Lien management and loan to value ratio calculations

A lien is a claim or legal right against assets that are used as collateral to satisfy a debt. In a secured loan application, it is important to record any existing liens on a collateral and to calculate the loan-to-value (LTV) ratio or the combined loan-to-value (CLTV) ratio by considering the proposed debt associated with an application. 

With the Hydrogen release of Q2 Origination, the system is enhanced to:

• Perform effective lien management on a collateral by recording and managing existing liens on a product.

• Record any other existing bank liens, and view if the collateral is linked to other applications. 

• Provide standard LTV/CLTV ratio calculations.

• View the LTV ratio considering all the senior liens.

• View the CLTV ratio considering all the existing liens.
  

Key Concepts

Lien Position

This is the ranking of the lien of the bank in relation to that of the other banks. The ranking is based on Static Values, such as First, Second, Third, Fourth, and so on. It is enabled if the nature of the lien is a Fixed Amount. The Lien Position up to 10 is allowed. The position should not be skipped, that is, if a Lien Position of 5 is assigned, the earlier four liens must be captured.

Lien Amount

The amount of the lien that the selected bank has on the collateral if the nature of lien is a fixed amount.

Lien Disposition

This is an optional field that the user will record for any existing liens which may get paid off from the proceeds of the current loan application. This field depicts the status of the lien.

Loan-to-Value (LTV) ratio

It is the ratio of a loan to the value of an asset purchased. The term is commonly used by the financial institutions to represent the ratio of the loan borrowed as a percentage of the total appraised value of a real estate property. 

For example, if someone borrows $96,000 to purchase a house worth $120,000, the LTV ratio is $96,000 to $120,000 or $96,000/$120,000, or 80%. The remaining 20% represents the lender's haircut, adding up to 100%, which is covered by the borrower's equity. The higher the LTV ratio, the riskier the loan is for a lender.

LTV ratio is one of the key risk factors that lenders assess when qualifying borrowers for a mortgage. The risk of default is always at the forefront of lending decisions, and the likelihood of a lender absorbing a loss increases as the amount of equity decreases.

CLTV ratio

It is the proportion of loans (secured by a property) in relation to its value. The CLTV ratio adds additional specificity to the basic loan to value, which indicates the ratio between one primary loan and the property value. The term, combined indicates that additional loans on the property have been considered for the calculation of the percentage ratio. 

CLTV ratio represents the aggregate principal balance(s) of all mortgages on a property divided by its appraised value or purchase price, whichever is less. Distinguishing CLTV  ratio from LTV ratio serves to identify loan scenarios that involve more than one mortgage.

For example, a property valued at $100,000 with a single mortgage of $50,000 has an LTV ratio of 50%. A similar property with a value of $100,000 for a first mortgage of $50,000 and a second mortgage of $25,000 has an aggregate mortgage balance of $75,000, thereby amounting the CLTV ratio to 75%.

CLTV ratio is an amount in addition to the LTV, ratio which represents the first position mortgage, or loan as a percentage of the property's value.

A Collateral Type 

Describes the type of collateral being pledged to a loan opportunity and drives the application processing requirements associated with the collateral.

A Collateral Category

Categorizes the assets or collaterals that you associate with a loan opportunity. It serves as a grouping mechanism for a large variety of potential Collateral Type values that you can configure in Q2 Origination and enables you to categorize them into smaller groups. The system administrator can define custom collateral categories, such as, Business Assets or Real Estate. Collateral Types can be considered as sub-categories of collateral categories.

If there are any existing liens, capture the lien position and record any other existing bank liens and view if a collateral is linked to other applications. When a collateral is added to an application for specific collateral, you can record any existing liens on the collateral based on the conversation with the borrower. The loan amount linked to each of these liens is also recorded. You can also capture the outstanding loan amount in other banks against liens. Considering the existing liens, the LTV  ratio and CLTV ratio values will vary. 

When you have the pledge collateral value On the collateral, input the lien amount and the lien position, and also update the status of the lien on the application. If there is any pledge value record on the application for specific collateral, that is also considered as part of the overall lien position. If the same collateral is linked to other applications, then the reference of that application (Application ID) and the application status are displayed on the application.

Manage Liens on the Collateral

Prerequisites

The following is the prerequisite to record a lien on the collateral:

• Collateral Valuation Record is created for the collateral.

Steps

Perform the following steps to record a lien on the collateral:

1. Log in to your Salesforce account.
   

2. Select theApp Launcher .
   

3. Search for Q2 Origination, and then select it.
   

4. On the Applications tab, select the required application ID.
   

5. On the Collateral tab, select the ellipsis and select Pledge Collateral Value.

   
   

   This section displays the appraised value of the collateral and the remaining value on the collateral.
   

   Remaining value=Appraised value-Total Lien Amount.
   

6. You can add or edit the lien amount on the application, and also record the lien position for the lien.
   

7. In the Associated Liens section, you can manage the liens associated liens with that collateral.
   

   Note:

   To understand the terms related to this section, see Associate Lien table.

   

8. Select Save.
   

   Field Name	Description
   Comments	Add if there are comments.
   Lien disposition	An option can be selected from the following list: To be paid with proceeds of the loan To be paid at closing To be paid prior to closing Subordinated Satisfied This is an optional field that the user records for any existing liens which may get paid off from the proceeds of the current loan application. This field depicts the status of the lien.
   Lien Status	The status of the lien that the other banks have on the collateral. The options include the following: Proposed: This is the default value until the loan is closed.   Open: This is when the lien is in place. Satisfied: This status depicts that the loan linked to a lien has been paid off and the lien no longer exists. When a new lien is added, the status is set to Proposed, and  & details saved first time. Later the status needs to be updated as part of the origination and the servicing flow.
   Lien ID	It is the unique ID for the lien.
   Bank Code	It is the bank code and the name of the bank related to the lien.
   Nature of Lien	It is the nature of the lien to be recorded. For example, the values could be Fixed Amount, Percentage, and more.
   Lien Position	It is the ranking of the lien of the bank in relation to that of the other banks. The ranking is based on Static Values, such as First, Second, Third, Fourth, and so on. It is enabled if the nature of the lien is a Fixed Amount. The Lien Position up to 10 is allowed. The position should not be skipped, that is, if a Lien Position of 5 is assigned, the earlier four liens must be captured.
   Lien Amount	The amount of the lien that the selected bank has on the collateral if the nature of lien is fixed amount. This option is enabled if the nature of lien is Fixed Amount, and is updated in update mode.
   Bank Name	Bank code &/or Name of the bank related to the lien. This is a lookup to the Bank Name described earlier. There must be a provision to identify the owned bank and other banks via the Bank Name here.
   Application ID	Application ID linked to the lien.
   Application Status	This will display the status of the application linked to the lien.

   Note:

   If CL Loan and Q2 Origination both exist in the same org, the contract details are displayed on the same page. The loan contract ID is displayed on the application instead of the Application ID.

Calculation of LTV and CLTV Ratios

LTV ratio = amount of credit secured by senior lien/ Market value of the collateral securing the credit .

CLTV ratio = amount of credit + all existing loans linked to the collateral securing the application/ market value of the collateral securing the credit.

The LTV and CLTV can be custom calculated using API for an application. 

In Custom settings Setup, the custom calculation is implemented by the abstract class named clcommon.AbstractCollateralLienCalculator and providing the class name in the custom setting: Custom Logic Parameters -> Custom LTV Calculator field as illustrated in the following images: 

Underwriting dashboard calls the API on page load.

Examples

The following examples explain the LTV and CLTV calculation in various scenarios:

Scenario 2

Senior Lien of $ 100000 placed on Collateral 1

The borrower requests for additional $50,000 for some medical expenses against Collateral 1

 LTV = (Amount of Credit(only first lien position)/Market value of collaterals securing the credit.

    = 100,000/((400,000)  

    = 25%                                                             

CLTV = Amount of Credit(All Loans)/Market value of collaterals securing the credit.

     =(50,000+100000)/ ((400,000)

     = 37.5%

Scenario 3

The borrower requests for $ 300,000 against the same Collateral 1 and is paying down the existing loan of $100000 , but not paying down the $50,000

LTV = Amount of Credit/ Market value of collaterals securing the credit.

    =  300,000/ 400000 

    =  75%                                                                                                                    

CLTV = Amount of Credit + All loans/ Market value of collaterals securing the credit.                               

     =(300000+50,000)/((400,000) = 87.5%)                                

In this scenario, LTV ratio is outside the prescribed limit, so bank asks for additional collateral.         

The borrower provides an additional Collateral 2

LTV = Amount of Credit/ Market value of collateral’s securing the credit                                                  

    = 300,000/ ((400,000 +100,000)

    =60%

CLTV = Amount of Credit (All Loans)/ Market value of collaterals securing the credit                                   

     = (300,000+50,000)/ ((400,000 +100000)

     = 70%

Senior Lien Amount on Collateral 1 is now $300000 and a senior lien amount on Collateral 2 is placed for $100,000