You may find it helpful to review the Credit Checklist and the Loan Policy Guidelines as you make a decision about approving the Sam Wilson loan from a credit perspective. (Note that The Harvard Westerman Loan section of this course covers the concept of credit risk in more detail.)

To determine whether the Sam Wilson loan presents excess credit risk, use the “ 5 Ps of Credit” found in the Credit Checklist under determining credit risk.

People:

Does it appear that Sam Wilson is of good character?
	Yes
	No	The correct answer is Yes. Sam has a long history with the bank. Sean mentions this in his presentation and emphasizes that Sam has been a good customer.

Purpose:

Is the purpose specific enough that you can tell how the loan proceeds will be used?
	Yes
	No	The correct answer is Yes . The purpose is very specific – Sam Wilson needs the loan in order to buy farm machinery from Hiram McCard.

Payment:

Is a primary source of repayment identified?
	Yes
	No	The correct answer is Yes. Payment would come from Sam’s farm operations, and, if this was not enough to repay the loan, Sam would sell a Treasury note that comes due at about the time the loan is to be repaid.

Plan:

Is there a plan to track the borrower’s financial condition and to ensure that the borrower stays in compliance with the loan agreement once the loan is made? Does the bank have a plan to ensure that Sam doesn’t sell or otherwise encumber the Treasury notes?
	Yes
	No	The correct answer is No. Since the loan is short-term and to a good customer, the plan may entail listing the Treasury note as part of the collateral on the security agreement that accompanies the loan. The plan may also entail obtaining an acknowledgement from the broker, or whomever holds Sam’s Treasury note in safekeeping, of the bank’s right to the note should Sam default on his loan.

Protection:

Is a secondary source of repayment identified?
	Yes
	No	The correct answer is Yes. The farm machinery, whose value seemed to be known, is one secondary source of repayment. Another layer of protection is provided by the Treasury note.

Based on your analysis, what is your view of the credit risk the Sam Wilson loan poses?
	Low
	Moderate	Given this information, Sam’s loan appears to present low credit risk. Unless you know some other matter that might bear on the bank’s credit decision, wouldn’t you say that making the loan to Sam seems in order?
	High

Knowing what you know at this moment, would you vote to make the loan to Sam? Before you cast your vote with the board, it would be a good idea to consider the applicable regulations.