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.