Selling Loans Flashcards
What is the primary reason banks sell loans?
To reduce credit risk, meet capital requirements, free up balance sheets for additional lending, and generate revenue by leveraging market conditions.
How does the Financial Services and Markets Act 2000 (FSMA) regulate loan sales?
FSMA establishes the regulatory framework for financial services, including loan sales. Part 6 governs regulated activities like securitisation, and Schedule 2 outlines the application of these rules to loan transfers.
What protections does the Consumer Credit Act 1974 provide for borrowers in loan sales?
Section 82 requires notification of loan assignment. Sections 77–79 allow borrowers to request copies of credit agreements after the sale.
What is the Loan Market Association (LMA)?
An organisation providing standardised documentation for syndicated loan sales, ensuring consistency and reducing legal disputes.
Define assignment in the context of loan sales.
Assignment transfers the right to receive payments under a loan agreement but does not transfer the original lender’s obligations.
What is novation in loan sales?
A legal mechanism that transfers both rights and obligations of a loan to a new party, requiring the borrower’s consent to form a new contract.
What is securitisation?
The process of bundling loans into securities, which are sold to investors, transferring the repayment risk to them.
What was the significance of the 2007–2009 financial crisis for securitisation?
It exposed how securitisation can lead to moral hazard, where lenders neglect creditworthiness checks, contributing to the subprime mortgage crisis.
What case confirmed that loan sales do not alter the borrower’s obligations unless explicitly stated?
National Bank of Greece v Pinios Shipping Co (1990).
How does Royal Bank of Scotland v Etridge (No 2) [2001] relate to borrower protection?
It reinforced the lender’s duty to ensure borrowers understand loan implications, particularly when loans are secured against property.
What are the borrower’s rights under a loan assignment?
Borrowers retain all original defences and set-offs against the new lender and must be notified of the assignment under statutory requirements.
What is the role of a special purpose vehicle (SPV) in securitisation?
The SPV holds the loans and issues securities to investors, insulating the lender from the associated risks.
What does Section 136 of the Law of Property Act 1925 require for statutory assignment?
The assignment must be absolute. It must be in writing. Notice must be given to the borrower.
Why is borrower notification important in loan sales?
It ensures transparency and allows borrowers to direct repayments to the correct lender, avoiding disputes.
What did Holt v Heatherfield Trust (1942) establish about statutory assignments?
The necessity of express notice to borrowers for enforceability.
What is the difference between legal and equitable assignments?
Legal (statutory): Full legal title is transferred; borrower notification is required. Equitable: Transfers rights but not legal title; no borrower notice is necessary.
What critical issues arise in syndicated loan sales?
Ensuring borrower obligations remain clear. Preserving security through collective agreements. Addressing fiduciary duties among syndicate members.
What are the challenges in cross-border loan sales?
Varying legal systems, regulatory compliance issues, and potential borrower confusion due to different servicing standards.
What fiduciary duties were highlighted in Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland Plc (2003)?
Lenders must disclose critical financial information to prevent misrepresentation during loan syndication sales.
How does the FSMA protect consumers in securitisation?
By regulating entities through the FCA and ensuring transparency in the securitisation process.
What is the moral hazard associated with securitisation?
Lenders may lower credit standards, knowing they will transfer the risk to investors.
What are the borrower’s risks in securitisation?
Reduced accountability of the original lender. Increased complexity in identifying the entity servicing the loan.
How does Cranston critique loan sales?
Cranston highlights a lack of transparency and insufficient borrower protections, particularly in securitisation and syndicated lending.
What does Amao argue about cross-border loan sales?
Amao critiques the regulatory gaps that expose borrowers to less stringent protections when loans are sold to foreign entities.
Why are standardised documents like those from the LMA important?
They reduce legal disputes, ensure clarity in loan sales, and streamline transactions, especially in syndicated loans.
What is the borrower’s position under novation?
The borrower forms a new contract with the new lender, who assumes all rights and obligations of the original lender.
What does Section 82 of the Consumer Credit Act 1974 require in loan assignments?
The creditor must notify borrowers when loans are assigned to a new party.
What are the practical benefits of novation for lenders?
Complete transfer of rights and obligations. Cleaner exit from the lending relationship. Reduced ongoing liabilities.
How does securitisation benefit banks?
Transfers risk to investors. Generates liquidity for new loans. Improves capital adequacy under Basel III.
What are the borrower’s key considerations during loan sales?
Understanding changes in loan servicing or fees. Identifying the new lender’s regulatory obligations. Ensuring contractual terms remain consistent.
What is novation’s role in syndicated loans?
Novation allows lenders to transfer their share in a syndicated loan, ensuring continuity in borrower obligations while transferring rights and duties to the new lender.
What does Tolhurst v Associated Portland Cement Manufacturers (1900) establish about equitable assignments?
Only rights, not obligations, can be transferred through equitable assignment, which limits its applicability in performance-based contracts.
Why is borrower consent not required for statutory assignment?
Under Section 136 of the Law of Property Act 1925, statutory assignment only transfers rights, not obligations, preserving the borrower’s original contractual relationship.
What key protections do borrowers retain under statutory assignment?
Borrowers can assert the same defences and set-offs against the new lender that they could against the original lender.
What procedural requirements must be fulfilled in statutory assignment?
Absolute transfer of the loan. Written documentation signed by the assignor. Notice provided to the borrower.
How does novation impact security arrangements?
The security must also be novated to the new lender, often requiring a security trustee to manage and preserve collateral rights.
What are the risks for borrowers in cross-border loan assignments?
Different legal protections may apply. New lenders may have varying servicing standards. Borrowers might face additional fees or changes in loan terms.
What role does the LMA play in simplifying loan sales?
It provides standardised documentation for syndicated loan sales, reducing legal disputes and ensuring consistency.
What is a partial assignment, and when is it used?
A partial assignment transfers only a portion of the loan. It is often used in syndicated loans where lenders sell their share of participation.
How did Holt v Heatherfield Trust (1942) influence borrower notification?
The case established that express notice to borrowers is crucial for enforcing statutory assignments against them.
What are the benefits of securitisation for investors?
Access to diversified loan pools. Potentially high returns. Risk mitigation through tranching of securities.
What regulatory measures address moral hazard in securitisation?
Basel III and similar frameworks require banks to retain some risk in securitised loans to ensure they maintain lending standards.
How does assignment differ from sub-participation in loan sales?
Assignment transfers ownership of the loan rights, while sub-participation involves an agreement where a third party shares in the loan’s benefits without legal transfer.
What are the borrower’s risks under sub-participation?
Borrowers remain unaware of the sub-participation arrangement, which does not affect their original obligations but may complicate servicing practices.
What is a security trustee’s role in syndicated loans?
The trustee holds and manages collateral on behalf of all participating lenders, ensuring enforceability during transfers or defaults.
What is the impact of securitisation on lender liability?
Once loans are sold, the original lender may no longer be directly accountable to borrowers, creating potential gaps in borrower recourse.
Why is Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland Plc (2003) significant in syndicated loans?
It established that fiduciary duties exist between lenders in syndicates, especially regarding disclosure of material information.
What consumer protections are built into the Consumer Credit Act 1974 for loan sales?
Borrower notification of assignments. Rights to request loan documentation post-transfer. Transparency requirements for regulated agreements.
What challenges arise with securitisation in consumer lending?
Borrowers often remain unaware of who owns their loan, complicating dispute resolution and servicing inquiries.
How do regulatory requirements address borrower confusion in loan assignments?
Statutes like the Consumer Credit Act mandate clear borrower notifications and accessible loan documentation.
What are tranches in securitisation?
Tranches are divisions of securitised loans, each with different risk levels and returns, allowing investors to choose based on risk appetite.
How does novation provide a “clean break” for lenders?
Novation transfers all rights and obligations to the new lender, freeing the original lender from further liabilities.
What was the key issue in National Bank of Greece v Pinios Shipping Co (1990)?
Whether loan sales altered the borrower’s obligations. The court held that borrower obligations remain unchanged unless explicitly stated.
Why is securitisation criticised for moral hazard?
Lenders may issue loans with lower credit standards, knowing the risk will be passed to investors.
What international challenges exist in securitisation?
Divergent regulatory standards across jurisdictions. Complexity in transferring collateral across borders. Difficulty in ensuring consistent servicing practices.
How do Basel III regulations affect securitisation?
Basel III requires banks to retain a portion of securitised loans to ensure accountability and maintain credit standards.
What are the risks of selling loans to unregulated entities?
Borrowers may lose protections afforded under domestic regulations, and servicing practices may vary widely.
How does the FSMA govern securitisation?
It ensures that entities engaged in securitisation are regulated by the FCA, requiring transparency and compliance with consumer protections.
What are the benefits of sub-participation for lenders?
Allows lenders to share loan benefits without transferring ownership, maintaining confidentiality and avoiding borrower notification.
What consumer rights exist under Section 77–79 of the Consumer Credit Act 1974?
Borrowers can request copies of their credit agreements after the loan has been transferred.
How do tranches mitigate risk for securitised loan investors?
Risk is divided into layers, with senior tranches offering lower returns but greater security and junior tranches bearing higher risks for higher rewards.
What is the significance of LMA documentation in syndicated loan transfers?
It ensures consistency, clarity, and reduced disputes, particularly in complex multi-party agreements.
How does borrower consent differ between novation and assignment?
Novation requires borrower consent for the creation of a new contract, whereas statutory assignment does not.
What are the borrower’s responsibilities post-loan sale?
Continue repayments as per the original agreement, but to the new lender, once notified.
How does sub-participation affect the borrower-lender relationship?
The borrower’s relationship with the original lender remains unchanged, as the new participant does not acquire legal rights over the loan.
Why are notification requirements crucial in loan assignments?
They prevent disputes and ensure borrowers direct repayments to the correct lender.
What role do securitisation frameworks play in international finance?
Facilitate global capital flows by transforming illiquid loans into tradeable securities, while introducing complex cross-border risks.
What are the benefits of securitisation for the financial system?
Enhances liquidity, distributes risk, and increases lending capacity.
What obligations do new lenders have post-loan assignment?
Honor the original loan terms and provide consistent servicing, ensuring borrower rights are maintained.
How does borrower confusion impact loan sales?
Leads to missed payments, disputes, and increased servicing costs, highlighting the importance of clear communication and compliance with notification laws.
