Finance Companies Industry Terminology

ABS (Asset-Backed Securities)

Bonds backed by pools of loans or receivables (auto, consumer, equipment, etc.). Finance companies use ABS to fund assets off balance sheet, diversify funding, and lower cost of funds by tranching risk to investors.

We financed originations by issuing a $500M auto loan ABS; The deal’s credit enhancement includes 8% subordination and 2% overcollateralization; Investor demand tightened spreads on the senior ABS notes by 15 bps.

ABL (Asset-Based Lending)

Secured lending where credit is primarily underwritten to the value and liquidity of pledged assets (e.g., receivables, inventory, equipment), with borrowing capacity determined by a borrowing base.

The company refinanced its revolver with a $200M ABL facility; Availability under the ABL is governed by the borrowing base; We carved out an ABL first lien on inventory and receivables.

Advance Rate

The percentage of collateral value a lender will fund. Determined by expected loss, haircuts, eligibility, and concentration limits; common in warehouses, ABL, and factoring.

The warehouse provides a 90% advance rate on prime auto loans; We lowered the advance rate on subprime receivables due to higher losses; The advance rate varies by asset stratification and performance triggers.

Allowance for Credit Losses (ACL)

Balance sheet reserve for expected credit losses (under CECL). It reflects lifetime expected losses on financial assets measured at amortized cost and changes flow through provision expense.

We built the ACL by 30 bps due to rising unemployment; ACL coverage stands at 5.2% of ending receivables; The ACL release boosted quarterly EPS as vintage performance improved.

Annual Percentage Rate (APR)

Standardized measure of the cost of credit expressed as a yearly rate, including interest and certain fees. Required in consumer disclosures for comparability.

The loan’s APR is 19.9% including the origination fee; Disclosures must show APR under Reg Z; Competitors lowered APRs to drive conversion.

Bankruptcy-Remote SPV

A special-purpose vehicle structured to be insulated from the sponsor’s bankruptcy. Used to hold assets for securitization and protect investors from sponsor insolvency.

Loans were sold to a bankruptcy-remote SPV prior to securitization; The SPV’s separateness covenants reduce consolidation risk; We obtained a true sale opinion to support the SPV structure.

BNPL (Buy Now, Pay Later)

Short-term installment credit offered at point-of-sale, often interest-free with merchant discount fees covering economics. Underwriting uses alternative data and instant decisioning.

Our BNPL portfolio shows lower first-payment default with payroll-linked repayments; We integrated BNPL via embedded checkout; Regulators are scrutinizing BNPL disclosures and dispute handling.

Borrowing Base

Formula that determines how much can be drawn under ABL or warehouse facilities, typically a percentage of eligible collateral less reserves and haircuts.

Availability equals 85% of eligible AR less reserves; The lender excluded stale receivables from the borrowing base; A dilution reserve reduced borrowing capacity this month.

BSA/AML Compliance

Bank Secrecy Act/Anti-Money Laundering obligations: risk assessments, customer due diligence, transaction monitoring, suspicious activity reporting, and sanctions screening.

We filed a SAR on suspected synthetic identity fraud; The AML team enhanced CDD for high-risk merchants; OFAC hits blocked onboarding of a new partner.

CECL (Current Expected Credit Loss)

US GAAP standard requiring recognition of lifetime expected credit losses for assets at amortized cost, using historical data, current conditions, and reasonable and supportable forecasts.

CECL requires lifetime loss estimates at origination; We incorporated macroeconomic scenarios into CECL models; The Day 1 CECL build increased reserves materially.

Charge-Off

Accounting write-off of uncollectible principal (and typically interest) per policy (e.g., 120/180 days past due). Reported as gross and net of recoveries.

Auto loans are charged off at 120 DPD; Net charge-off rate rose 50 bps QoQ; Recoveries from repossessions reduced net charge-offs.

Collateral Perfection (UCC Article 9)

Legal steps to establish and prioritize a secured creditor’s interest in collateral (e.g., UCC-1 filing, possession, or control), ensuring enforceability against third parties.

We filed a UCC-1 to perfect our lien on receivables; Possession perfected the security interest in chattel paper; Lapse of a UCC filing jeopardized our priority.

Covenant

Contractual promise in debt agreements (financial, affirmative, negative). Breaches can restrict distributions, increase pricing, or trigger amortization events.

The warehouse has a minimum tangible net worth covenant; A performance trigger covenant diverts cash to pay down seniors; We requested a covenant waiver after losses spiked.

Credit Box

Documented underwriting criteria defining acceptable applicants (e.g., FICO, DTI, LTV, income, employment, collateral). Guides automated decisioning and risk selection.

We tightened the credit box by raising minimum FICO and lowering max DTI; Exceptions outside the credit box require second-line approval; Channel partners must adhere to our credit box.

Days Past Due (DPD)

Count of days from a missed due date. Common delinquency buckets are 30, 60, 90+ DPD, used for collections strategy, roll-rate analysis, and loss forecasting.

Accounts at 30+ DPD rose to 4.1%; We measure roll rates across DPD buckets; DPD cures improved after hardship programs expanded.

Debt Service Coverage Ratio (DSCR)

Cash flow metric for commercial borrowers: cash available for debt service divided by required debt service. Indicates repayment capacity.

The small-business loan requires 1.25x DSCR; We adjusted DSCR for owner add-backs; DSCR deterioration triggered a borrowing base reserve.

Debt-to-Income Ratio (DTI)

Consumer underwriting metric: monthly debt obligations divided by gross income. Helps assess affordability and default risk.

We capped DTI at 40% for unsecured loans; Lower DTIs correlate with better early delinquency; DTI is verified with payroll and bank data.

Delinquency Roll Rate

The proportion of accounts moving from one delinquency bucket to the next over a period. Critical input to loss forecasting and stress testing.

30-to-60 roll rate worsened by 80 bps; We use transition matrices to project losses; Collection strategy changes reduced the 60-to-90 roll rate.

Effective Interest Rate (EIR)

The rate that exactly discounts expected cash flows to the carrying amount of a financial asset or liability. Used for interest income recognition and fee amortization.

Revenue is recognized using EIR under amortized cost; Upfront fees are accreted into EIR; Premiums/discounts are amortized through EIR.

Excess Spread

In securitization, the difference between asset yields and the sum of funding costs, servicing fees, and credit losses. Acts as ongoing credit enhancement.

Excess spread dropped as charge-offs rose; The deal traps excess spread once CNL triggers are hit; Strong excess spread supports AAA ratings.

Factoring

Financing where a factor purchases accounts receivable, often advancing a percentage upfront and collecting from debtors; can be with or without recourse.

We purchased invoices at a 2% discount with 80% advance; Dilution risk led us to require recourse factoring; The client’s concentration limits constrained factoring volume.

FCRA (Fair Credit Reporting Act)

US law governing consumer credit reporting, accuracy, permissible purpose, disputes, and risk-based pricing notices; implemented via Regulation V for furnishers/users.

We provided adverse action notices using FCRA-compliant reasons; Consumers can dispute bureau data under FCRA; Our permissible purpose for credit pulls is documented.

FDCPA (Fair Debt Collection Practices Act)

US law regulating third-party debt collection practices, including communications, disclosures, and prohibitions on harassment and deceptive practices.

Call caps and timing comply with FDCPA and Reg F; We validated the debt within five days of first contact; Scripts avoid misleading statements under FDCPA.

FICO Score

Widely used US consumer credit score (300–850) predicting default likelihood. A key input to underwriting and risk-based pricing.

Average booked FICO rose to 702; We tier pricing by FICO bands; Thin-file applicants require alternative data beyond FICO.

Forbearance/Hardship Program

Temporary relief that modifies payment obligations (deferrals, interest-only, extensions) for borrowers facing short-term hardship. Must be clearly disclosed and tracked.

We offered three-month payment deferrals after natural disasters; Hardship enrollments must not obscure true delinquency; Forbearance cures improved early-stage roll rates.

GLBA (Gramm-Leach-Bliley Act)

US law requiring financial institutions to protect consumer financial privacy and safeguard information via privacy notices and information security programs.

Annual privacy notices issued under GLBA; The Safeguards Rule drives our data security program; Vendor oversight addresses GLBA requirements.

Haircut

Discount applied to collateral’s stated value to reflect risk and liquidity when determining lendable value (common in repos and warehouses).

The lender applied a 10% haircut to subprime receivables; Haircuts increase during market stress; Lower haircuts improved our advance rate.

Indenture (Trust Indenture)

Governing contract for a bond or securitization trust outlining covenants, representations, events of default, and the waterfall of payments.

The ABS indenture defines priority of payments; An indenture supplement added a new series; Breaching the indenture trigger diverts cash to senior noteholders.

KYC (Know Your Customer)

Customer identity verification and due diligence at onboarding and ongoing, including beneficial ownership, risk scoring, and document verification.

We verified beneficial owners under CDD rules; High-risk customers require enhanced due diligence; KYC failures can lead to regulatory penalties.

LGD (Loss Given Default)

The percentage of exposure not recovered if a borrower defaults. Key input with PD and EAD to expected loss and risk-based pricing.

We estimate LGD at 45% for unsecured loans; Collateral improves LGD in secured products; PD and LGD assumptions drive expected loss and pricing.

Leverage Ratio

Measure of financial leverage (e.g., debt/equity or debt/EBITDA) used by lenders and rating agencies to assess solvency and risk.

Debt-to-equity is capped at 3.5x under the credit agreement; Rising leverage increased our cost of funds; Covenant leverage uses adjusted EBITDA.

Loan-to-Value (LTV)

Loan amount divided by collateral value. Higher LTV increases severity risk and often requires tighter pricing or terms.

Max LTV is 120% for certain auto refis; Higher LTV correlates with elevated LGD; We reduced LTV limits for older collateral.

Lockbox/Dominion of Funds

Cash management control where collections are swept to lender-controlled accounts, reducing diversion risk and strengthening collateral monitoring.

We implemented springing dominion once triggers were hit; Daily sweeps improve collateral control; Borrowers remit to a blocked account per the control agreement.

Margin Call

Lender demand for additional collateral or cash when collateral value or advance tests are breached under a warehouse or repo facility.

Collateral performance breaches triggered a margin call; We posted cash to cure the advance rate deficiency; Frequent margin calls strained liquidity.

Model Risk Management

Framework to govern model development, validation, and use, ensuring accuracy, stability, and appropriate controls over credit, pricing, and CECL models.

New PD/LGD models underwent independent validation; We track ongoing model performance with backtesting; Governance follows policy aligned to SR 11-7 principles.

Net Interest Margin (NIM)

Interest income on earning assets minus interest expense on funding, expressed as a percentage of average earning assets; a key profitability metric.

NIM compressed as funding costs rose faster than yields; Mix shift to secured loans lifted NIM; Hedging helped stabilize NIM quarter over quarter.

Nonaccrual

Status where interest income recognition stops due to doubt about collectibility. Interest may be reversed and only recognized when collected.

We place loans on nonaccrual at 90 DPD; Interest reversal from nonaccrual hit revenue; Cure from nonaccrual improves yield metrics.

OFAC Screening

Screening customers and transactions against US sanctions lists (e.g., SDN) to prevent dealing with prohibited parties.

Onboarding includes OFAC SDN list checks; A match led to immediate account blocking; Batch screening is run nightly for changes to sanctions lists.

PD (Probability of Default)

Estimated likelihood that a borrower will default over a defined time horizon. Core input to expected loss and risk-based pricing frameworks.

One-year PD is 2.1% for the near-prime tier; Macroeconomic scenarios increase PD in our CECL model; PD informs pricing and limits.

Personal Guaranty

A commitment by an individual (often an owner) to repay a loan if the primary obligor fails. Enhances recovery prospects and credit terms.

The owner signed a personal guaranty to support the loan; We pursued the guarantor after business default; Guarantee strength affects underwriting.

Provision for Credit Loss

Income statement expense that adjusts the ACL to reflect changes in expected credit losses due to volume, performance, and macroeconomic outlook.

Provision rose 40% due to higher originations and deterioration in roll rates; Provision releases boosted earnings as vintages outperformed; Provision aligns ACL with updated expected losses.

Risk-Based Pricing

Setting interest rates and fees according to the borrower’s risk profile (e.g., PD, LGD, FICO, DTI, collateral), targeting a required risk-adjusted return.

Risk tier C rates increased by 150 bps; We reprice accounts upon score migration; Better-than-expected performance allowed price cuts for prime tiers.

Securitization

Financing process that pools assets into a trust and issues securities backed by their cash flows. Provides matched-term funding and transfers risk to investors.

We executed a 144A term ABS to refinance the warehouse; Early amortization triggers are based on cumulative net loss; Excess spread and subordination support the ratings.

Servicing Advances

Payments a servicer makes (e.g., taxes, insurance, repossession, litigation) to protect collateral or maintain cash flow, recoverable from the trust per the waterfall.

The servicer advanced taxes and repossession costs to preserve collateral; Advance reimbursements occur senior in the waterfall; Elevated advances strained servicer liquidity.

SOFR (Secured Overnight Financing Rate)

Overnight interest rate benchmark based on transactions in the US Treasury repo market; replacement for USD LIBOR in new contracts.

Our warehouse priced at 1M SOFR + 250 bps; We transitioned legacy LIBOR contracts to SOFR; SOFR caps hedged rising funding costs.

Static Pool/Vintage Analysis

Cohort-based performance tracking of originations over time (delinquency, losses, prepayment), used for forecasting, pricing, and investor reporting.

The 2023-Q1 vintage shows lower early defaults; Static pool loss curves inform CECL and pricing; We compare vintages by channel and FICO band.

Subordination

Credit enhancement where junior tranches absorb losses before senior tranches, protecting senior noteholders in securitizations or capital structures.

The Class B and C notes provide 12% subordination to Class A; Losses first hit junior tranches; Credit enhancement builds via subordination and OC.

UCC-1 Financing Statement

Public filing that perfects a secured party’s interest in collateral under the Uniform Commercial Code, establishing priority versus other creditors.

We filed a UCC-1 to perfect our security interest in equipment; A lapse required immediate continuation filing; Competing UCC filings raised priority issues.

Underwriting Guidelines

Documented criteria and processes for evaluating credit applications, including eligibility, verifications, score cutoffs, and exception management.

Policy caps DTI at 40% and LTV at 110%; Exceptions require credit committee approval; We updated guidelines to include bank transaction data.

Warehouse Line of Credit

Secured, revolving facility used to finance loans prior to permanent takeout (e.g., securitization). Advance rates, haircuts, triggers, and covenants govern usage.

We fund new originations on a $750M warehouse before term ABS; A borrowing base shortfall triggered a margin call; Extension fees apply if takeout ABS is delayed.