Obtaining a loan is no easy task. Banks check many aspects of a borrower’s history, such as previous bankruptcy filings, liens, or judgments. Previously, obtaining a $150,000 business loan just required a 700 FICO score and a one page application. The process of lending used to be transacted in the same amount of time required to buy a cheeseburger in a drive-through as well as only relying on borrowers’ personal credit scores. The unsecured nature of loans gave little recourse to lenders apart from the personal commitments and principles of borrowers. The personal guarantees become void when principles are broken. This is the reason why Kenneth Lewis, former chairman BOA, in 2008, commented on the banks’ deteriorating credit quality as “a dam disaster”.

Banks of today are still compensating for the blunders of such loans. This has made the process of obtaining a loan much stricter than before. The underwriting processes that work these days can be summarized as follows:

1. An assessment of character through personal credit report.
2. Borrowers’ basic character can be questioned with a skipped or missed student loan or child support payment.
3. Late payments of mandatory payments like mortgage, car, and credit-card payments are taken into consideration by lenders. Even one late payment is considered an indication of a possible beginning of risk.
4. The qualitative sections receive more attention. This includes payment history and public records data.

Importance of Credit Scores

The personal credit score of a borrower is analyzed to find out if the person fits into the general risk profile of the bank. It is assumed that there is a strong correlation between personal credit and the capability of businesses to pay back loans. Scores are also found in the business credit reports, but with the reliability of such as being more questionable than personal credit scores. The reason being that such scores are less reliable as they are made with the cooperation of business partners and often exclude information about prior bankruptcies, payment history and outstanding liens.

Personal credit scores do not affect one’s application but it determines the borrowing costs. Credit agencies like FICO, FICO II, or Beacon have their own methods of calculating credit scores and so it may vary up-to 50 points. Cost of capital increases if the score is below 700.

Income Proof Required

Borrowers wanting to obtain $50,000 in loans, have to verify their income first and provide details of three years of business and personal tax returns. Banks want the guarantee of the borrower’s personal resources in addition to financial pro formas and other personal guarantees. The size of the bank also determines the depth of investigation. A regional bank has a smaller buffer to overcome losses and so they have made deposit certificates compulsory. In case of nationalized banks, the protectionist stand may be far less.

New consumer-friendly credit card regulations take effect today, after widespread complaints about unfair industry practices. President Obama signed a bill last May that restricts certain credit card fees, reforms billing practices and requires companies to give customers more notice on changes in interest rates or terms of their accounts. Customers will have the right to cancel their accounts if they don’t agree with the new terms.

USA Today breaks down what the new rules mean for customers.

Interest Rates:

New: Credit card companies can no longer raise interest rates retroactively on existing balances. In addition, if you open a new credit card account, the issuer can’t raise the interest rate for 12 months.

What Hasn’t Changes: The legislation imposes no limits on the rates credit card issuers can charge new customers. Nor does it limit how much card issuers can raise rates on future purchases, said USA Today.

Fees:

New: Credit card companies can no longer to charge a fee when you exceed your credit limit.

What Hasn’t Changes: Companies will still be allowed to charge annual fees, inactivity fees and other types of fees. Many experts agree companies will increase those fees.

Billing Practices:

New: Consumers often have different interest rates for new purchases, transfer balances and cash advances on the same credit card. Companies usually apply full payments to the lowest interest rate. Under the new regulations, they must apply payments over the minimum to the highest interest balances.

Also, customers must receive their bills at least 21 days before payment is due, and payment due dates must be the same every month. Banks can no longer use a customer’s average daily balance over two months to calculate interest, a practice known as “double-cycle billing,” said USA Today.

What Hasn’t Changed: If a customer only makes the minimum payment, the company can still apply that amount to the lowest-interest rate balance.

Disclosures and Notices:

New: Companies must give customers 45 days’ notice before raising interest rates, changing certain fees, such as annual fees or cash advance fees, or making other significant account changes. Card issuers also have to provide customers with more information about their accounts, such as how much you’d have to pay monthly to eliminate your balance in three years.

What Hasn’t Changed: Companies can close your account or lower your credit limit for any reason without giving advance notice.