Securities Flashcards
Why do banks sell loans?
Risk reduction: Transfer credit risk to other entities.
Meet capital requirements: Improve balance sheet efficiency.
Enable new lending: Free up capital for further loans.
Generate financial and commercial benefits: Exploit market opportunities for profit.
What are loans as bank assets?
Loans, such as mortgages and credit card receivables, form a critical part of a bank’s assets and are often sold to achieve strategic financial objectives.
What is novation in the context of loan sales?
Novation extinguishes an existing contract and replaces it with a new one, transferring both rights and obligations, requiring consent from all parties.
What is assignment in the context of loan sales?
Assignment transfers the rights (benefits) under a loan contract to a new party but leaves obligations with the original lender.
What is the difference between novation and assignment regarding obligations?
Novation transfers both rights and obligations.
Assignment transfers only rights; obligations remain with the original lender.
Why is borrower consent important in novation?
Borrower consent ensures fairness by acknowledging their contractual relationship with the new lender and is typically required for novation.
Is borrower consent required for statutory assignment?
No, borrower consent is not required, but the borrower must be notified of the assignment.
What are the formal requirements for statutory assignment under the Law of Property Act 1925?
Absolute transfer of the debt.
Assignment must be in writing.
Express notice must be given to the borrower.
What is equitable assignment?
An informal transfer of rights that does not meet statutory requirements. Legal title remains with the assignor, and partial assignment is permitted.
What is a “chose in action”?
A proprietary interest in the loan that the assignee acquires through assignment, allowing enforcement of the right to payment.
How does novation apply to syndicated loans?
It enables the transfer of a lender’s rights and obligations to another party while maintaining collective security and borrower obligations.
What does Holt v Heatherfield Trust (1942) establish?
The necessity of giving express notice to the borrower for a statutory assignment to be enforceable.
What are the benefits of novation for lenders?
A clean break from the loan agreement.
Transfer of obligations to the buyer.
Enables seamless participation in syndicated and revolving loans.
What limitations exist for statutory assignments?
Statutory assignments must transfer the entire debt unconditionally, and partial assignments do not qualify.
What role does a security trustee play in loan sales?
The trustee ensures that security rights are preserved and enforceable during and after the loan transfer.
Why can’t contracts involving personal obligations be assigned?
Obligations requiring personal skill, trust, or unique performance cannot be assigned due to their personal nature.
What challenges arise in the transfer of security during novation?
Security must be novated or restructured to ensure continuity and enforceability for the new lender.
What is the difference between syndication and participation in loans?
Syndication involves collective lending by multiple lenders.
Participation transfers benefits of the loan without creating a direct relationship between the borrower and participant.
What does Tolhurst v Associated Portland Cement Manufacturers (1900) clarify?
The extinguishment of obligations under novation and the transfer of new obligations to the buyer.
How does Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd 1994 protect borrowers?
It confirms that borrowers can restrict assignment through explicit contractual provisions.
What is sub-participation in loan sales?
An agreement where a third party shares in the benefits of a loan without acquiring legal rights over it.
How does sub-participation differ from assignment?
Sub-participation does not transfer ownership or require borrower notification, while assignment does.
What are the primary benefits of securitisation?
Transfers credit risk to investors.
Frees up capital for new lending.
Enhances liquidity through tradable securities.
What risks are associated with securitisation?
Moral hazard: Lenders may lower credit standards.
Complexity in servicing.
Lack of borrower awareness regarding loan ownership.
What is the borrower’s position in a novation?
The borrower’s obligations and rights remain, but they are now owed to the new lender under a new contract.
What does Re Western, Public v Gray (1919) establish about equitable assignments?
Consideration is not required for equitable assignments, making them flexible for informal transfers.
What are the borrower’s rights under statutory assignment?
Borrowers retain the ability to raise defences and set-offs against the new lender that existed against the original lender.
How do Basel III regulations impact securitisation?
They require banks to retain some risk in securitised loans, promoting accountability and reducing systemic risks.
Why is borrower notification crucial in loan sales?
It prevents disputes and ensures borrowers direct repayments to the correct lender.
How does privity of contract affect loan assignments?
Borrowers maintain their contractual relationship with the original lender unless explicitly altered by novation.
What is a partial assignment?
A transfer of a portion of the loan’s benefits, permissible under equitable assignment but not statutory assignment.
How does securitisation impact financial markets?
By enhancing liquidity, distributing risk, and creating investment opportunities through tradeable loan-backed securities.
Why do borrowers remain unaware of sub-participation agreements?
Because sub-participation does not involve a legal transfer of rights, the borrower’s relationship remains with the original lender.
What is the role of the FCA in regulating securitisation under the FSMA?
The FCA ensures transparency and compliance with consumer protection laws in securitisation practices.
What does William v Atlantic Assurance (1933) say about statutory assignments?
It confirms that only absolute transfers qualify as statutory assignments; partial transfers are excluded.
What challenges exist in cross-border loan sales?
Differences in legal systems, security enforcement, and borrower protections complicate international transactions.
What are tranches in securitisation?
Layers of securities offering varying levels of risk and return, catering to different investor risk appetites.
Why is legal documentation critical in novation?
To ensure clarity in the transfer of obligations and the preservation of security arrangements.
How does securitisation impact borrowers?
Borrowers often face uncertainty about loan ownership and may encounter changes in servicing practices.
What regulatory safeguards exist for borrowers in securitisation?
Statutes like the Consumer Credit Act mandate borrower notification and transparency in loan transfers.
What are the lender’s responsibilities post-loan assignment?
To ensure the borrower is notified and that servicing and repayment terms remain consistent.
How does Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland Plc (2003) affect syndication?
It emphasizes fiduciary duties among lenders, particularly regarding disclosure during syndication sales.
What is the borrower’s key consideration during novation?
Ensuring that the new lender honours the original loan terms and security arrangements.
How do market conditions affect loan sales?
Fluctuating market prices can impact the profitability of loan sales and the valuation of securitised assets.
Why is borrower consent a limitation in novation?
Obtaining consent can delay the transaction and complicate the process, especially in syndicated loans.
What are operational risks in loan sales?
Miscommunication between borrowers and new lenders.
Disruption of loan servicing processes.
Loss of borrower trust.
How do regulatory frameworks address borrower confusion?
By requiring clear borrower notifications and consistent enforcement of loan terms post-transfer.
What are the risks of selling loans to unregulated entities?
Borrowers may lose legal protections, and servicing standards may deteriorate.
How does the Rule in Clayton’s Case (1816) apply to revolving loans?
It determines the order of repayment in revolving loans, affecting loan balances during assignments or novation.
What are the future challenges in loan sales?
Increasing complexity in global markets, evolving regulatory requirements, and the rise of FinTech lenders disrupting traditional practices.
What is the purpose of securities in lending transactions?
Securities provide creditors with rights over a debtor’s assets, ensuring repayment and protecting lenders in case of default.
What are the key forms of security used in lending transactions?
Fixed charges.
Floating charges.
Mortgages.
Pledges.
What does Section 859A of the Companies Act 2006 require?
Companies must register charges over their assets within 21 days of creation to ensure enforceability.
What is the consequence of failing to register a charge under Section 859H of the Companies Act 2006?
Unregistered charges are void against a liquidator or creditor in the event of insolvency.
What is a fixed charge?
A security interest that attaches to a specific asset, preventing its disposal without the creditor’s consent.
What is a floating charge?
A security interest over a class of assets that the borrower can use or sell in the ordinary course of business until crystallization.
What triggers the crystallization of a floating charge?
Events such as insolvency, default, or the appointment of a receiver.
What does Section 245 of the Insolvency Act 1986 regulate?
The enforceability of floating charges created shortly before insolvency, often invalidating them if deemed preferential.
What is the difference in asset control between fixed and floating charges?
Fixed charges restrict asset use, while floating charges allow asset use until crystallization.
What does Re Yorkshire Woolcombers Association Ltd (1903) establish about floating charges?
Floating charges hover over assets until a triggering event causes crystallization, making them enforceable.
What is the priority of fixed charges compared to floating charges in insolvency?
Fixed charges take priority over floating charges.
What did National Westminster Bank plc v Spectrum Plus Ltd (2005) clarify about book debts?
Charges over book debts are likely to be classified as floating unless the creditor has significant control over the proceeds.
What role does the Financial Collateral Arrangements (No. 2) Regulations 2003 play in securities?
It simplifies taking security over financial collateral and allows enforcement without judicial intervention.
What is the effect of crystallization on floating charges?
The charge converts to a fixed charge, attaching to the specific assets covered by the floating charge.
How are fixed charges enforced?
Through direct legal action or judicial processes to seize and sell the secured asset.
What does Section 238 of the Insolvency Act 1986 address?
Transactions at an undervalue, allowing certain security arrangements to be set aside if deemed fraudulent.
How does a floating charge provide flexibility for businesses?
It allows the debtor to use and sell assets in the ordinary course of business.
What is a mortgage in the context of securities?
A legal agreement where a borrower secures a loan by pledging real estate or other property as collateral.
How does Barclays Bank Plc v Zaroovabli (1997) relate to mortgages?
The case highlights the importance of transparent and fair terms in mortgage agreements.
What is a pledge in secured lending?
A form of security where the debtor delivers an asset to the creditor as collateral, retaining ownership but relinquishing possession.
What is the main limitation of floating charges in insolvency?
They often rank behind fixed charges and preferential creditors in priority.
How does Tolhurst v Associated Portland Cement Manufacturers (1900) relate to novation in securities?
The case confirms that novation extinguishes old obligations, replacing them with new ones.
What is the borrower’s obligation under a fixed charge?
The borrower cannot sell or dispose of the secured asset without the creditor’s permission.
What protections does the Companies Act 2006 provide for third-party creditors?
The registration of charges ensures transparency, allowing creditors to assess existing securities over a company’s assets.
Why are floating charges considered weaker securities?
They offer less control over assets and lower priority in insolvency proceedings compared to fixed charges.
What is the purpose of crystallization in floating charges?
To solidify the creditor’s claim over specific assets during insolvency or other triggering events.
How do financial collateral regulations benefit lenders?
By reducing bureaucracy and streamlining enforcement of security over financial assets.
What are circulating assets in the context of floating charges?
Assets like stock or book debts that the borrower can use in the ordinary course of business.
What does Re Yorkshire Woolcombers Association Ltd (1903) say about the nature of floating charges?
It distinguishes them as hovering securities that crystallize upon specific events.
Why is borrower notification important in security agreements?
It ensures transparency and compliance with legal requirements, avoiding disputes over enforceability.
What are the key differences between fixed and floating charges?
Fixed charges attach to specific assets and offer stronger creditor protection, while floating charges cover fluctuating assets with less immediate control.
What rights does a creditor have under a fixed charge?
Immediate control and enforcement rights over the secured asset if the borrower defaults.
How can borrowers challenge unfair mortgage terms?
By invoking consumer protection laws such as the Unfair Terms in Consumer Contracts Regulations.
What are preferential creditors in insolvency?
Creditors with statutory priority, such as employees and certain tax authorities, who are paid before floating charge holders.
How does the priority rule affect multiple securities over the same asset?
Earlier registered charges typically take precedence over later ones unless otherwise agreed.
Why are independent legal advice and transparency critical in secured lending?
To ensure the borrower fully understands the implications of security agreements and to avoid claims of unfairness.
What role does a receiver play in enforcing security interests?
The receiver manages or sells the secured assets to repay the debt owed to the creditor.
How does the Insolvency Act 1986 regulate security in insolvency proceedings?
By setting priority rules and scrutinizing recent transactions for fairness and legality.
What does a floating charge crystallizing into a fixed charge mean?
It converts from covering fluctuating assets to attaching specifically to the assets present at the time of the trigger event.
How do creditors mitigate risks in securities?
By ensuring registration, monitoring borrower solvency, and maintaining compliance with legal formalities.
