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Cemap 2&3 Self Testing > 28. Arrears And Debt Management > Flashcards

28. Arrears And Debt Management Flashcards

1
Q

What are the two main principles relating to arrears and debt management in MCOB 13?

A
  1. Lenders must treat those in difficulty fairly
  2. Lenders must not take advantage of vulnerable customers
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2
Q

What are the lenders responsibilities regarding customers with debts and arrears? (6) SLAAP CT

A
  1. Seek agreement
  2. Liaise with third party sources of advice
  3. Allow time
  4. Permit changes
  5. Consider options - eg if you have to repossess, can cust stay in property until sale is made?
  6. Take possession as last resort
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3
Q

What is the fca circumstances of a reasonable period relating to when arrears need to be settled?

A

Depends on customer circumstances

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4
Q

What are the two main responsibilities of the lender in relation to direct debits? (second one has 3 parts)

A
  1. Don’t attempt to process more than 2 DDs in one month
  2. If the bank rejects at least once in two consecutive months
    - consider whether this payment method is suitable
    -make reasonable effort to contact the customer to discuss suitablilty
    - not pass on any costs from the failed DD
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5
Q

What options do lenders have for solving arrears? (8)

A
  1. Payment of arrears over a given term
  2. Full or partial suspension of monthly payments
  3. Accept I/O payments
  4. Extend the term
  5. Capitalising arrears
  6. Surrender a Supporting investment and switch to C/R
  7. Pension freedom
  8. Trade Down
  9. Rent a Room
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6
Q

What is capitalisation? Can it be automatically applied?

A

When payment shortfall is just added to the loan.
Must not automatically do this if impact is material. Fca defines material as:
1. Adds £50+ to overall interest throughout term
2. Adds £1 interest per month

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7
Q

How long should records of arrears and payment shortfalls be kept?

A

3 years from being dealt with

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8
Q

How long does the lender have to write to the borrower, notifying them that they are in arrears?

A

15 working days

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9
Q

What must the lenders arrears letter contain?

A
  1. The problems paying your mortgage info sheet from the money advice service
  2. List of payments missed or part paid
  3. Total arrears
  4. Charges incurred
  5. Total debt excluding charges (ie a redemption figure)
  6. Charges that will be incurred in the future if the debt is not settled
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10
Q

When may the lender contact the borrower regarding arrears? (2)

A

Not excessively. In reasonable hours, 8am-9pm, taking into account known work patterns and religious observance

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11
Q

Before a lender can begin the repossession procedure, what must they do? (3)

A
  1. Provide the arrears letter
  2. Ensure the borrower is informed of need to contact the local authority for rehousing
  3. Clearly state the repossession procedure
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12
Q

What 3 things must a lender do when marketing and selling a property?

A
  1. Market asap
  2. Take reasonable care to obtain the best price
  3. If the property sells for less than total debt, inform customer of the total shortfall and whether the debt is being sold to another company
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13
Q

What is nursing the property? How is it relevant?

A

When a lender deliberately delay the sale of a property to get a target price. This is not allowed in relation to repossessed properties

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14
Q

How long does the lender have to notify the borrower of their intention to recover any shortfall from sale of property?

A

6 years

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15
Q

When a lender sells the property after repossession, what happens if it sells for more than the total debt?

A

surplus goes to the customer

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16
Q

What figure or measure usually helps lender decide what type of action needs to be taken against arrears?

A

LTV. Lower LTV = Lower risk

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17
Q

When are short term measures taken in relation to arrears? Who are they suitable for?

A

Taken before litigation. Suitable for those 1-3 months in arrears.

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18
Q

When are medium term measures taken in relation to arrears? Who are they suitable for?

A

Taken once litigation starts. Suitable up to 12 months into arrears.

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19
Q

What constitutes as a long term measure in relation to arrears?

A

Anything longer than 12 months.

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20
Q

Which 3 solutions to arrears are suitable only for those who have experienced a sudden shortfall in money due to an unexpected change in circumstances, e.g. unemployment, but are likely to get a new job again in the near future?

A
  1. Payment of arrears over a given period
  2. full/ partial suspension of payments
    3.Interest only payments

The lender neeeds to be sure that they will be able to make up payments in the near future. These are short term solutions. Borrowers must clear the funds built up within a reasonable specified time.

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21
Q

What is rescheduling another name for?

A

Payment of arrears over a given period

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22
Q

What is a payment holiday?

A

suspension of payments

23
Q

According to FCA regulations, how often do affordability reviews need to be carried out for those who have rescheduled payments as a solution to arrears?

A

every 3-6 months

24
Q

At what stage in the mortgage term is switching to I/O payments likely to be a more effective solution to arrears? why?

A

The later year. This is because in the early years, most of the payment is made up of interest anyway, so the borrower wouldn’t see much of a difference by switching to I/O. The later in the term, the more of the payment gets repaid against the capital owed.

25
Q

What effect would extending the mortgage term have on C/R and I/O mortgages?

A

C/R - Lower payments over a longer time.
I/O - no effect on payments, but gives the repayment vehicle longer

26
Q

Which type of I/O repayment vehicle is not suited to extending the term of the mortgage? Why?

A

With-profits endowments. They have a fixed term and can’t be extended.

27
Q

Why must the lender be sure that the borrower is committed before extending the term?

A

This is not a measure that can be taken repeatedly.

28
Q

How many times can capitalising the arrears be done throughout the mortgage term? What are the possible consequences?

A

It’s a one-off solution. The borrower ends up paying more interest over the term of the mortgage due to the larger debt.

29
Q

Is surrendering a supporting investment and switching to C/R a solution for someone who is in serious arrears or not so serious arrears?

A

Serious arrears

30
Q

Can the lender surrender an endowment policy to cover any arrears, without the borrower’s consent?

A

Only if the policy is assigned to the lender

31
Q

Which three ways may surrendering an endowment policy and switching to C/R not be a suitable solution to arrears?

A
  1. If customer is in financial difficulty, they may have stopped paying for the endowment and the policy may have already been cancelled.
  2. It is not good to surrender an endowment early on in the policy - they are designed for long term capital growth
  3. Changing to C/R will lead to increased payments and loss of life assurance - this will need to be taken out separately.
32
Q

Insurers must tell their customers if it is possible to trade their endowment on the secondary market instead of surrendering the policy. Which is the only type of endowment that this is available for? What would be the benefit of doing this?

A

With profits endowments. They ususally trade at a higher price than surrender value.

33
Q

For endowment policies that cannot be traded on the secondary market, what is another option that lenders can give rather than surrendering a policy

A

The option to borrow against the policy instead.

34
Q

Why are ISAs considered a one of the better types of investment vehicle to surrender as a solution to arrears?

A

Flexible - you can withdraw a lump sum without penalty.

35
Q

If you surrender all or part of your ISA to cover your arrears, which two things can you do to ensure the mortgage will be repaid at the end of the term?

A
  1. Switch to C/R
  2. Increase investment levels to ensure the ISA is still a viable repayment vehicle
36
Q

What is pension freedom? What are the two possible negative consequences of using this as a solution for arrears?

A

Withdrawing cash lump sums from your pension at 55+.

  1. Only 25% is tax free, any more and you could have a large tax bill
  2. Less money for retirement - limited time to rebuild the pot as you’re already over 55
37
Q

What is trading down?

A

selling your property and buying a cheaper one. The lender will usually stop litigation processes if they can see you are genuinely attempting to do this.

38
Q

What is rent a room?

A

Lender allows the borrower to rent out a room, using the rent gained to repay any arrears.

39
Q

If an investment vehicle does not perform well enough to repay an I/O mortgage at the end of the term, what options can be taken to repay? (5) Which is the most common, usually done first?

A
  1. switch to retirement I/O mortgage (most common, done first)
  2. Use other capital if available, e.g savings
  3. Trade down
  4. Extend the term
  5. Equity release
40
Q

Who is equity release available to? What is the main benefit of this for those who’s investment vehicle underperforms?

A

55+ . No affordability checks needed because there are no repayments.

41
Q

Which is the only source of advice qualified to advise on regulated products? What is the one downside to using this source of advice for debt?

A

Independent financial advisers. The downside is, they are not free - you have to pay them

42
Q

What is the name of the goverment sponsored organisation that can provide free debt advice?

A

The money and pensions service

43
Q

What government department should you contact if you are in debt? Why?

A

DWP, to see if you are entitled to any benefits.

44
Q

How does a Mortgage Rescue Scheme work? What is the main downside to using one?

A

A company buys all or part of the home from the borrower and lets them live in it in exchange for rent. Risky, because the main motivation for the company is profit. They are known to set rent high to make maximum profit.

45
Q

If you have lots of unsecured debt that you can’t pay off, how could you fix the situation? (2)

A
  1. Remortgage to consolidate the debt
  2. Take out an IVA
46
Q

Why might someone prefer to take out an IVA rather than remortgage to consolidate debt? (2)

A
  1. You pay more in long run with mortgage
  2. House is at risk with mortgage
47
Q

What is an Equity Clause, in relation to an IVA?

A

For homeowners who take out an IVA, there will be an equity clause in the agreement stating that you are required to remortgage in the final year of the IVA to make a payment towards any unsettled debt, not cancelled out by the creditors.

48
Q

What is the minimum share of equity a debtor can have in the property for an IVA’s equity clause to apply? For sole borrowers, joint borrowers where one is subject to IVA and joint where both are subject to IVA.

A

Sole borrower - £5,000
Joint, one subject to IVA - their individual share of the equity must be £5,000 so the joint borrowers would have to have £10,000 total equity
Joint, both subject to IVA - Need £5,000 between them

49
Q

What is the maximum LTV for a remortgage which is being carried out as part of an IVA equity clause?

A

85%

50
Q

What limitations are there on the amount extra that can be raised by a remortgage as part of an IVA’s equity clause?

A

Extra funds raised cannot exceed total debt - you cannot profit from it. But the extra funds can also cover remortgaging fees.

51
Q

What proportion of IVA payments are the increased mortgage costs as part of a remortgage within an IVA’s equity clause not allowed to exceed? Why?

A

50% of IVA payments. Increases from the MTG are deducted from IVA payments in the final year.

52
Q

In relation to an IVA’s equity clause, what can the term of the remortgage not exceed? (2)

A
  1. state retirement age
  2. the existing mortgage term
53
Q

If the conditions relating to an IVA’s equity clause cannot be met, what other two options can the IVA supervisor take instead of a remortgage?

A
  1. Extend IVA term for extra 12 months so extra contributions can be made
  2. Accept payment from a third party, equivalent to what would have been gained by a remortgage.

Cemap 2&3 Self Testing (29 decks)

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