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Banking Law > Selling Loans > Flashcards

Selling Loans Flashcards

1
Q

What is the primary reason banks sell loans?

A

To reduce credit risk, meet capital requirements, free up balance sheets for additional lending, and generate revenue by leveraging market conditions.

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2
Q

How does the Financial Services and Markets Act 2000 (FSMA) regulate loan sales?

A

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.

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3
Q

What protections does the Consumer Credit Act 1974 provide for borrowers in loan sales?

A

Section 82 requires notification of loan assignment. Sections 77–79 allow borrowers to request copies of credit agreements after the sale.

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4
Q

What is the Loan Market Association (LMA)?

A

An organisation providing standardised documentation for syndicated loan sales, ensuring consistency and reducing legal disputes.

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5
Q

Define assignment in the context of loan sales.

A

Assignment transfers the right to receive payments under a loan agreement but does not transfer the original lender’s obligations.

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6
Q

What is novation in loan sales?

A

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.

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7
Q

What is securitisation?

A

The process of bundling loans into securities, which are sold to investors, transferring the repayment risk to them.

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8
Q

What was the significance of the 2007–2009 financial crisis for securitisation?

A

It exposed how securitisation can lead to moral hazard, where lenders neglect creditworthiness checks, contributing to the subprime mortgage crisis.

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9
Q

What case confirmed that loan sales do not alter the borrower’s obligations unless explicitly stated?

A

National Bank of Greece v Pinios Shipping Co (1990).

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10
Q

How does Royal Bank of Scotland v Etridge (No 2) [2001] relate to borrower protection?

A

It reinforced the lender’s duty to ensure borrowers understand loan implications, particularly when loans are secured against property.

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11
Q

What are the borrower’s rights under a loan assignment?

A

Borrowers retain all original defences and set-offs against the new lender and must be notified of the assignment under statutory requirements.

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12
Q

What is the role of a special purpose vehicle (SPV) in securitisation?

A

The SPV holds the loans and issues securities to investors, insulating the lender from the associated risks.

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13
Q

What does Section 136 of the Law of Property Act 1925 require for statutory assignment?

A

The assignment must be absolute. It must be in writing. Notice must be given to the borrower.

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14
Q

Why is borrower notification important in loan sales?

A

It ensures transparency and allows borrowers to direct repayments to the correct lender, avoiding disputes.

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15
Q

What did Holt v Heatherfield Trust (1942) establish about statutory assignments?

A

The necessity of express notice to borrowers for enforceability.

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16
Q

What is the difference between legal and equitable assignments?

A

Legal (statutory): Full legal title is transferred; borrower notification is required. Equitable: Transfers rights but not legal title; no borrower notice is necessary.

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17
Q

What critical issues arise in syndicated loan sales?

A

Ensuring borrower obligations remain clear. Preserving security through collective agreements. Addressing fiduciary duties among syndicate members.

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18
Q

What are the challenges in cross-border loan sales?

A

Varying legal systems, regulatory compliance issues, and potential borrower confusion due to different servicing standards.

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19
Q

What fiduciary duties were highlighted in Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland Plc (2003)?

A

Lenders must disclose critical financial information to prevent misrepresentation during loan syndication sales.

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20
Q

How does the FSMA protect consumers in securitisation?

A

By regulating entities through the FCA and ensuring transparency in the securitisation process.

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21
Q

What is the moral hazard associated with securitisation?

A

Lenders may lower credit standards, knowing they will transfer the risk to investors.

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22
Q

What are the borrower’s risks in securitisation?

A

Reduced accountability of the original lender. Increased complexity in identifying the entity servicing the loan.

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23
Q

How does Cranston critique loan sales?

A

Cranston highlights a lack of transparency and insufficient borrower protections, particularly in securitisation and syndicated lending.

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24
Q

What does Amao argue about cross-border loan sales?

A

Amao critiques the regulatory gaps that expose borrowers to less stringent protections when loans are sold to foreign entities.

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25
Q

Why are standardised documents like those from the LMA important?

A

They reduce legal disputes, ensure clarity in loan sales, and streamline transactions, especially in syndicated loans.

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26
Q

What is the borrower’s position under novation?

A

The borrower forms a new contract with the new lender, who assumes all rights and obligations of the original lender.

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27
Q

What does Section 82 of the Consumer Credit Act 1974 require in loan assignments?

A

The creditor must notify borrowers when loans are assigned to a new party.

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28
Q

What are the practical benefits of novation for lenders?

A

Complete transfer of rights and obligations. Cleaner exit from the lending relationship. Reduced ongoing liabilities.

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29
Q

How does securitisation benefit banks?

A

Transfers risk to investors. Generates liquidity for new loans. Improves capital adequacy under Basel III.

30
Q

What are the borrower’s key considerations during loan sales?

A

Understanding changes in loan servicing or fees. Identifying the new lender’s regulatory obligations. Ensuring contractual terms remain consistent.

31
Q

What is novation’s role in syndicated loans?

A

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.

32
Q

What does Tolhurst v Associated Portland Cement Manufacturers (1900) establish about equitable assignments?

A

Only rights, not obligations, can be transferred through equitable assignment, which limits its applicability in performance-based contracts.

33
Q

Why is borrower consent not required for statutory assignment?

A

Under Section 136 of the Law of Property Act 1925, statutory assignment only transfers rights, not obligations, preserving the borrower’s original contractual relationship.

34
Q

What key protections do borrowers retain under statutory assignment?

A

Borrowers can assert the same defences and set-offs against the new lender that they could against the original lender.

35
Q

What procedural requirements must be fulfilled in statutory assignment?

A

Absolute transfer of the loan. Written documentation signed by the assignor. Notice provided to the borrower.

36
Q

How does novation impact security arrangements?

A

The security must also be novated to the new lender, often requiring a security trustee to manage and preserve collateral rights.

37
Q

What are the risks for borrowers in cross-border loan assignments?

A

Different legal protections may apply. New lenders may have varying servicing standards. Borrowers might face additional fees or changes in loan terms.

38
Q

What role does the LMA play in simplifying loan sales?

A

It provides standardised documentation for syndicated loan sales, reducing legal disputes and ensuring consistency.

39
Q

What is a partial assignment, and when is it used?

A

A partial assignment transfers only a portion of the loan. It is often used in syndicated loans where lenders sell their share of participation.

40
Q

How did Holt v Heatherfield Trust (1942) influence borrower notification?

A

The case established that express notice to borrowers is crucial for enforcing statutory assignments against them.

41
Q

What are the benefits of securitisation for investors?

A

Access to diversified loan pools. Potentially high returns. Risk mitigation through tranching of securities.

42
Q

What regulatory measures address moral hazard in securitisation?

A

Basel III and similar frameworks require banks to retain some risk in securitised loans to ensure they maintain lending standards.

43
Q

How does assignment differ from sub-participation in loan sales?

A

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.

44
Q

What are the borrower’s risks under sub-participation?

A

Borrowers remain unaware of the sub-participation arrangement, which does not affect their original obligations but may complicate servicing practices.

45
Q

What is a security trustee’s role in syndicated loans?

A

The trustee holds and manages collateral on behalf of all participating lenders, ensuring enforceability during transfers or defaults.

46
Q

What is the impact of securitisation on lender liability?

A

Once loans are sold, the original lender may no longer be directly accountable to borrowers, creating potential gaps in borrower recourse.

47
Q

Why is Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland Plc (2003) significant in syndicated loans?

A

It established that fiduciary duties exist between lenders in syndicates, especially regarding disclosure of material information.

48
Q

What consumer protections are built into the Consumer Credit Act 1974 for loan sales?

A

Borrower notification of assignments. Rights to request loan documentation post-transfer. Transparency requirements for regulated agreements.

49
Q

What challenges arise with securitisation in consumer lending?

A

Borrowers often remain unaware of who owns their loan, complicating dispute resolution and servicing inquiries.

50
Q

How do regulatory requirements address borrower confusion in loan assignments?

A

Statutes like the Consumer Credit Act mandate clear borrower notifications and accessible loan documentation.

51
Q

What are tranches in securitisation?

A

Tranches are divisions of securitised loans, each with different risk levels and returns, allowing investors to choose based on risk appetite.

52
Q

How does novation provide a “clean break” for lenders?

A

Novation transfers all rights and obligations to the new lender, freeing the original lender from further liabilities.

53
Q

What was the key issue in National Bank of Greece v Pinios Shipping Co (1990)?

A

Whether loan sales altered the borrower’s obligations. The court held that borrower obligations remain unchanged unless explicitly stated.

54
Q

Why is securitisation criticised for moral hazard?

A

Lenders may issue loans with lower credit standards, knowing the risk will be passed to investors.

55
Q

What international challenges exist in securitisation?

A

Divergent regulatory standards across jurisdictions. Complexity in transferring collateral across borders. Difficulty in ensuring consistent servicing practices.

56
Q

How do Basel III regulations affect securitisation?

A

Basel III requires banks to retain a portion of securitised loans to ensure accountability and maintain credit standards.

57
Q

What are the risks of selling loans to unregulated entities?

A

Borrowers may lose protections afforded under domestic regulations, and servicing practices may vary widely.

58
Q

How does the FSMA govern securitisation?

A

It ensures that entities engaged in securitisation are regulated by the FCA, requiring transparency and compliance with consumer protections.

59
Q

What are the benefits of sub-participation for lenders?

A

Allows lenders to share loan benefits without transferring ownership, maintaining confidentiality and avoiding borrower notification.

60
Q

What consumer rights exist under Section 77–79 of the Consumer Credit Act 1974?

A

Borrowers can request copies of their credit agreements after the loan has been transferred.

61
Q

How do tranches mitigate risk for securitised loan investors?

A

Risk is divided into layers, with senior tranches offering lower returns but greater security and junior tranches bearing higher risks for higher rewards.

62
Q

What is the significance of LMA documentation in syndicated loan transfers?

A

It ensures consistency, clarity, and reduced disputes, particularly in complex multi-party agreements.

63
Q

How does borrower consent differ between novation and assignment?

A

Novation requires borrower consent for the creation of a new contract, whereas statutory assignment does not.

64
Q

What are the borrower’s responsibilities post-loan sale?

A

Continue repayments as per the original agreement, but to the new lender, once notified.

65
Q

How does sub-participation affect the borrower-lender relationship?

A

The borrower’s relationship with the original lender remains unchanged, as the new participant does not acquire legal rights over the loan.

66
Q

Why are notification requirements crucial in loan assignments?

A

They prevent disputes and ensure borrowers direct repayments to the correct lender.

67
Q

What role do securitisation frameworks play in international finance?

A

Facilitate global capital flows by transforming illiquid loans into tradeable securities, while introducing complex cross-border risks.

68
Q

What are the benefits of securitisation for the financial system?

A

Enhances liquidity, distributes risk, and increases lending capacity.

69
Q

What obligations do new lenders have post-loan assignment?

A

Honor the original loan terms and provide consistent servicing, ensuring borrower rights are maintained.

70
Q

How does borrower confusion impact loan sales?

A

Leads to missed payments, disputes, and increased servicing costs, highlighting the importance of clear communication and compliance with notification laws.

Banking Law (10 decks)

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