Maintaining Adequate Credit Loss Reserves for Payday Loans
Question
Banks must maintain an ____________ adequate to absorb estimated credit losses from payday loans. Banks should evaluate the collectability of accrued fees and finance charges on payday loans and ensure that this income is appropriately measured.
Answers
Explanations
Click on the arrows to vote for the correct answer
A. B. C. D.C
The correct answer to this question is C. ALLL.
The ALLL (Allowance for Loan and Lease Losses) is an accounting term that refers to the estimated amount of money that a bank sets aside to cover potential losses on loans and leases. The purpose of the ALLL is to ensure that a bank has enough money on hand to absorb any losses that may occur as a result of defaulting loans or leases.
In this context, the question is referring specifically to payday loans. Payday loans are short-term, high-interest loans that are typically granted to borrowers who are in need of immediate cash. These loans are considered to be high-risk, as borrowers may have a difficult time repaying the loan in full.
In order to ensure that a bank is adequately prepared for potential losses on payday loans, the bank must maintain an ALLL. The ALLL should be based on an estimate of the amount of credit losses that are expected to occur over a given period of time. This estimate should take into account factors such as the borrower's credit history, the size of the loan, and the length of the loan term.
In addition to maintaining an ALLL, banks should also evaluate the collectability of accrued fees and finance charges on payday loans. These fees and charges are a source of income for the bank, but they must be appropriately measured in order to ensure that the bank's financial statements accurately reflect its financial position.
Neither TILA (Truth in Lending Act) nor FCRA (Fair Credit Reporting Act) are directly related to the question at hand. TILA is a federal law that requires lenders to disclose certain information about a loan, such as the interest rate and fees, to the borrower before the loan is granted. FCRA is a federal law that regulates the collection, dissemination, and use of consumer credit information. While both laws are important in the context of lending, neither is directly related to the ALLL or the collectability of fees and charges on payday loans. Therefore, option D is not the correct answer.
