The Board has asked you to review the auto-loan model in place in the firm. This model is
designed to assess the expected loss related to each transaction underwritten by the firm.
One of the model’s main purposes is to prevent auto thievery via fraud. Key methods of fraud
committed on a loan application include income misrepresentation, employment
misrepresentation, fake identity, false collateral, and / or of a straw borrower to hide the identity
(a) Illustrate how each of the three (3) common valuation and estimation errors can apply
in the case of the firm’s fraud identification model. (15 marks)
Regular portfolio risk analysis and reporting is carried out by the firm on the delinquency rates
over its auto loans and on the recovery value of repossessed vehicles. The reports enable the
firm to use data to drive decisions. The model provides integrated analytics, allowing business
users to conduct nearly infinite variations of portfolio analysis. Analytics provides the ability
to continually identify and evaluate risk factors that influence portfolio performance. It allows
to make adjustments to credit policies and practices to mitigate risks.
(b) Indicate at least three (3) concrete examples of information in the auto-loan
delinquency report, which can lead to valuable insights for decision. (12 marks)
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