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Cemap 2&3 Self Testing > 2. Types Of Borrower > Flashcards

2. Types Of Borrower Flashcards

1
Q

How are mortgage applications assessed? (3 Ps)

A
  1. Person - is the lender legally able and willing to lend to the applicant?
  2. Purpose - is the purpose acceptable?
  3. Property - is the property suitable security?
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2
Q

Other than whether it is legally possible or whether the lender is willing to lend to an individual, what are two other questions lenders must ask themselves regarding lending amounts?

A
  1. How much should be lent to each applicant
  2. Should funds be earmarked for certain groups? Eg 1st time buyers
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3
Q

What 4 things should sound lending policies take into account

A
  1. Lender strategy - market strategy
  2. Applicant profile
  3. Desired profit margin
  4. Arrears and recovery stats
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4
Q

What are the 3 main purposes of a personal /private borrower?

A
  1. Family home
  2. Second charge
  3. Bridging finance
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5
Q

Are first time buyers usually able to get a BTL mortgage?

A

No

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6
Q

For joint BTL borrowers, how is responsibility for debt shared?

A

Jointly and severally, as in normal mortgages

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7
Q

Who regulates BTL mortgages?

A

Normal BTL - pra

CBTL - FCA

Normal btl is seen as a business loan as it is not their main residence

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8
Q

What are the PRA’s 3 main factors for lenders to assess affordability for BTL applications? (three I’s)

A
  1. Interest coverage ratio
  2. Interest affordability test - now
  3. Interest rate affordability stress test - future
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9
Q

What is the Interest Coverage ratio? (BTL) what is the minimum ICR required by the PRA?

A

Ratio of

rental income : mortgage payments (Inc costs and tax)

Min is 125% but lenders can choose to set theirs higher

I.e rent must cover 125% of all costs

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10
Q

How long should lenders stress test (BTL)?

A

At least 5 years

Unless the borrower is selected a fixed or capped mortgage for 5+ years

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11
Q

What is consumer buy to let?

A

BTL landlords who’s primary motivation is not business.

Those who accidentally end up in circumstances where they have to rent out their home, e.g inherited property or those who need to quickly move for a job

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12
Q

What qualifies a high net worth customer? (3)

A

£300k annual net income
Or
Minimum net assets of £3 million

Or

The customer has a guarantor who meets one of the above criteria instead

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13
Q

What qualifies a professional customer? (3)

A

Someone who has worked in home finance for 1+ years

And

In a position that requires knowledge of the product or service to be arranged

And

Who lender believes to be capable of understanding the risk involved

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14
Q

What is a personal representative? What are the two types?

A

Someone who acts on behalf of a deceased person

Executor - with will

Administrator - without will

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15
Q

Why might a personal representative need a mortgage?

A

To administer the estate or buy a property for a dependent of the deceased

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16
Q

What document appoints a trustee?

A

The trust deed

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17
Q

In who’s interest must trustees act?

A

Beneficiaries

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18
Q

What is the term for property mentioned in trust?

A

Trust property

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19
Q

Why might a trustee need to borrow?

A

They may be responsible for buying a house for the beneficiary to live in, often the case for disabled people

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20
Q

What must a lender be careful to do when lending to trustees?

A

Make sure that they legally have the power to borrow

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21
Q

What should lenders bare in mind when lending to clubs and associations? (2)

A
  1. Make sure the clubs constitution allows it to borrow
  2. Make sure it will be able to pay back
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22
Q

In what two instances are business borrowers subject to MCOB regulations?

A
  1. At least 40% of business property land is used as a residence
  2. The sole purpose is to raise funds for a small business with turnover of less than £1m per annum
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23
Q

For regulated business borrowers, which 4 things do lenders need to take into account when assessing affordability?

A
  1. Business plan / evidence that loan is for business purposes
  2. Applicant’s income and expenditure
  3. If payments are based on business resources, the STRENGTH Of RESOURCES must be taken into account
  4. If the borrower relies on business for their personal income and mortgage payments, can it support essential expenditure and basic quality of living?
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24
Q

What is a business partnership?

A

An arrangement between self employed people who work together

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25
Q

Is a business partnership a company?

A

No

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26
Q

Is a business partnership a separate entity to the business itself?

A

No, assets are owned entirely by the partners themselves

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27
Q

In a business partnership, who is responsible for debt?

A

Each partner is jointly and severally responsible

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28
Q

What 3 things are included in the partnership agreement between business partners?

A
  1. Each partner’s share of profits
  2. Arrangements for what happens if one partner dies, retires or becomes bankrupt
  3. Whether it is able to borrow, if so, how many signatures?
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29
Q

Are are mortgages to business partners regulated?

A

Yes if they meet the same requirements as normal businesses

  1. 40% residential
  2. Small business with turnover less than £1m per annum
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30
Q

Do partners in limited liability partnerships have responsibility for debt?

A

No. The partners are a separate legal entity to the business, they act as agents only. The only money they can lose is the capital they invested into the company from their personal finances. Loans and mortgages are provided to the company itself, not the partners.

31
Q

Is lending to limited liability partnerships fca regulated?

A

No. Llps are essentially a company

32
Q

What can lenders ask for from limited liability partners and directors of small companies to ensure that they take some responsibility for repaying the debt? How is this done?

A

A personal guarantee. The lender will usually take legal charge over something else which is the director’s own property.

Eg, lender takes legal charge over the directors private main residence. If the company defaults, unless the director repays the debt then the lender can repossess their house.

33
Q

What is a special purpose vehicle (spv)?

A

A limited company used by an individual to hold their business property do its a separate legal entity, rather than hold it in their own name.

34
Q

Who owns the property in a special purpose vehicle?

A

The company. The person who used to own the assets becomes a shareholder or director of the company.

The shareholder can buy and sell shares and controls the company, it just doesn’t own the assets.

35
Q

What type of borrower do special purpose vehicles tend to be popular with? Why? Would they be regulated?

A

BTL landlords due to taxation advantages.

Would not be regulated because it is a business. Spvs are unable to be CBTL as a business has been set up, it’s not accidental.

36
Q

What are corporate borrowers? Are they regulated?

A

Lending to a limited company. Can be residential or commercial property, it’s corporate because the BORROWER is corporate.

Not regulated, regardless of whether property is residential or not…. unless the company has a turnover of less than 1 million per annum

37
Q

What is the maximum percentage of it’s commercial assets building societies can have as corporate lending?

A

25%

38
Q

What must a lender check when lending to a corporate borrower? (2)

A
  1. Check the company itself is permitted to borrow (in its articles of memorandum)
  2. Check the person they are dealing with has correct authority to act
39
Q

What is commercial borrowing? What type of entity can be a commercial borrower?

A

Mortgage secured on commercial property, e.g. Shops and factories

Can be individuals or companies. It’s the PROPERTY that is commercial.

40
Q

Is commercial borrowing fca regulated?

A

No

41
Q

What are the two special categories of borrower outlined in MCOB?

A
  1. Mortgage prisoners
  2. Vulnerable customers
42
Q

What is the FCA definition of a vulnerable customer? Where can this definition be found?

A

Those who are

Especially susceptible to detriment as a result of their personal circumstances

Found in

FCAs Occasional Paper No 8

43
Q

What is a mortgage prisoner?

A

Those who have a regulated mortgage
Are prevented from switching lenders or changing to a new product with their existing lender
Due to stricter affordability tests implemented by MCOB since they first borrowed

44
Q

Can someone be a mortgage prisoner if they want to take out a mortgage on new property?

A

No, mortgage prisoners are only those who want a new loan on the property they already own.

45
Q

In the FG21/1 - Finalised guidance for firms on the fair treatment of vulnerable customers, the FCA states that in order to achieve good outcomes for vulnerable customers, firms must : (4)

A
  1. Understand the needs of their target market/customer base
  2. Ensure staff have the skills and capability to recognise and respond to vulnerable customers
  3. Respond to customer needs through
    -product design
    - customer service
    -communications
  4. Monitor and address’s whether needs are being met. Make improvements where they are not.
46
Q

What are the 4 key drivers that could cause vulnerability? (FCA FG21/1)
Clue - HERC

A
  1. Health - disability or illness that affect someone’s ability to carry out everyday tasks
  2. Life events - Bereavement, job loss, relationship breakdown, released from prison
  3. Resilience - low ability to withstand financial or emotional shock
  4. Capability - low financial knowledge or confidence in managing money. Low literacy, numeracy and digital skills.
47
Q

Which 4 types of financial arrangement automatically renders a person financially vulnerable in the eyes of the FCA, regardless of their personal characteristics?

Clue - REDS

A
  1. Statutory right to buy purchases
  2. Sale and rent back agreements
  3. Equity release
  4. Debt consolidation as a main purpose
48
Q

Which three groups are unable to borrow by law?

A
  1. Minors
  2. Mentally incapacited
  3. Undischarged bankrupts and those with poor credit records.
49
Q

Can a minor own land? Can they enter into a contract?

A

Under 18s cannot own land

They cannot enter into a contract unless it is for necessities

50
Q

If someone who is mentally incapacitated needs to raise money, how might they be able to borrow?

A

Someone would need to act for them. Either a POA or court appointed deputy if no POA is in place.

51
Q

What is the definition of insolvency?

A

When someone’s liabilities exceed their assets and they cannot meet financial obligations within a reasonable time period

52
Q

Is insolvency and bankruptcy the same thing?

A

No. All bankrupts are insolvent, but you can be insolvent without being bankrupt if your lender has not yet applied for a bankruptcy order.

53
Q

In which court is someone declared bankrupt?

A

County Court

54
Q

What is sequestration?

A

Scottish term for bankruptcy

55
Q

Who can petition for bankruptcy? (2)

A

Individual - regardless of how much they owe

Creditor - if the debt is at least 5k

56
Q

What happens after someone has been made bankrupt? Who is assigned to the case? What can they do? What can’t they do?

A

A trustee in bankruptcy is assigned to the case.

They can seize assets and sell them to cover court costs and as much debt as possible.

They cannot seize assets needed for work purposes or that provide a basic standard of living.

57
Q

How long is the period of bankruptcy?

A

12 months. But can be extended if the individual refuses to cooperate with the trustee.

58
Q

What is an undischarged bankrupt?

A

Someone who is still within the 12 month period of bankruptcy.

59
Q

Can undischarged bankrupts take out a mortgage?

A

For new property? No

To raise funds on property they already own? Yes

60
Q

Can undischarged bankrupts take out a loan? Do they have to disclose their bankruptcy when filling in applications?

A

Yes they can take out loans.

If the loan is less than £500 then they don’t have to disclose bankruptcy unless asked.

If more than £500 then they must disclose.

61
Q

How long are bankruptcy records kept on
1. The insolvency register
2. A person’s credit file

A
  1. 3 months after discharge from the bankruptcy order (12 months+3 months)
  2. 6 years after the bankruptcy was declared (12 months+5 years)
62
Q

Can a discharged bankrupt take out a mortgage?

A

They’re legally allowed to, but many lenders have policies that either automatically decline those with previous bankruptcies, or require a minimum number of years to have passed since discharge

63
Q

What is an individual voluntary agreement (IVA) and how long does it normally last for?

A

Formal agreement between debtor and creditors to make reduced payments over an agreed period. Typically over 5 years. After this, the debt is agreed to have been settled.

64
Q

Who is able to obtain a debt relief order? What does it do?

A

Non property owning individuals with limited assets. They must have less than 30k in debt which they are unable to repay.

It prevents creditors from seeking payments without court approval and the debt is written off after 12 months.

65
Q

With regards to power of attorney, who are the following :
1. Donor
2. Attorney
3. Deputy
4. Donee

A
  1. Person granting the power of attorney
  2. Person who the power has been granted to, they act on the donors behalf
  3. When someone does not have a POA in place, the court of protection can appoint a deputy to look after the affairs of someone who has become mentally incapacitated
  4. Another name for attorney
66
Q

What type of power of attorney is designed for those who are physically infirm but still mentally capable?

A

Ordinary POA

67
Q

What level of control does the donor have with ordinary power of attorney?

A

Full control.

They can do everything the attorney does and revoke the power at any time

68
Q

What happens if someone with ordinary POA becomes mentally incapacitated?

A

The POA ceases to exist.

If other arrangements are in place then these will begin. If there are no other arrangements, the court of protection will appoint a deputy

69
Q

Who can become someone’s court appointed deputy?

A

Anyone. It may be someone the donor knows, but the court can also appoint someone they don’t know who will charge fees.

70
Q

What is a lasting POA? What are the two types?

A

Same as mum

Lasts when someone is mentally incapacitated but can start before

  1. Property and financial affairs
  2. Health and wellbeing
71
Q

Who must lasting POAs be registered with?
A. The court of protection or
B. The office of the public guardian?

A

B

72
Q

What is an enduring power of attorney?

A

Like an ordinary POA in that attorney can assist donor when they are mentally capable.

Key difference is that after the person loses mental capacity, the enduring POA can be registered with the office of the public guardian so that the attorney can continue to act, whereas the ordinary POA will cease automatically and cannot be extended.

73
Q

Which type of POA is no longer available to new people?

A

Enduring power of attorney. No longer available since 30/09/2007

74
Q

Can enduring power of attorneys be revoked?

A

Unregistered EPA - yes if person has mental capacity

Registered EPA - Court of protection has to confirm the donor fully understands

Cemap 2&3 Self Testing (29 decks)

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