When a note buyer looks at the person paying a note, one of the first things they rate is credit. This guide comes from Metropolitan Mortgage and Securities Co., a note-buying company, and shows how it graded payors.
Credit scores and human judgment
The main challenge for a credit rating guideline is having enough flexibility to handle individual situations while staying consistent. Credit scores were then a fairly new tool for assessing risk in the note business.
Scoring helped Metropolitan evaluate risk, but it kept rating credit “the old-fashioned way.” Subjective human judgment gave it room to use the strengths of credit scoring while making up for its weaknesses.
Its rating system drew on historical information from its own portfolio and on a variety of industry sources.
The credit grades
| Grade | What the credit reports show |
|---|---|
| A and A- | Minimal, if any, derogatory remarks from the reporting agencies. Accounts are current, payments are prompt and the person has “seasoning” with the credit bureaus. |
| B | Some derogatory remarks within the past few years. The person may have had a misunderstanding with a few creditors, but good performance on other accounts balances it out. |
| C | Numerous derogatory remarks, but some satisfactory accounts in recent history. In some cases no trades are reported, but collections or judgments show. |
| D | Limited satisfactory history. Most accounts have multiple charge-offs, collections and a pattern of late payments. |
| N | No credit history found, good or bad. The deal has to be judged on other merits. The file may have a few credit items but is too new to rate. |
Credit is one of three C’s
Credit is an important tool for assessing risk, but it isn’t the only one. The “three C’s” of underwriting are collateral, credit and capacity. All three play a major role in deciding what level of risk is acceptable.
