It is early in the development process of the Loan Arranger system for FCO. You do not yet have a comprehensive set of requirements for the system. All you have is an overview of system functionality, and a sense of how the system will be used to support FCO’s business. Many of the terms used in the overview are unfamiliar to you, so you have asked the customer representatives to prepare a glossary.They give you the description in Table 2.3.
Borrower A borrower is the recipient of money from s lender. Borrowers may receive loans jointly; that is, each loan may have multiple borrowers. Each borrower has an associated name and a unique borrower identification number.
Borrower’s risk: The risk factor associated with any borrower is based on the borrower’s payment history.
A borrower with no loans outstanding is assigned a nominal borrower’s risk factor of 50. The risk factor decreases when the borrower makes payments on time but increases when a borrower makes a payment lateor defaults on a loan. mc borrower’s risk ia calculated using the following formula:
Risk = 50— [lox (number of years of loans in good standing)]+
[20 X (number or years of loans in late standing)] + [30 X (number of years of loans in default standing)] .
For example, a borrower may have three loans. The first loan was taken out two years ago, and all payments have been made on time. That loan is in good standing and has been so for two years. The second and third loans are four and five years old, respectively, and each one was in good standing until recently. Thus, each of the two late-standing loans has been in late standing only for one year. Thus, the risk is
50 — [10 X 2] + [20 X (t ÷ t)] + [30 X 0) = 70.
The maximum risk value is 100, and the minimum risk value is 1. 50 - [10 X 2] + [20 X (ر ÷ ر)] + [30 X 0) = 70.
Beadle: A bundle is a collection of loans that has been associated for sale as a single unit to an investor.
Associated with each bundle is the total value of loans in the bundle, the period of time over which the
loans in the bundle are active (that is, for which borrowers are still making payments on the loans), an estimate of the risk involved in purchasing the bundle, and the profit to be made when all loans are paid back by the borrowers.
Bundle risk The risk of a loan bundle is the weighted average of the risks of the loans in the bundle, with each loan’s risk (see ben risk, below) weighted according to that loan’s value, To calculate the weighted average over n loans, assume that each loan Li has remaining principal Pi and loan risk Ri. The weighted average is then
Discount: The discount is the price at which ECO is willing to sell a loan to an investor It is calculated according to the formula
Discount = (principal remaining) X [(interest rate) X (0.2 + (.005 X (101 — (loan risk))))]
Interest rate type: An interest rate on a loan is either fixed or adjustable. A fixed rate loan (called an FM)has the same interest rate for the term of the mortgage. An adjustable rate loan (called an ARM) has a rate that changes each year, based on a government index supplied by the U.S. Department of the Treasury.
Investor An investor is a person or organization that is interested in purchasing a bundle of loans from FCO.
investment request An investor makes an investment request, specifying a maximum degree of risk at which the investment will be made, the minimum amount of profit required in a bundle, and the maximum period of time over which the loans in the bundle must be paid.
Lender A lender is an institution that makes loans to borrowers A lender can have zero, one, or many loans
Lender information Lender information is descriptive data that are imported from outside the application.
Lender information cannot he changed or deleted. The following information is associated with each lender:
lender name (institution), lender contact (person at that institution), phone number for contact, a unique tender identification number. Once added to the system, a lender entry can be edited but not removed.
Lending institution: A synonym for lender. See lender.
Loan: A loan is a set of information that describes a home loan and the borrower identifying information associated with the loan. The following information is associated with each loan: loan amount, interest rate,
interest rate type (adjustable or fixed), settlement date (the date the borrower originally borrowed the money from the lender), term (expressed as number of years), borrower, lender, loan type (jumbo or regular), and property (identified by the address of the property). A loan must have exactly one associated lender and exactly one associated borrower. In addition, each loan is identified with a loan risk and a loan status
Loan analyst: The loan analyst is a professional employee of FCO who is trained in using the Loan Arranger system to manage and bundle loans Loan analysts are familiar with the terminology of loans and lending, but they may not have all relevant information at hand with which to evaluate a single loan or collection of loans.
Loan risk: Each loan is associated with a level of risk, indicated by an integer from 1 to 100. 1 represents the lowest-risk loan; that is, it is unlikely that the borrower wilt be late or default on this loan. 100 represents the highest risk; that is, it is almost certain that the borrower will default on this loan.
Loan status: A loan can have one of three status designations; good, late, or default. A loan is in good status if the borrower has made all payments up to the current time. A loan is in late status if the borrower’s last payment was made but not by the payment due date. A loan is in default status if the borrower’s last payment-was not received within 10 days of the due date.
Loan type: A loan is either a jumbo mortgage, where the property is valued in excess of $275,000, or a regular mortgage, where the property value is $275,000 or less.
Portfolio: the collection of loans purchased by FOC and available for inclusion in a bundle .the repository maintained by the loan arranger contains information about all of the loans in the portfolio.
This information clarifies some concepts for you, but you are still far from having a good set of requirements. Nevertheless, you can make some preliminary decisions about how the development should proceed. Review the processes presented in this chapter and determine which ones might be appropriate for developing the Loan Arranger. For each process, make a list of its advantages and disadvantages with respect to the Loan Arranger.