Topic 11 - Checking the applicant’s credit status (unit 3)

Question 1

What is a Credit Bureau?

Answer 1

Also known as a credit reference agency

An organisation with a vast database
of information on individuals, relating to previous bad debts
and default, county/sheriff court
judgments and insolvency

The stuff you can’t see on bank statements, which is why it is important lenders complete credit searches

Question 1

If a credit search shows the borrower has defaulted, what does this mean?

What is the consequences of this?

Answer 1

The borrower missed one or more payments and did not resolve the issue

The lender who the borrower hasn’t paid will issue a ‘default notice’

This default notice will remain on the persons credit for 6 years, paid off or not, which will make it more difficult for the person to obtain credit.

Question 2

What is a payday loan?

Answer 2

Short term, very high
interest unsecured lending designed to be paid off on the borrower’s next payday

Question 3

What are the consequences of taking out payday loans for future credit applications?

Do payday loans show on someones credit file?

Answer 3

The lender will deem this borrower as higher risk as they may feel they are not able to manage the finances effectively, since they have take out borrowing as last resort

Due to the short duration of payday
loans, they may not show up on all
credit searches but may appear elsewhere. Lenders carry out multiple searches on someone before giving credit

Question 4

What is the ‘cut off score’ in relation to credit scores?

Answer 4

A person’s credit score is based on a points system where each point is allocated on different risk factors which then add up to give someones total score

The cut off score is the minimum number of points required such that the borrowers credit score wood be satisfactory for the lender to grant them credit. For example, a lenders cut off score for their loan is 600. The borrowers score is 658. The borrower has exceed the cut off score so they should be able to obtain credit as long as the borrowing is still affordable and so on

Question 5

Why does applying for multiple credit cards or loans lower someones credit score?

Answer 5

This could indicate poor debt management

Question 6

What is a guarantor?

What is a guarantee in relation to a guarantor?

Answer 6

GUARANTOR
An individual, a company or a partnership that provides the guarantee.
Also known as a surety

GUARANTEE
A formal agreement to accept legal responsibility for the repayment of a
loan if the borrower cannot, or will not, repay it themselves

Question 7

A lender feels a borrower may be able to afford a higher mortgage but is reluctant unless they can provide the lender with an additional security. What would this typically be?

Answer 7

A guarantor who makes a guarantee to repay the credit if the borrower doesnt

Question 8

Why is it vital for directors of small companies to be made guarantor for any credit given to the company?

Answer 8

A loan made to a
company is enforceable only against the company, not its shareholders and
not normally against the director meaning the lender will have no security to recoup the credit if needed

The director (guarantor) acts as the security as they make a guarantee they will repay the credit if required

Question 9

What are the two types of mortgage guarantee?

Answer 9

Full liability (The guarantor is liable for the entire debt if the borrower defaults on the mortgage
payments)

Limited liability (The liability of the guarantor is limited to the difference between the loan the lender would normally agree and the loan needed. For example, the property was purchased for £200,000, the borrower had a £20,000 deposit
and the lender would normally lend £150,000 based on the borrower’s income, the
guarantee would be for £30,000 meaning the guarantor must pay back £30000 if required. NOTE: typically on top of this the lender may add an additional amount, say 10%, so in this case the guarantor may be required to pay £33000

Question 10

A major risk lenders must guard against in relation to mortgage guarantees, is the guarantor arguing that the guarantee is
invalid because they did not receive adequate explanation

What other reasons are there that could cause a guarantee to be invalid?

What are lenders now required to do to minimise all of these reasons?

Answer 10

Lack of capacity to contract
(the guarantor is a minor, lacks mental capacity or is a company that cannot give guarantees )

Undue influence
(Where one party is dominant over another and can persuade them to do something they probably would not otherwise do, common examples may be a solicitor and client, or a husband and wife)

Misrepresentation
(Where the terms of the guarantee were misrepresented to the prospective guarantor)

Misapprehension
(Where the prospective guarantor is under an incorrect impression about the nature and effect of the guarantee and different from what they had agreed)

Mistake
(Where the guarantor can show that they have not understood the nature of the document being signed)

Duress
(Where the guarantor has been forced, perhaps by way of physical threats, to sign the guarantee document)

Guarantor not receiving an adequate explanation

Because of the above lenders MUST now advise prospective guarantors to seek independent legal advice before agreeing to act in that capacity.

Question 11

Do guarantors of mortgage guarantees are any legal interest in the property?

Answer 11

The guarantor DOES NOT have an interest in the property on which
they are guaranteeing the mortgage

Question 12

Do lenders need to make the same checks on guarantors as they do the borrower?

Answer 12

Yes, the guarantor must be able to show they can repay the debt they have guaranteed

Question 13

If someone is jointly and severally liable for something with someone else what does the severally part mean?

Answer 13

The jointly part means they are both liable

The severally part means they are individually liable for it if the other individual is unable to meet their obligation

So it basically covers all situations which is why it used

Question 14

What is a joint mortgage, sole proprietor mortgage?

Answer 14

where the property is purchased in the sole name of the
buyer but a family member agrees to be a joint borrower, and
their income (less commitments) is taken into account when
assessing affordability.

As joint borrower they are jointly and
severally liable for the mortgage, but they have no rights over
the property.

This avoids SDLT tax issues as becoming joint owner would result in the SDLT surcharge on the purchase and also, If one owner was already a property owner, the first‑time buyer SDLT exemption would not apply to the purchase

Saying that, the joint borrower should fully understand the
potential risks in being liable for the mortgage without any rights over the property

Question 15

What is insolvency?

Answer 15

a person’s liabilities exceed their assets AND they cannot meet their financial obligations when they fall due

Question 16

Is someone has become insolvent what different legal processes can be used to address the issue?

Answer 16

County court judgment (CCJ)

Bankruptcy

Individual voluntary arrangements

Company voluntary arrangements

Debt relief orders

Question 17

What is an attachment of earnings order?

Answer 17

Can only be made against employees

Where a creditor of an insolvent individual can force the individual’s employer to deduct a certain amount from their pay and
pass it on to the court for onward payment to the creditor.

Question 18

Tell me about county court judgements

How long do CCJ stay on someones credit file.

If a CCJ is classed as being satisfied what does this mean and likewise if it is unsatisfied?

Answer 18

It is one of the possible next legal steps to resolve an individuals insolvency status (ie, where their liabilities exceed their assets and they cannot repay the credit when it is due)

It is where a creditor(s) bring civil case against the debtor to the county court.

The court can make a county court judgment (CCJ) against the debtor, setting out how the debt should be repaid.

CCJ’s stay on the persons credit file for 6 years

If the CCJ is paid within 1 month it is classed as being satisfied. If it is not paid within the month it is classed as being ‘unsatisfied’ for 6 years afterwards.

OBVS this will make borrowing more difficult

Question 19

True or false. A mortgage application always requires details of CCJ’s?

Answer 19

TRUE

Question 20

What is a sheriff court judgement?

Answer 20

The exact same as a county court judgement except it is Scotland

Question 21

If an undischarged bankrupt is the sole owner of a property and they have £1000 or more equity in it, what happens once bankruptcy has been declared?

Answer 21

If the bankrupt is the sole owner of a property with at least £1,000 equity in it, the property will transfer to the trustee in bankruptcy, who becomes the legal
owner and can sell it to settle debts.

Question 22

What is a bankruptcy restriction notice?

Answer 22

If an undischarged bankrupt is the sole owner of a property with at least £1,000 equity in it, the property will transfer to the trustee in bankruptcy, who becomes the legal owner and can sell it to settle debts

For this to happen, a bankruptcy restriction notice is entered at the Land Registry on the property

This shows that the bankrupt is no longer
the legal owner of the property and cannot
sell or deal with matters relating to the
property; only the trustee can do so.

Question 23

What is equity?

Answer 23

The difference between a property’s sale price
and any expenses such as the mortgage settlement figure and conveyancing fees.

Question 24

What is a debtor?

Answer 24

Anyone that owes money

Question 25

Where a couple owns a property and one of them is declared bankrupt and the other is not, what happens?

Answer 25

The bankrupt’s interest in the property does not pass to the trustee in bankruptcy, like it does if they were sole owner

The trustee enters a Form J restriction at the Land Registry. It requires the Land Registry to notify
the trustee of any dealings relating to the property. The restriction does not stop the bankrupt and the joint owner selling the property, but the restriction will not be lifted until the trustee has been
paid

The trustee in bankruptcy can apply for a possession order and sell the property if the bankrupt’s interest in the property (share of the equity) is
£1,000 or more (this can be delayed for 1 year to allow the family to make alternative arrangements)

Question 26

Where a couple owns a property and one of them is declared bankrupt and the other is not, and the property is the bankrupt’s main residence, how long has the trustee in bankruptcy got to issue a ‘possession order’ to sell the property?

Same question but the property is the not Bankrupts main residence

Answer 26

main residence: 3 years and if they don’t sell in that time, the property reverts back to the bankrupt

Not main residence: No time frame, can be sold whenever

Question 27

What is the term for bankruptcy in Scotland?

Answer 27

sequestration

Question 28

What is an individual voluntary arrangement?

Answer 28

Alternative to bankruptcy, supervised by an insolvency practitioner

An agreement with creditors to reduce credit, for example they debtor pays back 50p for every £1 they owe

Question 29

For an IVA to be agreed, what must happen?

And what happens once agreed

Answer 29

The creditor(s) representing at least 75 per cent of the debt amount must agree to the IVA

Once agreed, interest and charges on the debt are frozen and the debtor makes fixed monthly payments toward the debt, inline with the agreement

Question 30

What are company voluntary arrangements?

Answer 30

Equivalent to IVA’s but for limited companies and are subject to the same conditions (Ie, creditors with 75% must agree)

A company or limited liability partnership can apply for a CVA if all the directors or partners
agree

Question 31

What are debt relief orders?

In order to be eligible to undergo a debt relief order what 3 things must be satisfied?

How does they work?

Answer 31

Help debtors repay their debts

For debtors:

Who owe a max of £30,000

Have total gross assets not exceeding £2,000 (vehicles valued at £2,000 or lower are not included in the calculation)

Have disposable monthly income (after tax, NICs and normal household expenses) of no more than £75

How it works:
If a DRO is granted, the creditors listed in the order are subject to a ‘moratorium’ usually for 12 months, during which they cannot seek repayment or enforcement of debts owed to them.

At the end of the moratorium, the debts
are written off and they are discharged

NOTE: This is out of the scope of the qualification. Debt relief orders are obvs not beneficial to lender since the debt is written off. However where they are good for them is that the debt can be resolved easily without the lender needing to pursue them in court. Debtors who are eligible for DRO’s are in a dire position where they will likely never pay back their debt back so a DRO is better than nothing for lenders as it saves legal expenses etc.

Question 32

If a mortgage is granted but the borrower has carried out fraud such as by faking income or withholding knowledge of existing debts or many other things, what is this considered as under the Proceeds of Crimes Act 2002?

Answer 32

A Money Laundering offence

Question 33

If a borrower has already been through an intermediary does the lender need to verify through customer due diligence too?

Answer 33

The lender can accept the introducer’s written assurance that they have obtained sufficient evidence of identity, so no

Question 34

How long must firms keep the records of how the cust was identified after the firm and customer’s relationship has ended?

How long must supporting evidence of transactions be kept by firms, ie invoices?

What act requires this and why?

Answer 34

• evidence of identification must be retained until at least 5 years after the relationship with the customer has ended;
• supporting evidence of transactions (originals or copies admissible in court proceedings) must be retained until at least 5 years after the transaction was executed

Institutions must keep this information to use as evidence in any investigation into money laundering.

NOTE ( DONT NEED TO REMEMBER THIS BUT GOOD TO KNOW ) This is required by the Money
Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, strengthened by 2019 amendments

Question 35

The lender has discovered a default registered against a potential borrower during a credit reference search for a mortgage application. Which of the following is untrue?

The default will show on the credit record for six years from the date of the default notice.

The default will be removed from the credit record if the arrears are settled.

The record will show the amount of the original default, subsequent payments made and the current balance.

Answer 35

Untrue = The default will be removed from the credit record if the arrears are settled.

The default will remain on the record for six years, even if the arrears are settled within that period

Question 36

Which of the following statements are true of payday loans? Select all that apply.

A) They charge high rates of interest.

B) They are a form of long-term lending.

C) Mortgage lenders may not lend to those who have used them.

D) They are seen as a regular form of borrowing.

E) They may not show up on credit searches.

F) Lenders use multiple data searches to check for them.

Answer 36

A
C
E
F

Payday loans are short-term high-interest lending so not B

They are seen as last-resort borrowing for those who cannot manage their finances effectively so not D

Question 36

Credit scoring IS WHAT?

is a standardised process offered to lenders by specialist providers.

is a statistical tool used to determine probability.

blends data and customer attitudes to produce a score.

Answer 36

is a statistical tool used to determine probability.

Lenders tend to use a variety of processes to suit their own needs. Credit scoring is based purely on statistical data, and establishes the probability of a loan being repaid satisfactorily. It is used mainly to screen out high-risk applications

Question 37

In relation to mortgage guarantors, with a limited liability guarantee the:

guarantee is shared between two or more guarantors.

amount of the guarantee is limited to a proportion of the mortgage.

guarantee will only be triggered in certain limited circumstances.

Answer 37

amount of the guarantee is limited to a proportion of the mortgage.

With a limited liability guarantee, the liability is limited to the difference between the loan the lender would normally agree and the loan needed, with a possible additional percentage of perhaps 10%.

With a full guarantee the guarantor agrees to guarantee the whole mortgage, which is riskier than limited liability

Question 38

Tell me whether each of the following statements about guarantors is true or false.

A) The guarantor must be informed if the mortgage holder requests a further advance, and they can refuse their consent.

B) There is no requirement for a lender to assess a prospective guarantor’s financial position before agreeing to take a guarantee.

C) The guarantor must be informed if any payments are missed.

D) A prospective guarantor may be able to guarantee a mortgage by depositing a specific sum with the lender for a specified period.

E) The guarantor has an interest in the property that is subject to the guarantee.

F) It is entirely up to the lender to decide if it will agree to a guarantor’s request to be released from the guarantee.

Answer 38

A = TRUE
B = FALSE
C = FALSE
D = TRUE
E = FALSE
F = TRUE

” The guarantor has an interest in the property that is subject to the guarantee.” - The guarantor has no interest in the property. If they wanted an interest they would have to become a joint owner and party to the mortgage.

“The guarantor must be informed if any payments are missed.” - There is no such requirement, which means that the guarantor may be unaware of missed payments until the lender enforces the guarantee.

“There is no requirement for a lender to assess a prospective guarantor’s financial position before agreeing to take a guarantee.” - MCOB 11.6 requires lenders to carry out similar affordability checks to those for the borrower to teh guarantor.

Question 39

A county court judgment will show on the Register of Judgments, Orders and Fines for England and Wales for six years from the date of the judgment:

in all circumstances.

unless the debt is paid in full within one month of the judgment.

but will be removed if the debt is settled within six years of the judgment.

Answer 39

unless the debt is paid in full within one month of the judgment.

A county court judgment will show on the Register of Judgments, Orders and Fines for England and Wales for six years from the date of the judgment unless the debt is settled within a month of the judgment. If it is settled during the six-year period it will remain on the register as ‘satisfied’.

Question 40

Sue and Paul jointly own their family home. The house is worth £250,000 and they have a mortgage of £100,000. Paul has now been declared bankrupt. The trustee in bankruptcy is considering options in relation to the house. The trustee:

cannot force a sale because it is jointly owned.

can force a sale but may be required to delay the sale for 12 months.

has two years from the date of the bankruptcy order to decide whether to sell the property to pay the debts.

Answer 40

can force a sale but may be required to delay the sale for 12 months.

The trustee for bankruptcy could force a sale because, although the house is jointly owned, Paul’s ‘interest’ (his share of the equity) is more than £1,000. As it is the family home, the sale can be delayed for up to 12 months to allow the family to find other accommodation. The trustee has three years to decide whether to sell the property to pay the debts.

Question 41

Which of the following applies to an individual voluntary arrangement (IVA)?

75% of the creditors attending a creditors’ meeting must agree to the arrangement.

Interest and charges on the debt will be frozen if an IVA is agreed.

The debtor will agree to make fixed monthly payments to settle the debts outstanding at the start of the arrangement

Answer 41

ANSWER = Interest and charges on the debt will be frozen if an IVA is agreed.

WHY
Creditors representing 75% of the total debt must agree, not 75% creditors attending in general must agree (read carefully)

The agreement will be to repay a proportion of the debt through regular fixed payments.

Question 42

For anti-money-laundering purposes, for how long must a lender keep records of customer identification?

Five years from the date evidence was last obtained.

Indefinitely.

Five years from the end of the customer relationship

Answer 42

Five years from the end of the customer relationship

Question 43

Which of the following would not be acceptable to a lender as evidence of a customer’s identity?

Written assurance from an authorised financial adviser.

Mobile telephone bill in the customer’s name.

Council tax bill in the customer’s name.

Answer 43

ANSWER = Mobile telephone bill in the customer’s name.

Council tax bills are acceptable, as are utility bills in the customer’s name, although mobile phone bills are not acceptable.

If an authorised financial adviser has already carried out ID checks on a customer, the lender can accept written assurances that the adviser has carried out satisfactory checks

Question 44

An individual who assumes full liability as a guarantor for a mortgage loan must be in a position to repay 100% of the outstanding loan if the borrower defaults. True or false?

True
False

Answer 44

TRUE

Question 45

Which of the following is most likely to invalidate a guarantee?

The lender failing to advise the guarantor that the borrower had missed several repayments.

The guarantor losing their job.

The guarantor having experienced an episode of mental illness at the time of signing the guarantee.

The guarantor writing to the lender requesting to be released from the guarantee.

Answer 45

Answer =The guarantor having experienced an episode of mental illness at the time of signing the guarantee.

A person suffering from a mental illness may be regarded as lacking the capacity to contract and therefore any guarantee they give may be invalid

Question 46

A sole trader who fails to make payments under a CCJ may be issued with an attachment of earnings order. True or false?

True
False

Answer 46

False

False. An attachment of earnings order can only be made in relation to an employee, as it requires the employer to deduct money from the individual’s pay and send it to the court for onward payment to the creditor.

Question 47

What is the effect of a trustee in bankruptcy filing a ‘Form J restriction’ with the Land Registry in relation to a bankrupt’s property?

Answer 47

It requires the Land Registry to note the trustee’s interest in the property and notify the trustee of any dealings relating to it. (ie they sell the property)

Question 48

When completing a mortgage application, making false statements or providing false information is only a crime if the application leads to a mortgage being granted. True or false?

True
False

Answer 48

False

False. Misrepresentation or making false statements are crimes under the Fraud Act 2006, regardless of the outcome.

Question 49

An expression of opinion as to an applicant’s creditworthiness is not regarded as personal data under data protection legislation. True or false?

True
False

Answer 49

False

Data protection legislation exists to protect the rights of individuals where information is held about them.

The term ‘data’ includes both facts and
expressions of opinion about people – so the statement ‘we consider this individual to be creditworthy’, in response to a credit reference request, would be covered under the legislation (The Data Protection Act 2018 superseded the 1998 Act on 25 May 2018, enacting the EU General Data Protection Regulation (GDPR). The GDPR strengthened
existing data protection rules )

Question 50

Which of the following would potentially be regarded as mortgage fraud?

Submitting a mortgage application while under notice of redundancy without mentioning the fact.

Including a variable annual bonus in the figure for regular income on the application.

Stating a purchase price 10% more than the agreed price.

Omitting information from the mortgage application about repayments due on a loan from a friend.

Answer 50

ALL are mortgage fraud

Question 51

What does it mean if you default?

Answer 51

The borrower has missed one or more payments and failed to respond satisfactorily to requests to correct the problem

Question 52

What is the Register of Judgments, Orders and Fines for England and Wales

Answer 52

A register of CCJs, which stay on the register for six years unless settled within one month of the judgment. If paid after one month, they stay on the register but are shown as satisfied