When “A-Paper” Loans Go Bad



There’s almost nothing more frustrating than that perfect A-paper loan that goes belly-up 6 months after approval.  I think we’ve all had that happen more than once.  But what if there was a way to predict which of those seemingly “good loans” would go bad?  While there’s no perfect system out there, at Lending Solutions Consulting we believe there are some telltale signs of trouble in most of these cases.  Over the next few months, we’ll be examining a number of examples of these types of loans and featuring them in this column to see if we can identify some patterns to help credit unions recognize red flags ahead of time.

To start off, here’s a snapshot of a portfolio analysis we performed for one of our clients. (Note: All of these loans were sent to us because they were “A” business that went south in a very short time period, and left the credit union baffled):

Name Age Sec. D/R LTV Score HYLS Drop Rate Score Code Trend
Loan A 21 80% 112% 721


526 27% N/A
Loan B 25 66% 111% 704


500 29% N/A
Loan C 24 57% 102% 724


601 17% N/A
Loan D 36 84% 123% 725 638 12% 4/4

going down

Loan E 25 64% 121% 690 566 18% 4/4
Average 26 70% 114% 713 566 21%

What do all these loans have in common? First, with an average age of 26, they are relatively young.  While not a red flag in and of itself, age is relevant when it pairs up with these other factors that are prevalent here:

  • High secured debt ratio
  • High loan-to-value (all over 100% ltv)
  • High relative credit scores, but in 3 out of the 5 cases, the score is not valid
  • HYLS dropped the scores on average of 21%

Let’s take a closer look at the factors mentioned above. The first two items, secured debt ratio and high ltv, are pretty self-explanatory. And again, any one of these factors by themselves, do not mean a loan is going to go bad.  But when you start to have multiple factors present, you can see some common themes develop.

Valid Credit Score:

When we talk about a score not being valid, we believe a credit report needs to needs to have 3 things for the score to be legitimate:

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