reasons for instance front end loads eliminate the need to continually pay additional fees and commissions as time progresses allowing the capital to grow unimpeded over the long term mutual fund a shares the class that carries front end loads pay lower expense ratios than other shares pay expense ratios are the annual management and marketing fees further funds that don t carry up front fees often charge an annual maintenance fee that increases along with the value of the client s money meaning the investor may wind up paying more in contrast front end loads are often discounted as the size of the investment grows on the downside since front end loads are taken out of your original investment less of your money is going to work for you given the benefits of compounding less money at the outset has an impact on the way your money grows over the long term it may not matter but front end loaded funds are not optimal if you have a short investment horizon you won t have a chance to recoup the sales charge through realizing earnings over time back end loadback end loads can be associated with b shares or c shares the back end load is paid when an investor sells the fund in class b shares the back end load is typically contingent deferred which means it decreases over time a back end load can be a flat fee or can gradually decrease over time usually within five to 10 years in the latter case the fee percentage is highest in the first year and decreases yearly until the specified holding period ends at which time it drops to zero a back end load should not be confused with a redemption fee which some mutual funds charge to discourage frequent trading that can sometimes interfere with the fund s investment objective investors may automatically assume load funds are the better choice over no load funds but that may not be the case fees on load funds go to pay the investor or fund manager who does research and makes investing decisions on the client s behalf other fund expensesany type of payment to an intermediary for distribution services can be considered a load mutual fund investors pay annual operating expenses which are accounted for in the fund s net asset value a portion of the fund s operating expenses may include a 12b 1 fee also called a level load this fee is paid by the mutual fund to the intermediary annually and is quoted as a percent of a share classes assets for example the principal equity income fund offers investors a c and i shares the a shares have a front end sales charge of 5 50 and a back end sales charge of 1 00 the c shares have no front end sales charge and a back end sales charge of 1 00 both share classes have a 12b 1 level load included with the fund s operating expenses the a share class pays a smaller level load than the c shares at 0 25 since it offers higher front end load compensation the c share class charges a level load of 1 00 12investors may also incur redemption fees redemption fees are not paid to intermediaries and therefore are not considered to be a load these fees are charged on the back end and help to compensate the fund for transaction costs incurred from short term investors redemption fees may be charged if an investor redeems shares within 30 days to a year from their initial investment sales load considerationssales charges are commissions agreed upon between mutual fund companies and intermediaries they are typically charged by full service brokers and mutual fund distributors investors can potentially avoid sales loads by buying and selling mutual fund shares through a discount brokerage platform oftentimes investors can also avoid sales loads by investing in mutual funds through a retirement plan most mutual funds offer breakpoints rights of accumulation and letter of intent options with sales load discounts these discounts are associated with larger investments in the fund and are outlined in the fund s prospectus no load fundsa no load fund is a mutual fund in which shares are sold without a commission or sales charge this absence of fees occurs because the shares are distributed directly by the investment company instead of going through a secondary party this absence of a sales charges is the opposite of a load fund either front load or back load which charges a commission at the time of the fund s purchase or sale also some mutual funds are level load funds where fees continue for as long as the investor holds the fund | |
what is a load fund | a load fund is a mutual fund that comes with a sales charge or commission the fund investor pays the load which goes to compensate a sales intermediary such as a broker financial planner or investment advisor for his time and expertise in selecting an appropriate fund for the investor the load is either paid upfront at the time of purchase front end load when the shares are sold back end load or as long as the fund is held by the investor level load load funds may be contrasted with no load funds which do not carry a sales charge understanding load fundsif a fund limits its level load to no more than 0 25 the maximum is 1 it can call itself a no load fund in its marketing literature front end and back end loads are not part of a mutual fund s operating expenses and are typically paid out to the selling broker and the broker dealer as a commission however level loads called 12b 1 fees are included as operating expenses funds that do not charge a load are called no load funds which are typically sold directly by the mutual fund company or through their partners investors may automatically assume no load funds are the better choice over load funds but that may not be the case fees on load funds go to pay the investor or fund manager who does research and makes investment decisions on the client s behalf these experts can sort through mutual funds and help investors make smart investment decisions they may not have the skill or knowledge to make on their own paying upfront fees can also eliminate the need to sap investment returns by paying continual expense fees on the returns the fund achieves the main disadvantage of course is the load itself no load mutual funds now exist as options that carry no sales charge in the 1970s mutual fund companies came under criticism for the high front end sales loads they charged along with excessive fees and other hidden charges as a result they introduced multiple share classes giving investors several options for paying sales charges | |
what is a loan | the term loan refers to a type of credit vehicle in which a sum of money is lent to another party in exchange for future repayment of the value or principal amount in many cases the lender also adds interest or finance charges to the principal value which the borrower must repay in addition to the principal balance loans may be for a specific one time amount or they may be available as an open ended line of credit up to a specified limit loans come in many different forms including secured unsecured commercial and personal loans investopedia tara anandunderstanding loansa loan is a form of debt incurred by an individual or other entity the lender usually a corporation financial institution or government advances a sum of money to the borrower in return the borrower agrees to a certain set of terms including any finance charges interest repayment date and other conditions in some cases the lender may require collateral to secure the loan and ensure repayment loans may also take the form of bonds and certificates of deposit cds it is also possible to take a loan from a 401 k account the loan processhere s how the loan process works when someone needs money they apply for a loan from a bank corporation government or other entity the borrower may be required to provide specific details such as the reason for the loan their financial history social security number ssn and other information the lender reviews this information as well as a person s debt to income dti ratio to determine if the loan can be paid back based on the applicant s creditworthiness the lender either denies or approves the application the lender must provide a reason should the loan application be denied if the application is approved both parties sign a contract that outlines the details of the agreement the lender advances the proceeds of the loan after which the borrower must repay the amount including any additional charges such as interest the terms of a loan are agreed to by each party before any money or property changes hands or is disbursed if the lender requires collateral the lender outlines this in the loan documents most loans also have provisions regarding the maximum amount of interest in addition to other covenants such as the length of time before repayment is required | |
why are loans used | loans are advanced for a number of reasons including major purchases investing renovations debt consolidation and business ventures loans also help existing companies expand their operations loans allow for growth in the overall money supply in an economy and open up competition by lending to new businesses the interest and fees from loans are a primary source of revenue for many banks as well as some retailers through the use of credit facilities and credit cards components of a loanthere are several important terms that determine the size of a loan and how quickly the borrower can pay it back in addition the lender may also tack on additional fees such as an origination fee servicing fee or late payment fees for larger loans they may also require collateral such as real estate or a vehicle if the borrower defaults on the loan these assets may be seized to pay off the remaining debt tips on getting a loanin order to qualify for a loan prospective borrowers need to show that they have the ability and financial discipline to repay the lender there are several factors that lenders consider when deciding if a particular borrower is worth the risk in order to increase the chance of qualifying for a loan it is important to demonstrate that you can use debt responsibly pay off your loans and credit cards promptly and avoid taking on any unnecessary debt this will also qualify you for lower interest rates it is still possible to qualify for loans if you have a lot of debt or a poor credit score but these will likely come with a higher interest rate since these loans are much more expensive in the long run you are much better off trying to improve your credit scores and debt to income ratio relationship between interest rates and loansinterest rates have a significant effect on loans and the ultimate cost to the borrower loans with higher interest rates have higher monthly payments or take longer to pay off than loans with lower interest rates for example if a person borrows 5 000 on a five year installment or term loan with a 4 5 interest rate they face a monthly payment of 93 22 for the following five years in contrast if the interest rate is 9 the payments climb to 103 79 higher interest rates come with higher monthly payments meaning they take longer to pay off than loans with lower rates similarly if a person owes 10 000 on a credit card with a 6 interest rate and they pay 200 each month it will take them 58 months or nearly five years to pay off the balance with a 20 interest rate the same balance and the same 200 monthly payments it will take 108 months or nine years to pay off the card the interest rate on loans can be set at simple or compound interest simple interest is interest on the principal loan banks almost never charge borrowers simple interest for example let s say an individual takes out a 300 000 mortgage from the bank and the loan agreement stipulates that the interest rate on the loan is 15 annually as a result the borrower will have to pay the bank a total of 345 000 or 300 000 x 1 15 compound interest is interest on interest and that means more money in interest has to be paid by the borrower the interest is not only applied to the principal but also the accumulated interest of previous periods the bank assumes that at the end of the first year the borrower owes it the principal plus interest for that year at the end of the second year the borrower owes the bank the principal and the interest for the first year plus the interest on interest for the first year with compounding the interest owed is higher than that of the simple interest method because interest is charged monthly on the principal loan amount including accrued interest from the previous months for shorter time frames the calculation of interest is similar for both methods as the lending time increases the disparity between the two types of interest calculations grows if you re looking to take out a loan to pay for personal expenses then a personal loan calculator can help you find the interest rate that best suits your needs types of loansloans come in many different forms there are a number of factors that can differentiate the costs associated with them along with their contractual terms loans can be secured or unsecured mortgages and car loans are secured loans as they are both backed or secured by collateral in these cases the collateral is the asset for which the loan is taken out so the collateral for a mortgage is the home while the vehicle secures a car loan borrowers may be required to put up other forms of collateral for other types of secured loans if required credit cards and signature loans are unsecured loans this means they are not backed by any collateral unsecured loans usually have higher interest rates than secured loans because the risk of default is higher than secured loans that s because the lender of a secured loan can repossess the collateral if the borrower defaults rates tend to vary wildly on unsecured loans depending on multiple factors such as the borrower s credit history loans can also be described as revolving or term a revolving loan can be spent repaid and spent again while a term loan refers to a loan paid off in equal monthly installments over a set period a credit card is an unsecured revolving loan while a home equity line of credit heloc is a secured revolving loan in contrast a car loan is a secured term loan and a signature loan is an unsecured term loan | |
what is a loan shark | a loan shark is a slang term for predatory lenders who give informal loans at extremely high interest rates often to people with little credit or collateral because these loan terms may not be legally enforceable loan sharks have sometimes resorted to intimidation or violence in order to ensure repayment | |
how can you reduce your total loan cost | the best way to reduce your total loan cost is to pay more than the minimum payment whenever possible this reduces the amount of interest that accumulates eventually allowing you to pay off the loan early be warned however that some loans may have early pre payment penalties | |
how do you become a loan officer | a loan officer is a bank employee who is responsible for approving mortgages car loans and other loans each state has different licensing requirements but the standard is at least 20 hours of pre licensing classes in addition mortgage loan officers must pass the nmls national test in addition to a criminal background check and credit check commercial loan officers have fewer requirements but their employers may still require additional credentials the bottom lineloans are one of the basic building blocks of the financial economy by loaning out money with interest lenders are able to provide funding for economic activity while being compensated for their risk from small personal loans to billion dollar corporate debts lending money is an essential function of the modern economy | |
what is a loan application fee | a loan application fee is charged to a potential borrower for processing and underwriting an application for a loan such as a mortgage or car loan loan application fees may be required for all types of loans and are intended to pay for the costs of the process of loan approval but are considered by many observers to be unnecessary or overly costly understanding loan application feesa loan application fee is one type of fee borrowers may be charged for obtaining a loan different from other types of loan fees the loan application fee is an up front usually nonrefundable charge that borrowers are required to pay when they submit a loan application loan application fees will vary by lender and many lenders will not charge a loan application fee at all because most loan application fees are nonrefundable they present a high risk for low credit quality borrowers therefore borrowers should first do due diligence on their own credit score and the standard approval requirements for the type of loan they wish to obtain in order to ensure that the application fee will not be lost with a credit application rejection borrowers should also seek to compare application fees across lenders loan application fees can vary significantly among different types of lenders ranging on a mortgage loan anywhere from 0 to 500 thus researching loan options and application fees with various competitors can potentially result in hundreds of dollars saved some lenders may also be willing to waive the application fee through negotiation or comparison to other competitor market fees special considerationsonline lenders generally require the lowest application fee thanks to automated processing that does not require some of the added expenses associated with traditional and in person loan consultations loan application fees are typically most common in a mortgage loan which includes many ad hoc fees in addition to the monthly interest working with a mortgage broker can increase the likelihood of a loan application fee because the broker works as an intermediary on behalf of both the borrower and the lender types of loan feesloan application fees are just one type of fee lenders can charge on a loan other fees may include an origination fee and monthly service fees 1 in general fees help a lender cover costs associated with underwriting and processing a loan in the credit market mortgage loans tend to have the broadest fee requirements mortgage lenders may charge origination fees appraisal fees and administration fees in some cases a mortgage lender may bundle its fees by charging a closing points fee which is a comprehensive fee calculated as a percentage of the principal balance the loan application fee is sometimes considered to be a garbage or junk fee which are often unnecessary charges and fees that are tacked onto mortgage closing costs by lenders lenders do this to increase their own profit on the loan there are a number of ways that lenders manage to fold garbage fees into closing costs | |
what is a loan commitment | a loan commitment is an agreement by a commercial bank or other financial institution to lend a business or individual a specified sum of money a loan commitment is useful for consumers looking to buy a home or a business planning to make a major purchase the loan can take the form of a single lump sum or in the case of an open end loan commitment a line of credit that the borrower can draw upon as needed up to a predetermined limit understanding a loan commitmentfinancial institutions make loan commitments based on the borrower s creditworthiness and in if it s a secured commitment on the value of some form of collateral in the case of individual consumers this collateral may be a home borrowers can then use the funds made available under the loan commitment up to the agreed upon limit an open end loan commitment works like a revolving line of credit when the borrower pays back a portion of the loan s principal the lender adds that amount back to the available loan limit interest rates when obtaining a secured loan commitment may be lower but this type of loan requires putting up collateral if you can t repay the loan you may risk losing the collateral types of loan commitmentsloan commitments can be either secured or unsecured a secured commitment is typically based on the borrower s creditworthiness and it has some form of collateral backing it two examples of open end secured loan commitments for consumers are a secured credit card where money in a bank account serves as collateral and a home equity line of credit heloc in which the equity in a home is used as collateral because the credit limit is typically based on the value of the secured asset the credit limit is often higher for a secured loan commitment than for an unsecured loan commitment in addition the loan s interest rate may be lower and the payback time may be longer for a secured loan commitment than for an unsecured one however the approval process typically requires more paperwork and takes longer than with an unsecured loan the lender holds the collateral s deed or title or places a lien on the asset until the loan is completely paid defaulting on a secured loan may result in the lender assuming ownership of and selling the secured asset at which point they would then be responsible for using the proceeds to cover the loan a loan that doesn t have any collateral backing it is primarily based on the borrower s creditworthiness an unsecured credit card is one very basic example of an unsecured open end loan commitment typically the higher the borrower s credit score the higher the credit limit however the interest rate may be higher than on a secured loan commitment because no collateral is backing the debt unsecured loans typically have a fixed minimum payment schedule and interest rate the process for acquiring this type of loan often takes less paperwork and approval time than a secured loan commitment advantages and disadvantages of loan commitmentsopen end loan commitments are flexible and can be useful for paying unexpected short term debt obligations or covering financial emergencies in addition helocs typically have low interest rates which may make their payments more affordable secured credit cards can help consumers establish or rebuild their credit paying their bill on time and keeping total credit card debt low will improve their credit scores and in time they may be eligible for an unsecured credit card the downside of a secured loan commitment is that borrowers who take out too much money and are unable to repay the loan may have to forfeit their collateral for example this could mean losing their home unsecured commitments have a higher interest rate which makes borrowing more expensive | |
what is a loan committee | a loan committee is the lending or management committee of a bank or other lending institution it generally consists of upper level officers with management authority the loan committee analyzes and subsequently approves or rejects any loan that the initial loan officer does not have the authority to approve typically those of large sizes or higher risk the committee ensures that the loan meets the institution s standard lending policy if it does the committee can agree to fund and disburse the loan with a binding commitment understanding a loan committeea loan committee is usually responsible for regular credit reviews of the bank s maturing loans which are the ones whose terms are nearing completion and are up for renewal for example a 10 year loan in its ninth year would be a maturing loan and up for renewal if the borrower is interested in extending the loan at times a bank may extend the original credit facility however the loan committee must ensure that this is done in accordance with proper procedure for the bank it is important to make sure that the borrower s creditworthiness has not deteriorated in addition to reviewing maturing loans a loan committee is responsible for reviewing new loans that may be large complex or come with a high risk these types of loans are usually above the authority of the initial loan officer and require the approval of upper management such as the chief risk officer cro and chief financial officer cfo determining loan qualityto determine the creditworthiness of a borrower a loan committee will conduct a valuation that includes factors such as the borrower s past repayment history and credit score along with the value of assets and liabilities on the individual s balance sheet the purpose of the loan the risks of the industry the individual or firm operates in forecasting models and other information that will paint a clear picture of the potential risks of the borrower a loan committee analyzes and subsequently approves or rejects the loan it may also approve the loan but with completely different terms than the borrower intended which will mitigate any risks the three credit reporting agencies in the united states are experian transunion and equifax that report update and store consumers credit histories which loan committees incorporate into their decision to extend credit to a single borrower the five main factors that these agencies use when calculating a credit score are payment history the total amount owed length of credit history types of credit and new credit collecting on a loana loan committee also determines which collection action should be taken on past due loans depending on the policy of the lending institution once a borrower has missed their due date the committee can either immediately charge a late fee or allow the borrower to enter a grace period to bring the account up to good standing the borrower must make the required minimum monthly payments including any late fees individuals or businesses that are 30 days behind schedule on loan payments will usually find that the delinquent account has affected their credit report finally a loan committee will also be charged with making sure that the bank is compliant with all regulations this can include not only lending procedures but also bankruptcy and receivership issues and even extend to the review of marketing materials that are provided to potential customers | |
what is a loan constant | a loan constant is a percentage that shows the annual debt service on a loan compared to its total principal value the calculation for a loan constant is the annual debt service divided by the total loan amount when shopping for a loan borrowers can compare the loan constant of various loans before making a decision the loan with the lowest loan constant will have lower debt service requirements meaning the borrower will pay less in interest and principal over a given period loan constants are only applicable to fixed interest rate loans and not loans with variable interest rates | |
how a loan constant works | a loan constant is a comparison of a loan s annual debt service to the loan s total principal value a loan s debt service is the total cash the borrower must pay to cover the repayment of interest and principal on the loan for a given period the loan constant is expressed as a percentage and can be determined for all types of loans it helps borrowers and analysts to understand better the factors involved with a loan and how much they are paying annually in comparison to the loan principal a mortgage constant is a loan constant that is specific to a real estate loan calculating a loan constantcalculating the loan constant often requires a borrower to obtain from the lender the multiple terms associated with the lending deal terms include factors such as total principal loan interest rate length of payments and frequency of payments obtaining these loan term factors allows for the calculation of a simple present value payment to arrive at the monthly payments once the monthly payments are identified a borrower can easily calculate their loan constant using the following equation loan constant annual debt service total loan amountfor example take a mortgage borrower who has obtained a 150 000 loan the loan has a fixed interest rate of 6 with a 30 year duration and monthly interest payments using a payments calculator the borrower would calculate monthly payments of 899 33 which results in an annual debt service of 10 791 96 with this annual debt service the borrower s loan constant would be 7 2 or 10 791 96 150 000 special considerationsthe loan constant when multiplied by the original loan principal gives the dollar amount of the annual periodic payments the loan constant can be used to compare the true cost of borrowing loan constants are only available for loans with fixed interest rates since variable interest rates have differing annual debt service levels based on variable interest given the choice of two loans a borrower will generally opt for the one with the lower loan constant since it will have the lower debt service requirement loan constant tablesloan constant tables were widely used in the real estate industry before the advent of financial calculators since they made it relatively easy to calculate monthly mortgage payments loan constant tables provide prepopulated information for borrowers about their loan with a quoted loan constant level if the borrower from the example above were given their loan constant they could find the interest and payment terms from a loan constant table without other inputs the borrower would only need to identify 7 2 in the table from there they would find the corresponding interest rate of 6 on the horizontal axis on the vertical axis the number of payments in months would also be provided at 360 the concept of loan constant is especially relevant in the area of commercial real estate since when compared to the capitalization rate an investor can tell if they will actually make or lose money on the part of the investment they finance for example if an investor is buying an apartment building with a 7 cap rate and their loan constant is 6 then they will be earning 1 on the borrowed money and 7 on equity however if the loan constant is 7 1 2 then the investor would be losing 1 2 of 1 on the mortgaged part of the investment | |
what is a loan credit default swap lcds | a loan credit default swap lcds is a type of credit derivative in which the credit exposure of an underlying loan is exchanged between two parties a loan credit default swap s structure is the same as a regular credit default swap cds except that the underlying reference obligation is limited strictly to syndicated secured loans rather than any type of corporate debt loan credit default swaps can also be referred to as loan only credit default swaps understanding a loan credit default swap lcds the lcds was introduced to the financial market in 2006 at the time the hot market for credit default swaps showed that there was still an appetite for more credit derivatives and the lcds was largely seen as a cds with the reference obligation shifting to syndicated debt instead of corporate debt the international swaps and derivatives association isda helped to standardize the contracts being used at the same time as the creation of syndicated secured loans for the purpose of leveraged buyouts was also increasing the lcds comes in two types a cancelable lcds is often referred to as a u s lcds and is generally designed to be a trading product as the name suggests the cancelable lcds can be canceled at an agreed upon date or dates in the future without penalty costs a non cancelable lcds or european lcds is a hedging product that incorporates prepayment risk into its makeup the non cancelable lcds remains in force until the underlying syndicated loans are repaid in full or a credit event triggers it as a u s lcds has the option to cancel these swaps are sold at a higher rate than comparable non cancelable swaps the recovery rate for lcds is much higher than for cds on bonds because the underlying assets for lcds are syndicated secured loans 1loan credit default swaps vs credit default swapsas with regular credit default swaps these derivative contracts can be used to hedge against credit exposure the buyer may have or to obtain credit exposure for the seller a lcds can also be used to make bets on the credit quality of an underlying entity to which parties have not had previous exposure the biggest difference between a lcds and a cds is the recovery rate the debt underlying an lcds is secured to assets and has priority in any liquidation proceedings whereas the debt underlying a cds while senior to shares is junior to secured loans so the higher quality reference obligation for a lcds leads to higher recovery values if that loan defaults as a result a lcds generally trades at tighter spreads than an ordinary cds | |
what is the loan credit default swap index markit lcdx | the loan credit default swap index markit lcdx is a specialized index of loan only credit default swaps cds covering 100 north american companies with unsecured debt trading in broad secondary markets the lcdx is traded over the counter and several large investment banks manage it provide liquidity and assist in pricing individual credit default swaps ihs markit ltd headquartered in london is the index provider understanding the loan credit default swap index markit lcdx the index begins with a fixed coupon rate 225 basis points trading moves the price and changes the yield much like a standard bond the index rolls every six months buyers of the index pay the coupon rate and purchase the protection against credit events while sellers receive the coupon and sell the protection what is being protected in this instance is a credit event at a particular company in the index such as its defaulting on a loan or declaring bankruptcy if such a credit event occurs in one of the underlying companies the protection is paid out via physical delivery of the debt or through a cash settlement between the two parties the underlying company is then removed from the index and a new one is substituted in order to return the index to an even 100 members credit default swaps essentially put a price on the risk that a particular debt issuer might default companies with strong credit ratings have low risk premiums so protection can be purchased for a minimal fee assessed as a percentage of the notional dollar value of the underlying debt companies with low credit ratings cost more to protect against so the credit default swaps covering them may cost several additional percentage points of the notional amount minimum purchase amounts for the lcdx can run into millions of dollars so most investors are large institutional firms such as asset managers banks hedge funds and insurance companies which invest as either a hedge or as a speculative play the advantage of the lcdx to these investors is that they can gain access to a diversified group of companies for much less than it would cost them to purchase the credit default swaps individually | |
what is loan grading | loan grading is a classification system that involves assigning a quality score to a loan based on a borrower s credit history quality of the collateral and the likelihood of repayment of the principal and interest a score can also be applied to a portfolio of loans loan grading is part of a lending institution s loan review or credit risk system and is usually an aspect of the credit underwriting and approval processes there are many purposes for a loan review system such as identifying loans with credit weaknesses so banks can take steps to minimize credit risk identifying trends affecting the collectability of the loan portfolio and for financial and regulatory reporting purposes | |
how loan grading works | being able to manage their lending capacity effectively is central to the success of a bank so banks must come up with a loan grading system that accurately evaluates credit risk or the probability of loss due to a borrower s failure to make payments the processes that banks use to grade loans help examiners and management make good lending decisions there is no one correct system for grading loans although the federal deposit insurance corporation fdic requires that all lending institutions have a loan review system larger institutions may maintain separate departments specifically for loan reviewing depending on the size and complexity banks develop different approaches community banks often use more broad factors to judge the risk of a loan whereas larger more complex institutions may rely on more quantitative approaches to measure and monitor credit risk when assigning a score to a loan the examiner will review the loan documentation collateral and the borrower s financial statements the score takes into account not only the borrower s credit score but also a combination of several indicators of credit risk from the credit report and loan application these factors may include the level of guarantor support repayment history cash flow projected yearly expenses etc smaller institutions typically use an expert judgment system in this system a loan officer is entrusted with assigning a grade based on their judgment and knowledge other banks may use quantitative scorecards or other modeled approaches that allow for adjustments based on qualitative judgments since there are no regulatory requirements that mandate how a loan grading system is structured it is up to banks to develop a system that is suitable for their size and complexity | |
what is the loan life coverage ratio llcr | the loan life coverage ratio llcr is a financial ratio used to estimate the solvency of a firm or the ability of a borrowing company to repay an outstanding loan llcr is calculated by dividing the net present value npv of the money available for debt repayment by the amount of outstanding debt llcr is similar to the debt service coverage ratio dscr but it is more commonly used in project financing because of its long term nature the dscr captures a single point in time whereas the llcr addresses the entire span of the loan the formula for the loan life coverage ratio llcr is t s s n c f t 1 i t d r o t where c f t cash flows available for debt service at year t t the time period year s the number of years expected to pay the debt back i the weighted average cost of capital wacc expressed as an interest rate d r cash reserve available to repay the debt the debt reserve o t the debt balance outstanding at the time of evaluation begin aligned frac sum t s s n frac cf t left 1 i right t dr o t textbf where cf t text cash flows available for debt service at year t t text the time period left text year right s text the number of years expected to pay the debt back i text the weighted average cost of capital left text wacc right text expressed as an interest rate dr text cash reserve available to repay the debt left text the debt reserve right o t text the debt balance outstanding at the time of text evaluation end aligned ot t ss n 1 i tcft dr where cft cash flows available for debt service at year tt the time period year s the number of years expected to pay the debt backi the weighted average cost of capital wacc expressed as an interest ratedr cash reserve available to repay the debt the debt reserve ot the debt balance outstanding at the time ofevaluation | |
how to calculate the loan life coverage ratio | the llcr can be calculated using the above formula or by using a shortcut dividing the npv of project free cash flows by the present value of the debt outstanding in this calculation the weighted average cost of debt is the discount rate for the npv calculation and the project cash flows are more specifically the cash flows available for debt service cfads | |
what does the loan life coverage ratio tell you | llcr is a solvency ratio the loan life coverage ratio is a measure of the number of times over the cash flows of a project can repay an outstanding debt over the life of a loan a ratio of 1 0x means that llcr is at a break even level the higher the ratio the less potential risk there is for the lender depending on the risk profile of the project sometimes a debt service reserve account is required by the lender in such a case the numerator of llcr would include the reserve account balance project financing agreements invariably contain covenants that stipulate llcr levels the difference between llcr and dscrin corporate finance the debt service coverage ratio dscr is a measure of the cash flow available to pay current debt obligations the ratio states net operating income as a multiple of debt obligations due within one year including interest principal sinking fund and lease payments however dscr captures just a single point in time while llcr allows for several time periods which is more suitable for understanding liquidity available for loans of medium to long time horizons llcr is used by analysts to assess the viability of a given amount of debt and consequently to evaluate the risk profile and the related costs it has a less immediate explanation compared to dscr but when llcr has a value greater than one this is usually a strong reassurance for investors limitations of llcrone limitation of the llcr is that it does not pick up weak periods because it basically represents a discounted average that can smooth out rough patches for this reason if a project has a steady cash flows with a history of loan repayment a good rule of thumb is that the llcr should be roughly equal to the average debt service coverage ratio | |
what is a loan lock | a loan lock refers to a lender s promise to offer a borrower a specified interest rate on a mortgage and to hold that rate for an agreed upon period of time a loan lock helps protect borrowers from an increase in interest rates during the lock period however mortgage lenders may charge a fee for a rate lock or add a margin to the interest rate | |
how a loan lock works | a loan lock guarantees a borrower that a mortgage lender will upon closing provide a loan with a specified interest rate typically lenders offer quotes to prospective borrowers that reflect prevailing interest rates at the time of the offer rather than at the time of settlement the quoted rate will also include a lender s margin rates can go up or down prior to closing so a loan lock provides the borrower with protection against a rise in interest rates during the lock period a lender will sometimes offer a loan lock at a specific rate plus a number of points points represent a fee paid at the origination of a loan to receive a lower interest rate over the loan s life if rates go down during the lock period the borrower may have the option to withdraw from the agreement the probability of such a withdrawal is known as a fallout risk for the lender however the borrower should ensure the lock agreement allows for withdrawal in some cases where prevailing rates decline during the lock period the borrower may have the option to take advantage of a float down provision to lock in a new lower rate as with any feature that increases interest rate risk to the lender a float down provision will only be available at an additional cost to the borrower loan locks generally last 30 or 60 days at a minimum they should cover the period necessary for the lender to process the borrower s loan application an example of a short lock period is one that expires shortly after the completion of the loan approval process in some cases this lock period can be as short as a few days a borrower can negotiate the terms of a loan lock and often extend the term of the lock for a fee or slightly higher rate 1a loan lock protects the borrower against a rise in interest rates during the lock period however the downside to a rate lock is that it can be costly if you need to extend it 1loan lock vs loan commitmentit is worthwhile to distinguish between a loan lock and a loan commitment a loan commitment can refer to a commercial line of credit but when used in reference to a mortgage agreement the term refers to a lender s intention to lend a certain amount at an unspecified point in the future the commitment may or may not contain a loan lock generally a borrower uses a lender s commitment to make their offer more attractive to the seller of a property in a competitive bidding environment | |
is it better to lock in a mortgage rate or wait | if you re buying a home and under contract it may make sense to lock in the interest rate since mortgage rates fluctuate and can increase which would increase your monthly payment | |
what are the disadvantages of a loan lock | the disadvantage of locking in your interest rate is that rates could fall and you might miss out on locking in your mortgage at a lower rate however for an added cost you may be able to add a float down provision allowing you to get the lower rate if rates decrease | |
how long can a lender lock in a rate | typically a lender can lock in a rate for 30 45 or 60 days 1the bottom linea loan rate lock is an agreement between a mortgage lender and a borrower to lock in an interest rate up to the loan s closing since interest rates fluctuate a rate lock helps protect the borrower from a rate increase and a higher monthly payment however there is a cost to the borrower either as a fee or as a margin added to the rate by the lender | |
what is a loan loss provision | a loan loss provision is an income statement expense set aside as an allowance for uncollected loans and loan payments this provision is used to cover different kinds of loan losses such as non performing loans customer bankruptcy and renegotiated loans that incur lower than previously estimated payments loan loss provisions are then added to the loan loss reserves a balance sheet item that represents the total amount of loan losses subtracted a company s loans 1 2 | |
how a loan loss provision works | banking industry lenders generate revenue from the interest and expenses they receive from lending products banks lend to a wide range of customers including consumers small businesses and large corporations lending standards and reporting requirements are constantly changing and constraints have been rigorously tightening since the height of the 2008 financial crisis improved regulations for banks resulting from the dodd frank act focused on increasing the standards for lending which have required higher credit quality borrowers and also increased the capital liquidity requirements for the bank 3despite these improvements banks still have to account for loan defaults and expenses that occur as a result of lending loan loss provisions are a standard accounting adjustment made to a bank s loan loss reserves included in the financial statements of banks loan loss provisions are consistently made to incorporate changing projections for losses from the bank s lending products while standards for lending have greatly improved banks still experience late loan payments and loan defaults 2because the loan loss provision appears on the income statement as an expense it will lower operating profits loan loss reserves in accountingloan loss reserves are typically accounted for on a bank s balance sheet which can increase by the amount of the loan loss provision or decrease by the amount of net charge offs each quarter loan loss provisions are constantly made to update estimates and calculations based on statistics for the bank s customer defaults these estimates are calculated based on average historical default rates by different levels of borrowers credit losses for late payments and collection expenses are also included in loan loss provision estimates and are calculated using a similar methodology which takes into account the previous payment statistics of a bank s credit clients 2overall by setting aside loan loss reserves and constantly updating estimates through loan loss provisions banks can ensure they are presenting an accurate assessment of their overall financial position this financial position is often released publicly through the bank s quarterly financial statements | |
what is loan modification | loan modification is a change made to the terms of an existing loan by a lender it may involve a reduction in the interest rate an extension of the length of time for repayment a different type of loan or any combination of the three such changes usually are made because the borrower is unable to repay the original loan 1 most successful loan modification processes are negotiated with the help of an attorney or a settlement company some borrowers are eligible for government assistance in loan modification | |
how loan modification works | although a loan modification may be made for any type of loan they are most common with secured loans such as mortgages 1a lender may agree to a loan modification during a settlement procedure or in the case of a potential foreclosure in such situations the lender has concluded that a loan modification will be less costly to the business than a foreclosure or a charge off of the debt a loan modification agreement is not the same as a forbearance agreement a forbearance agreement provides short term relief for a borrower with a temporary financial problem a loan modification agreement is a long term solution a loan modification may involve a reduced interest rate a longer period to repay a different type of loan or any combination of these there are two sources of professional assistance in negotiating a loan modification federal government assistance is also available to some borrowers mortgage loan modifications are the most common type because of the large sums of money at stake during the housing foreclosure crisis that took place between 2007 and 2010 several government loan modification programs were established for borrowers some of those programs have expired but government sponsored loan modification assistance is still available to some borrowers these include some traditional lenders have their own loan modification programs a mortgage loan modification application will require the details of a borrower s financial information the mortgage information and the specifics of the hardship situation each program will have its own qualifications and requirements these are typically based on the amount the borrower owes the property being used for collateral and specific features of the collateral property if a borrower is approved the approval will include an offer with new loan modification terms | |
what types of loans are eligible for modification | although many loans may have options for modification mortgages are the most commonly modified loans your loan holder may have a specific program in place for times of need | |
do i need a lawyer to get a loan modification | some loan companies may have programs in place to help with modifications but a lawyer may help the process go more smoothly however you are not required to have a lawyer to apply for a loan modification | |
what are the ways a loan can be modified | a modification can help you lower the interest rate extend the loan term switch from a variable rate to a fixed rate and move missed payments to the end of the loan term any one of these actions could lower your monthly payment amount and make it easier to repay the bottom lineif you re on the brink of a loan foreclosure or default a loan modification could help you get back on your feet to find out if you re eligible for a loan modification contact your lender often a lender will find it more preferable to alter your loan than to foreclose or repossess your property | |
what is a loan note | a loan note is an extended form of a generic i owe you iou document from one party to another it enables a payee borrower to receive payments from a lender possibly with an interest rate attached over a set period of time and ending on the date at which the entire loan is to be repaid loan notes are usually provided in lieu of cash at the payee s request a loan note denotes a type of contract that typically outlines the legal obligations of the lender and the borrower a proper loan note will include a set of contractual penalties including the right to sue or seek arbitration if either party to the contract fails to meet or otherwise defaults on financial obligations | |
how a loan note works | a loan note a form of promissory agreement includes all of the associated loan terms it is considered a legally binding agreement with both parties considered committed to the terms as they are written a loan note can be drawn up by either borrower or lender though it is more traditionally completed by the lender the note is considered valid until the amount listed on the document is paid in full by the borrower a loan note can help an individual avoid a tax hit due to a lump sum payment from a settlement or cash out package information contained in a loan notethe loan note contains all of the pertinent details regarding the legal agreement reached by the involved parties this includes the names and contact information for both parties as well as the principal balance and any interest rate being applied over the term of the loan additional information regarding the payment schedule including the due date will be included penalty information may also be included this can include repercussions for late payments or information pertaining to prepayment penalties while prepayment clauses serve as a protection to the lender against losing interest income over the course of the loan the clause means the borrower will pay a penalty for paying down or paying off the loan during a specified time usually within the first few years of the loan s start date example of a loan noteloan notes are used mostly for installment debts in which the borrower is making a purchase of a particular good or service and paying the amount back over time a common consumer need for a loan note is a home purchase which includes a loan note along with the mortgage or deed of trust loan notes are also used for vehicle financing and most other forms of installment loans benefits of loan notesa loan note can help an individual avoid an undue tax hit due to a lump sum payment from a settlement or cash out package from a company in these cases the individual is given a choice between cash or a loan note when loan notes are used between businesses the purchaser is able to act as a borrower and make payments over time often at a minimal interest rate loan notes can be fairly simple to draw up and convenient for both parties to implement with straightforward details they can represent the first form of funding for young businesses startups and new entrepreneurs often use them to obtain seed capital from friends and family in order to establish a business special considerations for loan noteslegally a loan note holds more significance than an informal iou even when the informal iou is notarized generally a loan note will be upheld unless either party can prove the agreement was entered into while under duress which may make the conditions within the document void rendering them unenforceable | |
what is a loan officer | a loan officer is a representative of a bank credit union or other financial institution who assists borrowers in the application process 1 loan officers are often called mortgage loan officers since that is the most complex and costly type of loan most consumers encounter however most loan officers assist consumers and small business owners with a wide variety of secured and unsecured loans loan officers must have a comprehensive knowledge of lending products banking industry rules and regulations and the required documentation for obtaining a loan loan officers that assist with mortgages must be licensed through the nationwide multistate licensing system and registry nmls 2 | |
how a loan officer works | the loan officer is the direct contact for most borrowers applying for a loan from a financial institution the entire process can be handled over the internet but most consumers probably still prefer a well informed human on the other side of a costly and complex transaction in fact one reason why banks continue to have so many branch offices is that they need to bring loan officers face to face with potential borrowers loan officers are knowledgeable about all of the various types of loans offered by the financial institutions they represent and can advise borrowers on the best options for their needs they also can advise the potential borrower about what type of loan they might be eligible to get the loan officer is responsible for the initial screening process and is unlikely to proceed with an application from someone who does not meet the lender s qualifications once a borrower and a loan officer agree to proceed the loan officer helps prepare the application the loan officer then passes the application along to the institution s underwriter who assesses the creditworthiness of the potential borrower if the loan is approved the loan officer is responsible for preparing the appropriate documentation and the loan closing documents the loan officer is responsible for collecting the appropriate closing documents for a mortgage or other loan some loans are more work than others secured loans generally require more documentation than unsecured loans mortgage loans require a hefty stack of documentation due to the many federal state and local regulations that pertain to them reverse mortgages and mortgage refinancings require that the borrower receive a hud 1 settlement statement before the closing 3some loan officers are compensated through commissions this commission is a prepaid charge and is often negotiable commission fees are usually highest for mortgage loans can i obtain a loan without a loan officer even in a world of online lenders loan officers are necessary parts of the process loan officers evaluate whether borrowers are trustworthy enough to handle a loan even online bank utilize loan officers to complete transactions | |
what is a mortgage loan | a mortgage loan is a secured installment loan used for a singular purpose to purchase real estate the loan amount covers the principal used to purchase the property and it can include funds for paying insurance and property taxes as well 4 | |
is a loan officer a good job | the median salary for a loan officer was 65 740 per year in 2022 loan officers work indoors in typically comfortable surroundings with full benefits if employed by a bank or credit union if you re interested in a stable white collar job a loan officer position may be a great choice 1the bottom lineloan officers are the gatekeepers of loan funds for banks and credit unions if you re looking for a personal loan or mortgage you ll likely work with a loan officer to assemble your paperwork for your application a good loan officer can make the entire process run more smoothly through their experience and knowledge of state regulations and procedures | |
what is a loan participation note | a loan participation note lpn is a fixed income security that permits investors to buy portions of an outstanding loan or package of loans lpn holders participate on a pro rata basis in collecting interest and principal payments and are similarly exposed to a proportional risk of default banks credit unions or other financial institutions often enter into loan participation agreements with local businesses and may offer loan participation notes as a type of short term investment or bridge financing | |
how a loan participation note works | to meet the needs of local borrowers and increase loan income many community banks use loan participation agreements in which one or more banks share in the ownership of a loan community banks have also formed lending consortia one example is the community investment corporation of north carolina cicnc an affordable housing loan consortium that provides long term permanent financing for the development of low and moderate income multifamily and elderly housing throughout north and south carolina one of the purposes of loan participation notes is to help meet the needs of borrowers within a local community several other institutions have also sprung up for similar reasons credit unions are one such example a credit union is a financial cooperative that is created owned and operated by their participants while some credit unions can be large and national in scale such as the navy federal credit union nfcu others are smaller in scope cooperative principles of credit unions include voluntary membership democratic organization economic participation of all members autonomy education and training for members cooperation and community involvement credit unions and banks generally offer the same services including accepting deposits originating loans for individuals or small businesses and offering financial products such as credit and debit cards and certificates of deposit cds key structural differences exist in terms of how a commercial bank and credit union use their profits however while traditional banks function to generate profits for their shareholders many credit unions operate as not for profit organizations putting excess funds into concrete projects that will better serve their community of de facto owners i e members example of an lpnfor example angel v castro a pioneer in the latin american credit union movement was recently recognized for his efforts by the national credit union foundation castro believed that the traditional u s model of consumer credit based poverty reduction would not fit the needs of the people in the communities he worked with in ecuador he focused on organizing credit unions that extended access to credit for its members specifically for agriculture and other endeavors | |
what is a loan production office | a loan production office lpo is an administrative division of a bank that as the name implies deals solely with loan related activities the federal reserve defines an lpo as a staffed facility other than a branch which is open to the public and provides lending related services such as loan information and applications regulated by both state law and the board of directors of the main banking facility the lpo itself cannot make loans but may only carry out administrative functions regarding the processing of them for that reason regulations prohibit prevent the lpo facility from being called a branch of the bank unless the state banking commissioner grants an application for it to act in a branch capacity at this point the loan production office may provide full loan servicing | |
how a loan production office works | located on the bank s premises or at another location the loan production office reviews and process loan applications checking for underwriting standard compliance and completeness of documents it most often deals with residential mortgages but services other sorts of loans as well an lpo processor or underwriter performs these support duties the receipt collection distribution and analysis of information required for the processing or underwriting of a loan also the lpo processor communicates with applicants to obtain the information necessary for these activities other roles in an lpo include loan production leader loan specialist operations supervisor and customer service coordinator an lpo can provide clients with educational information about mortgages and loans either proprietary materials from its parent bank or general ones from a government agency however lpo processors may not offer or negotiate loan rates or terms nor may they counsel consumers about residential mortgage loan rates or terms once it has finished gathering and analyzing all the data the loan production office then forwards the application to the bank itself for a final decision the senior processor of the lpo may recommend the approval of an application but the actual decision should be from the home office or a branch if the loan is approved the lpo may also be in charge of delivering the bank s check or funds to the borrower or their account a loan production office can only act in a branch capacity providing full loan servicing if the bank successfully petitions the state banking commissioner for permission special considerations for loan production officebecause it is not a full branch of the bank the loan production office is not required to post federal deposit insurance corporation fdic or availability of funds and collection of checks regulation cc policies or signage however the office should display an equal housing lender poster which is a requirement wherever deposits are received or loans made lpo vs loan serviceralthough they both provide financing support services an lpo is not the same as a loan servicer in act the two operate at different ends of the process lpos may only administer the process from application to disbursement of a loan in contrast from the time the proceeds of a loan are dispersed until the loan is paid off the loan servicer administers it the confusion often arises because loans are often serviced nowadays by third parties separate from the institution that issued them traditionally loan servicing was a core function carried out by and housed within banks today the duties may be done by a non bank entity specializing in loan servicing or a sub servicer who operates as a third party vendor for lending institutions | |
what is loan servicing | loan servicing refers to the administrative aspects of a loan from the time the proceeds are dispersed to the borrower until the loan is paid off loan servicing includes sending monthly payment statements collecting monthly payments maintaining records of payments and balances collecting and paying taxes and insurance and managing escrow funds remitting funds to the note holder and following up on any delinquencies | |
how loan servicing works | loan servicing can be carried out by the bank or financial institution that issued the loans a non bank entity specializing in loan servicing or a third party vendor for the lending institution loan servicing may also refer to the borrower s obligation to make timely payments of principal and interest on a loan as a way to maintain creditworthiness with lenders and credit rating agencies loan servicing was traditionally seen as a core function held within banks banks issued the original loan so it made sense that they would be responsible for handling the administration of the loan that was of course before widespread securitization of loans changed the nature of banking and finance in general once loans and mortgages in particular were repackaged into securities and sold off a bank s books the servicing of the loans proved to be a less profitable business line than the origination of new loans so the loan servicing part of the loan life cycle was separated from origination and opened up to the market given the record keeping burden of loan servicing and the changing habits and expectations of borrowers the industry has become especially dependent on technology and software loan servicing exampleloan servicing is now an industry in and of itself loan servicers are compensated by retaining a relatively small percentage of the outstanding balance known as the servicing fee or servicing strip this fee usually amounts to 0 25 to 0 5 percentage points of each periodic loan payment for example if the monthly mortgage payments are 2 000 and the servicing fee is 0 25 the servicer is entitled to retain 5 or 0 0025 x 2 000 of each payment before passing the remaining amount to the note holder special considerationsmortgages represent the bulk of the loan servicing market which amounts to trillions of dollars worth of home loans though student loan servicing is also big business as of 2018 just three companies were responsible for collecting payments on 93 of outstanding government owned student loans amounting to 950 billion from about 30 million borrowers meanwhile the trend among big mortgage loan servicers is to slowly back away from the marketplace in response to growing regulatory concerns in their place smaller regional banks and non bank servicers are moving into the space loan servicing has traditionally been performed by lenders big banks but smaller regional players and non bank service providers are moving into the space the mortgage meltdown during the 2007 2008 financial crisis brought increased scrutiny on the practice of securitization and the transfer of loan servicing obligations as a result the cost of loan servicing has increased compared to the levels seen before the crisis and there is always the potential for more regulation meanwhile some loan servicers have embraced technology to try to reduce compliance costs and there has also been a refocus by some banks on servicing their own loan portfolio to keep the connection with their retail clients | |
what is a loan shark | a loan shark is a person who or an entity that loans money at extremely high interest rates and often uses threats of violence to collect debts the interest rates are generally well above an established legal rate and often loan sharks are members of organized crime groups loan sharks charge borrowers interest usually far above any established legal rate even in a serious cash crunch there are safer alternatives | |
how a loan shark works | a loan shark can be a person within a personal or professional network offering to provide loans at high interest rates they may be found in underbanked neighborhoods on the internet or through personal networks their funds are usually from unidentified sources and they work for personal businesses or unregistered entities 1loan sharks do not require background checks or credit reports they will lend large sums of money with the intention of gaining high levels of interest in a short time loans from loan sharks charge interest rates far above any regulated rate for example a loan shark might lend 10 000 to a person with the provision that 20 000 be repaid within 30 days these lenders may also call on the debt to be repaid at any time using violence as a means of forcing repayment in most cases business dealings with a loan shark are illegal it is best to seek other alternatives loan sharks vs payday and other alternative lenderssome payday lenders may approach the level of loan sharks offering loans at extremely high interest rates for short periods of time however these rates can be completely legal standard usury laws typically dictate the maximum interest rates a lender can charge in each state ranging up to approximately 45 payday lenders are often granted exceptions charging annual interest rates of up to 400 2 they can offer such high rates because of the special provisions offered by state governments loan sharks typically charge rates higher than the rates charged by payday lenders payday lenders are a legal form of high interest lending offered to borrowers they are typically registered entities that follow standard credit application procedures requesting personal information for a credit check payday lenders also require proof of employment and income payday lenders usually base the principal offered on a borrower s income and credit profile while payday lenders are not known for violent tactics in debt collection they do offer short term rates on payday loans with extremely high interest costs making it difficult for a borrower to repay generally payday lenders will follow standard collection procedures if delinquencies occur reporting missed payments and defaults to credit bureaus other alternative lenders have emerged in the credit market to offer individuals and businesses credit alternatives these lenders offer alternative products comparable to traditional loans many of these loans will have lower borrowing standards making credit more affordable for a greater portion of the population loan application procedures will generally be similar to standard conventional loans however loan applications are usually automated and lenders are willing to work with borrowers if conflicts arise these lenders can offer varying principal amounts and interest rates to a variety of borrowers | |
is borrowing from a loan shark legal | it is not illegal to borrow from a loan shark it s just extremely risky loan shark are themselves illegal lenders but their victims haven t broken the law | |
what is a payday loan | a payday loan is a short term loan meant to be repaid by your next payday payday loans typically have extremely high interest rates and are often considered a form of predatory lending | |
what are some alternatives to payday loans or loan sharks | if you need money quickly consider asking a family member for help or taking out a personal loan even if you have bad credit you may still qualify for a personal loan which should have lower interest rates and more reasonable repayment terms the bottom lineloan sharks often prey on those that feel like they have no other alternative if you need cash quickly think through your options engaging with a loan shark seldom ends well as it runs the risk of serious financial and even physical harm | |
what is loan stock | loan stock refers to shares of common or preferred stock that are used as collateral to secure a loan from another party the loan earns a fixed interest rate much like a standard loan and can be secured or unsecured a secured loan stock may also be called a convertible loan stock if the loan stock can be directly converted to common shares under specified conditions and with a predetermined conversion rate as with an irredeemable convertible unsecured loan stock iculs understanding loan stock | |
when loan stock is being used as collateral the lender will find the highest value in shares of a business that are publicly traded and unrestricted these shares are easier to sell if the borrower is unable to repay the loan | lenders may maintain physical control of the shares until the borrower pays off the loan at that time the shares would be returned to the borrower as they are no longer needed as collateral this type of financing is also known as portfolio loan stock financing risks to lenderssince the price of a share can fluctuate with market demand the value of the stock used to secure a loan is not guaranteed over the long term in situations where a stock loses value the collateral associated with a loan may become insufficient to cover the outstanding amount if the borrower defaults at that time the lender may experience losses in the amount that is not covered by the current value of the shares being held because stock prices can even drop to zero or the company might go bankrupt loans collateralized in this way can theoretically result in a completely uncovered loan issuing business concerns over loan stockthe issuing business of a stock used to secure a loan may have concerns regarding the outcome of the agreement if the borrower defaults on the loan the financial institution that issued the loan becomes the owner of the collateralized shares by becoming a shareholder the financial institution may obtain voting rights regarding company affairs and become a partial owner of the business whose shares it possesses loan stock businessesthere are full fledged businesses that function solely by providing options for loan stock transactions allowing a portfolio holder to obtain financing based on the value of their securities as well as other factors such as the implied volatility of their holdings and creditworthiness a loan to value ltv ratio is established based on the portfolio similar to how a home s value is assessed when securing a home mortgage and the funds are backed by the security holdings in the borrower s portfolio primary dealer credit facilityin sept 2008 as an emergency measure the federal reserve expanded the range of eligible collateral on loans through its primary dealer credit facility pdcf to include some equities this was one among many unprecedented moves by the central bank in the face of the 2008 financial crisis and the pdfc was later wound down in 2010 as the economy stabilized 1in march 2020 the fed reopened the pdcf to address the stock market crash and liquidity problems associated with the spread of the covid 19 virus and resulting containment measures instituted by public health officials the reopened pdcf includes a broad range of equities as eligible collateral 2this makes the fed a holder of loan stock collateral against the overnight loans it makes through the pdcf this potentially exposes the fed to substantial stock market risk during a very volatile period and could raise concerns that the fed as a government institution might end up in the position of becoming a direct shareholder in some publicly traded companies | |
what are the characteristics of loan stock | loan stocks are long term agreements so are seen as a form of long term debt financing they are negotiated at a fixed rate with pre determined interest payment periods and the amount of collateral | |
what are the different types of loan stocks | loan stocks can be unsecured or convertible unsecured loan stocks are more risky and these lenders are equal to other unsecured creditors if there is a default convertible loan stocks allow for the conversion into common shares providing lenders with a form of collateral | |
what is stock lending | stock lending is the lending of shares to another party for a fee as well as with interest charges stock lending is primarily done in short sell trades where the seller doesn t own the stock but needs it for the trade it can also be used for hedging and arbitrage trades the bottom lineloan stock is used to reduce the risk of lending lenders have access to collateral in the form of shares if the borrower is no longer able to make good on their debt the risk for the lender is that the price of the shares drops from when the deal was made effectively reducing their collateral value and putting them in danger of not recovering the loan amount if it goes into default | |
what is loan syndication | the term loan syndication refers to the process of involving a group of lenders that fund various portions of a loan for a single borrower loan syndication most often occurs when a borrower requires an amount that is too large for a single lender or when the loan is outside the scope of a lender s risk exposure levels multiple lenders pool together and form a syndicate to provide the borrower with the requested capital understanding loan syndicationsloan syndication is often used in corporate financing firms seek corporate loans for a variety of reasons including funding for mergers acquisitions buyouts and other capital expenditure projects these capital projects often require large amounts of capital that typically exceed a single lender s resource or underwriting capacity there is only one loan agreement for the entire syndicate but each lender s liability is limited to their respective share of the loan with the exception of collateral requirements most terms are generally uniform among lenders collateral assignments are generally assigned to different assets of the borrower for each lender the syndicate does allow individual lenders to provide a large loan while maintaining more prudent and manageable credit exposure because the associated risks are shared with other lenders the agreements between lending parties and loan recipients are often managed by a corporate risk manager this reduces any misunderstandings and helps enforce contractual obligations the primary lender conducts most of the due diligence but lax oversight can increase corporate costs a company s legal counsel may also be engaged to enforce loan covenants and lender obligations the loan syndications and trading association is an established organization within the corporate loan market that seeks to provide resources on loan syndications it helps to bring together loan market participants provides market research and is active in influencing compliance procedures and industry regulations 1bank of america securities jpmorgan wells fargo and citi are among the industry s leading syndicators in the u s loan market as of the first quarter of 2021 2special considerationsfor most loan syndications a lead financial institution is used to coordinate the transaction this institution is often known as the syndicate agent this agent is also often responsible for the initial transaction fees compliance reports repayments throughout the duration of the loan loan monitoring and overall reporting for all lending parties a third party or additional specialists may be used throughout various points of the loan syndication or repayment process to assist with various aspects of reporting and monitoring loan syndications often require high fees because of the vast reporting and coordination required to complete and maintain the loan processing example of a loan syndicationlet s say company abc wants to buy an abandoned airport and convert it into a large development with a sports stadium multiple apartment complexes and a mall to do this it needs a 1 billion loan the company goes to jpmorgan the bank approves the loan but because it s such a large amount and greater than the bank s risk tolerance it decides to form a loan syndicate jpmorgan acts as the lead agent and brings together other banks to participate it contracts bank of america credit suisse citi and wells fargo to participate in the loan jpmorgan contributes 300 million to the loan and the remaining 700 million is shared between the other syndicate members bank of america lends out 200 million credit suisse 100 million citi 250 million and wells fargo 150 million as the lead bank jpmorgan also organizes the terms covenants and other details needed for the loan once complete company abc receives the 1 billion loan through the loan syndicate | |
how does loan syndication work | loan syndication is a process that involves multiple banks and financial institutions who pool their capital together to finance a single loan for one borrower there is only one contract and each bank is responsible for their own portion of the loan one institution acts as the lead and is responsible for getting other banks on board documenting collateral assignments and distributing payments from the borrower who are the parties involved in loan syndication loan syndication is a process that involves the borrower and two or more banks one bank acts as the lead or the syndicate agent and is responsible for overseeing documentation and repayment this bank then filters payments to the remaining banks | |
how does a loan syndication affect the borrower | loan syndication doesn t affect borrowers any differently than other types of loans the borrower generally applies for a loan at one bank if approved this institution approaches others to form a syndicate which allows them each to spread the risk after the loan is advanced the borrower signs a single contract which names every member of the syndicate and their contribution to the loan regular payments are made to the lead bank which divides it up among syndicate members | |
what are the disadvantages of the loan syndication process | the main drawback to the loan syndication process is the amount of time it takes to get approved or denied that s because it can take a number of days even weeks to get approval and the syndicate together | |
what is the loan to cost ltc ratio | the loan to cost ltc ratio is a metric used in commercial real estate construction to compare the financing of a project as offered by a loan with the cost of building the project the ltc ratio allows commercial real estate lenders to determine the risk of offering a construction loan it also allows developers to understand the amount of equity they retain during a construction project similar to the ltc ratio the loan to value ltv ratio also compares the construction loan amount but with the fair market value fmv of the project after completion formula for ltc loan to cost loan amount construction cost begin aligned text loan to cost frac text loan amount text construction cost end aligned loan to cost construction costloan amount | |
what does the loan to cost ltc ratio tell you | the ltc ratio is used to calculate the percentage of a loan or the amount that a lender is willing to provide to finance a project based on the hard cost of the construction budget after the construction has been completed the entire project will have a new value for this reason the ltc ratio and the ltv ratio are used side by side in commercial real estate construction the ltc ratio helps to delineate the risk or risk level of providing financing for a construction project ultimately a higher ltc ratio means that it is a riskier venture for lenders most lenders provide loans that finance only a certain percentage of a project in general most lenders finance up to 80 of a project some lenders finance a greater percentage but this typically involves a significantly higher interest rate while the ltc ratio is a mitigating factor for lenders that are considering the provision of a loan they must also consider other factors lenders will also take into account not only the location and value of the property on which the project is being built but also the credibility and experience of the builders as well as the borrowers credit record and loan history example of how to use ltcas a hypothetical example let s assume that the hard construction costs of a commercial real estate project are 200 000 to ensure that the borrower has some equity at stake in the project the lender provides a 160 000 loan this keeps the project slightly more balanced and encourages the borrower to see the project through to its completion the ltc ratio on this project would be calculated as 160 000 200 000 80 the difference between the loan to cost ltc and loan to value ltv ratiosthe loan to value ltv ratio is closely related to the ltc ratio but is slightly different the ltv ratio compares the total loan given for a project against the value of the project after completion rather than to its cost of construction considering the above example let us assume that the future value of the project once completed is double the hard construction costs or 200 000 if the total loan given for the project after completion is 320 000 then the ltv ratio for this project would also be 80 or 320 000 400 000 | |
how do i calculate the loan to cost ltc ratio | divide the amount of a loan for a construction project by the cost of the project and you have the loan to cost ltc ratio | |
how is the ltc ratio used | the ltc ratio is used to calculate the percentage of a loan or the amount that a lender is willing to provide to finance a project based on the hard cost of the construction budget | |
how is the ltc ratio different from the ltv ratio | the loan to cost ltc ratio compares the financing amount of a commercial real estate project to its cost the loan to value ltv ratio on the other hand compares the loan amount to the expected market value of the completed project the bottom linethe loan to cost ltc ratio compares the financing of a project as offered by a loan with the cost of building the project ltc is a metric used in commercial real estate construction the higher the ltc is the riskier the project is for lenders who usually will finance projects with an ltc of up to 80 | |
what is the loan to deposit ratio ldr | the loan to deposit ratio ldr is used to assess a bank s liquidity by comparing a bank s total loans to its total deposits for the same period the ldr is expressed as a percentage if the ratio is too high it means that the bank may not have enough liquidity to cover any unforeseen fund requirements conversely if the ratio is too low the bank may not be earning as much as it could be investopedia crea taylorformula and calculation of the ldr ldr total loans total deposits begin aligned text ldr frac text total loans text total deposits end aligned ldr total depositstotal loans to calculate the loan to deposit ratio divide a bank s total amount of loans by the total amount of deposits for the same period you can find the figures on a bank s balance sheet loans are listed as assets while deposits are listed as liabilities | |
what the ldr can tell you | a loan to deposit ratio shows a bank s ability to cover loan losses and withdrawals by its customers investors monitor the ldr of banks to make sure there s adequate liquidity to cover loans in the event of an economic downturn resulting in loan defaults also the ldr helps to show how well a bank is attracting and retaining customers if a bank s deposits are increasing new money and new clients are being on boarded as a result the bank will likely have more money to lend which should increase earnings although it s counterintuitive loans are an asset for a bank since banks earn interest income from lending deposits on the other hand are liabilities because banks must pay an interest rate on those deposits albeit at a low rate the ldr can help investors determine if a bank is managed properly if the bank isn t increasing its deposits or its deposits are shrinking the bank will have less money to lend in some cases banks will borrow money to satisfy their loan demand in an attempt to boost interest income however if a bank is using debt to finance its lending operations instead of deposits the bank will have debt servicing costs since it will need to pay interest on the debt in times of financial crisis a low ldr will benefit a bank as it will have more liquidity to meet its obligations as a result a bank that borrows money to lend to its customers will typically have lower profit margins and more debt a bank would rather use deposits to lend since the interest rates paid to depositors are far lower than the rates it would be charged for borrowing money the ldr helps investors spot the banks that have enough deposits on hand to lend and won t need to resort to increasing their debt the proper ldr is a delicate balance for banks if banks lend too much of their deposits they might overextend themselves particularly in an economic downturn however if banks lend too few of their deposits they might have opportunity cost since their deposits would be sitting on their balance sheets earning no revenue banks with low ltd ratios might have lower interest income resulting in lower earnings multiple factors can drive changes in the loan to deposit ratios economic conditions can impact loan demand as well as how much investors deposit if consumers are unemployed they re unlikely to increase their deposits the federal reserve regulates monetary policy by raising and lowering interest rates if rates are low loan demand might increase depending on the economic conditions in short there are many outside factors that impact a bank s ldr | |
what is an ideal ldr | typically the ideal loan to deposit ratio is 80 to 90 a loan to deposit ratio of 100 means a bank loaned one dollar to customers for every dollar received in deposits it received it also means a bank will not have significant reserves available for expected or unexpected contingencies regulations also factor into how banks are managed and ultimately their loan to deposit ratios the office of the comptroller of the currency the board of governors of the federal reserve system and the federal deposit insurance corporation do not set minimum or maximum loan to deposit ratios for banks however these agencies monitor banks to see if their ratios are compliant with section 109 of the riegle neal interstate banking and branching efficiency act of 1994 interstate act 1example of how to use the ldrif a bank has 500 million in deposits and 400 million in loans the bank s ldr ratio would be calculated by dividing the total loans by its total deposits ldr 4 0 0 million 5 0 0 million 8 8 0 begin aligned text ldr frac 400 text million 500 text million 8 80 end aligned ldr 500 million 400 million 8 80 the difference between the ldr and the ltv ratiothe loan to value ltv ratio is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage typically assessments with high ltv ratios are higher risk and therefore if the mortgage is approved the loan costs the borrower more the ltv ratio measures the value of the property versus the amount of the loan while the ldr measures a bank s ability to cover its loans with its deposits limitations of using the ldrthe ldr helps investors assess the health of a bank s balance sheet but there are limitations to the ratio the ldr does not measure the quality of the loans that a bank has issued the ldr also does not reflect the number of loans that are in default or might be delinquent in their payments as with all financial ratios the ldr is most effective when compared to banks of the same size and similar makeup also it s important for investors to compare multiple financial metrics when comparing banks and making investment decisions |
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