Chapter 6: Credit and Consumer Lending Flashcards

1
Q

what are the 4 C’s of credit

A

character, capacity, callateral, capital

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2
Q

the integrity of the bprrower is paramount which is why interviews and disscussions with them are so important - what Cof credit doe this refer to?

A

Character

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3
Q

Refers to the borrowers ability to repay the loan - what C or credit does this refer to?

A

Capacity

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4
Q

refers to the assets being provided to secure the loan. It is typically required as a way to reduce the lenders risk. - what C of credit does this refer to?

A

Collateral

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5
Q

theThe amount of ……, is often refered to as the deposit of equity provided by the customer can indicate their commitmment to the purpose of the loan

A

Capital

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6
Q

what is a customers net worth

A

the difference between their total assets and total liabilities

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7
Q

under CCCFA 2003 lenders can harge various fees , however these must be reasonable and the lender must have told the consumer about them at the outset of the contract. If a fee is unreasonable what can be done

A

an application can be made to the district court to have it reduced or cancelled

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8
Q

when the NZ courts are deciding whether a credit fee or default fee is reasonable what rules apply to establishment fees

A

Establishment fees should generally be no more than the lenders reasonable costs in setting up the credit contract, processing the application, documentation and advancing the credit

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9
Q

when the NZ courts are deciding whether a credit fee or default fee is reasonable what rules apply to break fees

A

teh CCCFA refers these a ‘prepayment fees’ and cannot be ore than a reasonable estimate of the lenders loss resulting from the early repayment

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10
Q

when the NZ courts are deciding whether a credit fee or default fee is reasonable what rules apply to default fees

A

these fees should generally be no more than is needed to “reasonably” compensate the lender for any costs or losses they incurred because of the default

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11
Q

when the NZ courts are deciding whether a credit fee or default fee is reasonable what rules apply to Thrid party fees

A

lenders can pass on any fees they have been charged by others in relation to the credit contract such as a credit check. iThe lender cannot mark up these fees.

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12
Q

from april 2021 lenders are required to keep records to substantiate how each credit and default fee is calculated and demonstrate that it was not unreasonable at the time it was calculated or reviewed, according to which piece of legislation

A

The credit contracts legislation Amendment Act 2019

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13
Q

The RBNZ (MPC) meets seven times a year to decide amongst other things, whether to change the Official Cash Rate (OCR). What is the OCR?

A

The rate banks pay the reserve bank when they need to borrow money

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14
Q

The CCCFA does not set interest rates but states that the interest rates must not be ………. and usually interest must not be charged .. ……

A
  • oppressive, in advance
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15
Q

what is the Loan to Value Ration (LVR)

A

it reflects the size of the borrowing compared to the value of the asset being purchased

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16
Q

How is LVR calculated

A

Loan amount /asset value *100

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17
Q

when calculating LVR the asset value should be the lower of ……..

A

of the cost of the assets or bank valuation

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18
Q

The LVR is a primary measure of what for bankers

A

risk

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19
Q

loans with a higher LVR, which typically means over ..%, are often viewed as having a higher risk for the lender, and to compensate fo rhtis what is normally done?

A
  • 80%
  • a higher interest rate may be applied to the borrowing. (the borrower may also be asked to provide more capital to reduce the LVR)
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20
Q

Banks are permitted to make no more that …..% of their residential owner occupied mortgage lending to high LVR (<20% deposit) borrowers

A

20%

21
Q

Banks are permitted to make no more that …..% of their investor lending to high LVR (<30% deposit) borrowers

A

5%

22
Q

with residential loans what is the max period they are taken over and how many years can they be interest only at max

A

30 yrs and 5 yrs IO

23
Q

when going for a mortgage what are the 3 principles for verifying a customers financial situation

A
  1. recency of documentation (ie pay slips no older than 30 days)
  2. consistency of information (from exisiting records or previous applications)
  3. benchmarking (using experience and knowledge of other customers to validate info provided)
24
Q

What are the 3 essential qualities in good security

A

simplicity of ownership
stability of value
saleability or realisation

25
Q

when the descirbing good security what does stabilitt of value mean

A

how much the lender can rely on the value of the security
Easiest types of security to value:
- cash lodgements or term deposits
- residential property
- listed shares

more difficult to value:
- specialised or commercial property
- furniture, fixtures, and fittings
- unlisted shares
- managed investment funds

26
Q

what is considered to unacceptable residential security

A

time shares or large rural properties

27
Q

what type of interest rate loans allow a customer to lock in an interest rate, and provide certainty of knowing what their repayments will be over the agreed period, typically 1 to 5 years. Safeguards against future rate rises but removes the potential to take advantage of and rate declines . May also have restrictions on making any additional repayments and have a break fee

A

fixed rate interest loan

28
Q

in a floating or variable rate loan why may the interest rate fluctuate

A

mainly in response to the changes in the OCR but also potentially due to other commercial considerations by the credit provider such as competitor rates, regulatory changes and funding costs.

29
Q

what are the advantages of a floating rate loan

A
  • flexibility
  • no restrictions on making additional repayments
  • excess repayments may be withdrawn on some loans (ie the CARL - repay and redraw facility)
  • savings account can also be attached to a floating rate loan and if it holds a positive balance would decrease interest rate charges
30
Q

what is a mixed rate or hybrid loan

A

where you can split your loan into fixed or floating portions

31
Q

What is a discounted interest rate

A

it means the interest paid by the borrower will be lower than the floating rate - whichever way it move - for the length of the discount period.

32
Q

How does a capped rate work

A

if the floating rate rises above the cap the interest rate that applies is the capped rate. If the floating rate drops below the cap it is the actual rate that applies.

33
Q

what 9 things can affect interest rate?

A
  1. loan term (fixed rates will typically be higher over a longer term due to the bank locking in a rate for a longer period ie 1yr fixed rate is less than 3 yr)
  2. amount of overall borrowings against the asset base(LVR)
  3. customer relationship
  4. competitor interest rates for comprable products
  5. admin costs, including default and recovery management
  6. govn taxes
  7. prior borrowing history and credit conduct of the customer
  8. the financial institutions funding or borrowing costs
  9. regulatory change
34
Q

lender mortgage insurance is one of the ways to help customers acheive home ownership soner, without having a 20% deposit. how does this work

A

the lender (ie the bank) is the insured party, not the borrower or guarantor. it protects the lender against a loss should the borrower not be able to make the repayments.

35
Q

what legislation protects NZ consumers when they are borrowing money

A

the Credit Contracts and Consumer Finance Act 2003 (CCCFA)

36
Q

how doe the CCCFA help to protect NZ consumers

A

it helps to ensure consumers make informed borrowing decisions, know what they are agreeing to and helps them to keep track of their debts.

37
Q

what types of transactions does the CCCA cover?

A

where money is being loaned for personal use including, consumer credit contracts, consumer leases and buy-back transactions.

38
Q

what are the 4 key lender responsibilites under the CCCFA

A
  • must clearly and accurately disclose key info about a contract
  • must disclose any fees and make sure they are reasonable
  • unable to enforce contracts in an oppressive way
  • unable to impose oppressive requirements on borrowers
39
Q

What are the borrowers rights under the CCCFA (3)

A
  • able to cancel their contract in the first few days after receiving it
  • have the right to repay what they owe on their contract early
  • can ask lenders to change their contract if they are suffering unexpected hardship
40
Q

what 5 types of contract are NOT considered to be consumer credit contracts and are therefore NOT covered bythe CCCFA regulations

A
  1. credit is provided for commercial or investment purposes
  2. the total amount to be paid is due within 2 months and the debt equals the sale price of the products or services
  3. a borrower goes into overdraft without the lenders prior agreement
  4. the borrower is acting as a trustee of a family trust
  5. a student loan under the student loan scheme
41
Q

If the lender uses any other reason other than those 5 previously listed to state that the CCCFA does not apply the lender may be in breach of what ACT

A

the Fair trading Act 1986

42
Q

why did the Credit Contracts Legislation Amendemnt Act 2019 come in

A

to amend the CCCFA 2003

43
Q

all lenders must comply with the lender responsibility principles when providing credit. The lender responsibility principles impose obligations when …. (3)

A
  • advertising,
    before entering a loan,
  • during all subsequent dealings with borrowers and garuantors
44
Q

what are the 2 lender responsibility principles

A

Principle 1: lenders must exercise the care, diligence and skill of a responsible lender in all its dealings with borrowers and guarantors
Principle 2: lenders must comply with the specific listed lender responsibilities set out in the CCCFA

45
Q

what is credit scoring

A

credit scoring can take the form of a credit scorecard - a set of rules that generate a numeric score for the various elements in a credit application. Each score is added up to produce an overall figure that represents the risk for the application and indicates whether or not the loan should be approved.

46
Q

The CCCFA applies to people or businesses who… (3)

A

Provide credit
Lease out goods
Operate or promote buy-back schemes

47
Q

A contract where a borrower is provided credit for personal use is called a…

A

Consumer credit contract

48
Q

Consumer leases are

A

A lease contract where someone is leasing goods for personal use and either has the option to purchase the leased goods or the term of the lease is more than one year

49
Q

Where a home owner transfers their home (or an interest in their home) to a transferee, who typically pays their debts or gives them money. The former owner (the occupier) has the right to continue living in the home and to buy it back at some time in the future is a called a …… transaction

A

Buy-back transaction