3 - Securities for advances Flashcards
1
Q
What three things must be considered when taking security?
A
- Simplicity of title
- Stability of value
- Realisability
2
Q
Why do banks only take a percentage of the security value?
A
- The security value may decrease
- There could be expenses involved with realising the security.
- The interest might have been added to the loan therefore final debt will be greater than the outstanding borrowing.
3
Q
What types of security can a personal customer offer?
A
- cash deposit
- guarantee
- residential property
- letter of undertaking/irrevocable mandate
- life assurance and/or insurance policy
- gilts (government securities)
- stocks and shares.
4
Q
Cash deposit - What security value percentage will the bank take?
A
100% - This is because the security will not decrease.
5
Q
Guarantee - What security value percentage will the bank take?
A
100% - Depending on whether the guarantee is supported or unsupported.
6
Q
What is a supported guarantee?
A
Where the guarantor provides additional security which is looked at only in the event that the guarantor is not able to fulfil their guarantee.
7
Q
Residential property - What security value percentage will the bank take?
A
Around 80% - This allows for drops in the market.
8
Q
Letter of undertaking/ Irrevocable mandate- What security value percentage will the bank take?
A
Closed bridging - 100%
Open bridging - 80%
9
Q
Life assurance policy - What security value percentage will the bank take?
A
Around 75% - Covers any shortfall due to market movements.
10
Q
Gilts - What security value percentage will the bank take?
A
Around 75% - Less risky than shares as they are issued by the government.
11
Q
What different types of share can be offered as security?
A
- FTSE shares
- Alternative Investment Market (AIM) shares
- unquoted shares.
12
Q
FTSE Shares - What security value percentage will the bank take?
A
Around 50%
13
Q
AIM Shares - What security value percentage will the bank take?
A
Around 25%
14
Q
Unquoted shares- What security value percentage will the bank take?
A
No value due to very limited marketability.
15
Q
Why would a bank still take unquoted shares as security, even if such shares are valued at zero?
A
A bank may still want to take this type of share as security because they can be
regarded as a mark of the customer’s commitment to the lending proposal, or the bank
may feel that, although they are valuing these shares at zero for security purposes, they
still have a monetary value that could be utilised in the event of default by the customer.
16
Q
What is Corporeal real Property (England and wales/ Corporeal heritable property (Scotland)?
A
- Land, buildings fixtures, minerals, trees.
17
Q
What is Incorporeal real Property (England and wales/ Incorporeal heritable property (Scotland)?
A
Leases and rent
18
Q
What is Corporeal Personalty (England and wales/ Corporeal moveable property (Scotland)?
A
Vehicles, animals, furniture
19
Q
What is Incorporeal Personalty (England and wales/ Incorporeal moveable property (Scotland)?
A
Copyrights, claims of debt, shares, goodwill, trademarks.
20
Q
How do you determine whether anything is a fixture (Corporeal real property/corporeal heritable property)?
A
-Degree of attachment - can the item be removed without damage to the property.
-Purpose of attachment - was the item attached with view of improvement to the property.
-Relationship between contending parties - Contract of sale will indicate whether items can be removed or not.
21
Q
What is an easement (EW) or servitude(Scot)?
A
is an accessory right usually to allow, for example, electricity cables or drainage pipes to be passed through land under different
ownership.
22
Q
What two legal interests recognised in corporeal personalty/corporeal moveable
property?
A
Ownership and possession
23
Q
For corporeal personalty/corporeal moveable property to be transferred voluntarily, the owner must?
A
- consent to and intend to transfer the property, and
- actually deliver the property to the other person in pursuance of that intention.
24
Q
What are the three key aspects to define a mortgage
A
-subject to general law of contract
-Doesn’t need to be in writing although they often are
-A mortgage is an undertaking by the borrower
25
When a legal charge is executed - what two types of conveyances are there?
-Transfer of property from the vendor to the purchaser
-Creation of rights in favour of the lender.
26
What are standard conditions of a mortgage?
Borrower must:
-Keep property in good repaid
-Allow lender access for inspection
-Not make structural alterations without lender consent
-Insure the property
-Not let the property without lenders permission
27
The legal charge will provide that the whole debt will become immediately payable if?
* any of the borrower’s covenants are breached
* arrears amounting to a specified number of monthly instalments are due but unpaid
* the borrower becomes bankrupt
* the property is compulsorily purchased.
28
Once the debt becomes due in any of the bad circumstances, the lender can
* take possession of the property and manage it
* agree to the letting of the property
* make repairs and improvements to protect the value of the security
* appoint a receiver to manage the property and use the moneys collected to reduce the mortgage debt
* sell the property
29
For registered land, HM Land Registry holds details on what three registers
* property register – details the land, title number and a plan
* proprietorship (ownership) register – includes the name and address of the
property and owner, the nature of title and date of registration
* charges register – includes, for example, any charges over the property and
spouse’s interests under the Family Law Act 1996.
30
How do the bank know they have enforceable security?
The solicitor will provide them with a form known as a certificate of title.
31
Scotland - Standard security may be drawn either as?
- A fixed sum
-All monies
32
Scotland - in regards to the facility letter when is Form A appropriate?
- Included in the deed
- The advance is of a fixed amount
-The advance is limited to a maximum amount
- The advance is of uncertain amount but the personal obligation can be expressed.
33
Scotland - in regards to the facility letter when is Form B appropriate?
- Seperate instrument
- Not recorded on register of sasines
-Likely to be considerable changed in the amounts of the advance
34
Scotland - personal obligation - how is it noted?
Form A - In the standard security
Form B - A separate Deed.
35
Scotland - Which two categories
of provisions are non-variable in regards to the standard conditions.
- Power of sale and foreclosure by the creditor
- The exercise of these powers.
36
Scotland - What are parts of the standard security document?
- Personal Obligation
-Description of the property
-Standard conditions
-Warrandice
37
Scotland - What is Warrandice?
Guarantee
The grantor of the standard security indemnifies the bank against any defect in his title to the property.
38
Scotland - Where is security recorded?
In the register of Sasines or Land Register
39
Scotland - What is the period of purification for standard security?
6 months from date of recording.
Before security is regarded as beyond challenge it must go through this period.
40
Scotland - What does nova debita mean?
New debit
41
Scotland - what does missives concluded mean?
Contracts have been exchanged.
42
If a property is under insured how is the pay out calculated?
Property Value: £100k
Insured: £80k
Damage: £50k
Sum insured / Value of building X Loss
£80k / £100k x £50k = £40k
43
What does intimation of security mean?
Notice that security has been taken - i.e second security lending giving the first legal charge lender notice.
44
What is claytons case?
In the case of a current account, payments in, in the absence of any express indication to the contrary by the customer, are presumed to have been appropriated to the debit items in order of date.
In other words - first in first out.
45
What are legal remedies?
Actions set out in law that the lender can take against the borrower who is in default.
46
England and wales - What 5 legal remedies are there?
* Sue for possession
*Exercise power of sale
*Sue on the borrowers personal covenant
*Appoint a receiver
*Foreclosure (Not used anymore)
47
What two legal remedies are commonly used?
*Sue for power of possession
*Exercise power of sale
48
Who can grant a possession order?
County court.
49
When a possession order has been granted what 3 courses of actions can it take?
- Grant outright possession - Lender takes possession in 28 days.
- Grant suspended possession order - Borrower is required to make payments to the court - if the fail then the lender gets possession.
- Adjourn the case until a future date.
50
When a customer is in default - why would a lender appoint a receiver?
When there is an income from the property. I.e tenants are paying rent.
Money is credited to the borrowers account to reduce their debit.
51
Scotland - When the customer is in default what can they be served with?
- Calling up notice - Requires whole debt to be paid.
-Notice of default which requires only the arrears to be brought up to date.
If these fail then the lender can proceed to possession.
52
What is classed as a regulated mortgage?
* the mortgage is secured by a first charge
* the property is in the UK
* at least 40% of the land is used (or is intended to be used) for residential purposes by the borrower or member of their immediate family.
53
PRA (Prudential regulation authority) overseas what?
the stability of the financial services firms and is linked to the bank of England
54
FCA (Financial conduct authority) overseas what?
behavioural aspects of the industry and is and effective city watchdog.
55
MCOB sourcebook governs all aspects of mortgages including?
-Lending mortgages
-Advising on mortgages
-administering mortgages
-Financial promotion of mortgages
56
How many MCOB rules are there?
13
57
What is an advised mortgage?
Customer needs are taken into consideration to identify the best product for them.
58
What is a non-advised mortgage?
Scripted questions must be used by the product seller to help the customer choose the right mortgage. Only permitted under limited circumstances.
59
What is the difference between 'direct security' and 'third party security'?
Direct security has to be deducted from the value of security.
Third party security does not require to be deducted and is therefore better benefit to the lender.
60
What is a third parties limit of liability when giving security.
The value of the security and not the specified sum of money.
61
A guarantee is defined as
answer for the debt or default of another.
62
For a guarantee to be enforceable what conditions must be met?
1. The guarantee must be in writing.
2. There are 3 parties to the guarantee.
3. Signed a written document.
4.Signing has been witnessed.
63
What 3 parties are there to a guarantee?
1. Guarantor - Person who gives written promise.
2. The debtor /borrower- The person whose liabilities are being secured.
3. The creditor/Lender - The third party who the guarantee is given to.
64
What is a 'Specific guarantee'?
Cover one debt only and typically for a personal loan.
65
What is a 'continuing and limited in amount guarantee'?
Most common type, drawn up to cover all monies owed by the debtor.
66
What are 'Joint guarantors'?
Each guarantor is personally liable for a pro rata share of the guarantee. If a party dies then the others share owed will increase.
67
What are 'Several guarantors'?
Each guarantor is personally liable for the full amount of the guarantee.
68
What are 'Joint and Several guarantors'?
The bank can sue the guarantors jointly or separately and successively.
69
Advantages of guarantees
- Easy to take
- Clauses in the guarantee give the bank maximum protection.
- The guarantors maximum liability is fixed to the amount quoted.
- Liabilities are secured (apart from specific).
- Stable value
70
What are disadvantages of guaratees?
- If not supported by security then not of stable value.
- Bad feeling may result if security called on.
- If they refuse to pay legal costs can be expensive.
71
How can a bank protect itself from undue influence cases?
To insist that the guarantor has taken independent legal advise.
72
What is the core minimum that should be explained when seeking legal advice?
- The nature of the documents
- The risks
- The amount
- The purpose
- The fact the terms can change.
73
Who is considered a young person and not allowed to enter a contract with a bank?
England - 18 and under
Scotland - 16 and under. Under 21 must go through a court.
74
What is Determination of guaratee?
When the guarantee is determined, it is 'crystallised' meaning the guarantor is only responsible for the balance on the debtors account at the date of determination.
75
When stocks and shares are used as security what happens?
They are normally transferred to the bank's nominee company and a letter of pledge is taken.
76
What are the advantages of stocks and shares for security?
- Quoted shares are easy to value
- Bank can have full legal title over the shares.
- Power of sale arises immediately after customer default.
-Stable in value
77
What is the most common type of security offered today?
Registered securities.
78
How do you transfer shares of a company?
Complete a stock transfer form (CREST form). Together with the share certificate - this is then sent to the company registrar via stockbrokers.
79
In the event of a company being wound up, what ranks above ordinary shares?
Preference shares.
80
Whats the difference between preference shares and ordinary shares?
Preference shares are entitled to recieve their dividend at a fixed rate out of company profits before ordinary shares receive their dividend.
81
What are bearer bonds?
Not registered under the name of any particular sharehoder, possession of the bond is proof of ownership.
82
When the bank holds bearer bonds as security what are they responsible for?
Collection of interest.
Carefully scrutinised for any announcements affecting the bonds.
83
Who commonly use hand to hand ceritificates?
American, Canadian and some European companies.
84
What is considered good as a 'marking name' on hand to hand certificates?
Stockbrokers, finance houses, banks.
85
What is considered bad as a 'marking name' on hand to hand certificates?
Private individual
86
What is a unit trust?
Pools resources of many people placing funds in a wide range of investments.
The investor will be given a certificate which shows that they have purchased a stated number of units in the trust.
86
What is a unit trust?
Pools resources of many people placing funds in a wide range of investments.
The investor will be given a certificate which shows that they have purchased a stated number of units in the trust.
87
What is an investment trust?
It is not actually a trust but more of a limited company with a fixed share capital and is quoted on the London stock exchange.
They do not make or sell products but invest in quoted shares of other companies.
88
How do you obtain valuation on unquoted shares?
Write to company secretary ask for latest figure based on sale or valuation.
Obtain a copy of the company's latest balance sheet and accounts.
89
What is Alternative investment market (AIM)?
Allows smaller newly established companies to raise capital through the sale of shares.
90
What are the stages of taking security for registered shares?
* certificate
* inspection
* valuation
* margin
* pledge
* transfer
* process
91
When registered shares are being transferred what must happen on the transfer form?
Shares only need to show nominal consideration of 25p.
HMRC must stamp the form within 30 days of signing.
92
What is the process for realisation on default of shares?
Bank will first ask customer to pay.
If they are unable to do so the bank will then sell the shares using an authorised broker. The sale proceeds are then applied to the customers account.
93
What happens in the event of a mortgagor dying?
The bank will make a claim to the solicitors acting for the estate.
Dividends will continue to accrue on the deceased account.
94
What are the advantages of take life policy as secuirty?
-Simple
-Easy to establish value
-Easy to realise
-Cost to the customer is low
-Policy monies are payable immediately
95
What are the disadvantages of taking a life policy?
- Customer may not make the regular payments.
-Contracts can be voidable
- May be a breach to the terms of the policy
- Bad publicity
96
What is an endowment policy?
savings policies that provide both a life cover payable on the
death of the saver and a capital sum at maturity. Often used as repayment vehicles for interest only mortgages.
Endowment policies provide a minimum guaranteed sum assured payable on death.
Minimum term of 10yrs.
97
What is a 'whole of life' policy?
Policy can be taken with or without profits. Only the family will benefit.
Typically taken out to help with funeral costs.
98
What is a term assurance policy?
Cheapest and most common.
If a person dies within a set period of time the policy will pay out to family. If the insured lives longer than the set time then there is no pay out.
99
What must the bank check when life policies are received as security?
- Assignability.
- uberrimae fidei
100
What are the two values of a life policy?
Sum assured and the surrender value.
101
What is the difference between sum assured and surrender value?
Sum assured is the sum the assurance company will pay to beneficiary on death or survival past a certain date.
Surrender value is only paid out after 2 years of the policy and is the amount the assurance company is willing to pay to cancel the agreement.
102
What is the process to complete assignment on a life policy?
-Obtain original policy from customer.
- Examine the policy
-Establish the surrender value
-Assignment deed should be executed by all parties.
-Submit assignment duplicate to assurance company.
103
When taking a cash deposit for security purposes, the percentage value a bank would place on
this is:
100%
104
A lease is an example of:
incorporeal real (E & W) or incorporeal heritable property (Scotland)
105
If a property is valued at £250,000, but only insured for £150,000 and the property suffers a loss
of £100,000 due to a serious fire, the measure of indemnity will be:
£60,000
106
The legal case which established the “first in/first out” principle for lodgements and withdrawals
to a bank account is commonly referred to as:
Clayton’s case
107
To be classified as a regulated mortgage contract, at least how much of the property must be
occupied by the borrower or their immediate family?
40%
108
A guarantee is an example of:
third party security
109
Upon determination a guarantee is said to:
crystallise
110
When giving a bank shares as security the customer will sign:
a letter of pledge
111
The amount of money a life company will pay on the death of the life assured is called:
the sum assured
112
Security over a life policy is released by way of:
a retrocession
