Topic 28: Arrears and debt management (UNIT 6)

Question 1

WHAT MUST THE LENDER DO IF A BORROWER HAS A PAYMENT SHORTFALL in relation to direct debits?

Answer 1

If a borrower has a payment shortfall, the lender must not attempt to process more than two direct debit requests in any one calendar month.

Question 1

MCOB 13 requires that a borrower who has arrears or a mortgage debt shortfall must be dealt with fairly by the lender.

What specifically must the lender do to satisfy this requirement?

Answer 1

Firstly, the lender must have in place a
written policy and operational procedures before anyone falls into arrears

Once a borrower falls into arrears the lender must do the following:

Seek agreement (Ie, find a suitable way to repay the borrowing)

Liaise with a third party source for advise regarding the situation

Allow time

Allow changes to the mortgage contract such as the repayment dates or repayment vehicle, unless there is a good reason otherwise

Take possession as a last resort (only once all other reasonable attempts of resolution have been attempted)

Question 2

One way lenders can deal with payment shorfalls (ie missed payment, likely because the borrower is under financial difficulty) on a mortgage is by adding the shortfall to the principle amount and as such treating it as the original amount

What is this process known as?

This can be done automatically but under some circumstances the borrower must be consulted first. What are these circumstances?

Answer 2

‘capitalisation

This must not be done automatically if it increases the interest payable over the mortgage term by £50 or more or the contractual monthly repayment amount by £1 or more

Question 3

A firm must not capitalise a payment shortfall where the impact would be ‘material’. How is ‘material’ defined in this context

Answer 3

MCOB defines capitalisation as ‘material’ if, on its own or taken together with previous automatic capitalisations, it increases the interest payable over the mortgage term by £50 or more or the contractual monthly repayment amount by £1 or more

Question 4

The lender must keep records of its dealings with borrowers who are in arrears or have a shortfall debt

How long must these records be retained?

Answer 4

3 years

Question 5

Under MCOB 13, the lender must write to the borrower within HOW LONG of becoming aware that the account is in arrears

What info must the letter include:

Answer 5

15 BUSINESS DAYS

The current MoneyHelper information sheet ‘Problems paying your
mortgage’

The nature and level of charges that will be incurred unless the payment shortfall is cleared

as well as other more obvs info

Question 6

What must the lender do before issuing a possession order

Answer 6

They must:

Provide a written update of the arrears and charges (see section 28.1.2);

„ ensure the borrower is informed of the need to contact the local authority to establish their eligibility for rehousing after the lender takes possession;

clearly state the repossession procedure

Question 7

Once a property has been taken into possession, the lender must take steps to:

„ market the property for sale as soon as possible

AND WHATELSE

Answer 7

Take reasonable care to obtain the best price that might be reasonably achieved, taking into account market conditions and the increasing debt.

The lender has a duty of care. It cannot ‘nurse’ the property, which
is the term used when the lender delays accepting reasonable offers in the
hope of achieving a ‘target’ price

Question 8

When a lender issues a possession order they cannot ‘nurse’ the property. What does this mean?

Answer 8

This means the lender has delayed accepting reasonable offers in the
hope of achieving a ‘target’ price

This is not allowed. Lenders sell the property at a reasonable price as soon as possible, taking into account market conditions and the increasing debt

Question 9

If the lender sells the property following a possession order, but the sale proceeds are not enough to repay the loan, what must they do

Answer 9

If the proceeds of the sale are less than the debt, the lender must advise the customer of the mortgage shortfall and whether another firm – mortgage indemnity insurer, etc – may pursue the debt.

If the lender decides to recover the shortfall, it must notify the borrower of its intention within 6 years of sale

Question 10

What is rescheduling?

Answer 10

Where the borrower pays more than their monthly instalment for an agreed period to repay the arrears

If chosen, the FCA requires the situation to be reviewed every three to six month

Question 11

One option the lender has if the customer is in arrears is full or partial suspension of monthly payments

True or false

Answer 11

True

Works where the lender grants a payment ‘holiday’ or partial suspension of monthly payments. Arrears build up over the period
of the ‘holiday’ or suspension, and the borrower then clears them within a set
time after the end of the concessionary period

Typically used where the customer has gone into arrears because of a one off life event.

Question 12

One why lenders can help borrowers who are in arrears are by extending the term of their loan to reduce monthly payments This is typically only done for repayment mortgages. Why is not usually done for interest only mortgages?

Answer 12

Extending the term of an interest-only mortgage will only result in additional interest over the term, as no capital is repaid.

It is only of benefit
if the repayment vehicle term can also be extended to reduce the monthly or investment costs or to allowed the repayment vehicle to build in value further

NOTE: With-profits endowment mortgages cannot usually have
their term extended because they mature on a particular date. Other repayment
vehicles, such as unit-linked endowments and ISAs, are more flexible and more
likely to allow the holder to change payments or the term

Question 13

What is the following an example of?

A lenders allows a mortgage of £50,000 with £2,000 in arrears to join as one balance (ie, making the mortgage balance outstanding £52,000)

Answer 13

This is an example of capitalisation

Can be useful for borrowers in arrears but it does mean
they will be paying interest on the capitalised arrears for a long period, potentially
the rest of the mortgage term (as it is now part of the mortgage)

Question 14

If an interest only mortgage is using an endowment policy as a repayment vehicle, does the lender have a right to surrender the policy if the borrower is in arrears?

Answer 14

Only when the policy has been assigned to the lender

If the policy
has not been assigned, it cannot be surrendered unless the borrower is in
agreement.

Question 15

It is not good investment practice to surrender an endowment policy early

Why?

Answer 15

Nearly all policies are tailored to long-term capital growth and perform badly over short periods.

Early surrender is a way of obtaining capital in a
hurry but has no benefits other than this. Lenders have the right to surrender a policy to recoup arreas without the borrowers consent only if the policy is assigned to them. Otherwise the borrower must agree

Question 16

What are mortgage rescue schemes?

Answer 16

Operate in 2 ways

An organisation buys the property from the borrower and then rents it back to them, allowing the borrower to remain in their home as a tenant.

„ The borrower sells part of the property, leaving them in a shared ownership situation

NOTE: An issue with these schemes is some of them are run by private companies, on a profit-making basis because is bad because they may be less sympathetic to the borrower ( ie charge higher rent)

Question 17

In some cases, the borrower may have significant debts that they are struggling
to service, and may be considering an individual voluntary arrangement (IVA),
whereby some of their debt is written off by their creditors

It is possible for
a homeowner to enter into an IVA, but the IVA is likely to contain specific conditions regarding the property, referred to as an WHAT

Answer 17

referred to as an ‘equity clause’

This requires the debtor to agree to remortgage their property at a specific point
in the IVA, usually during the last year, to make a payment towards their
unsettled debt.

Question 18

In some cases, the borrower may have significant debts that they are struggling
to service, and may be considering an individual voluntary arrangement (IVA),
whereby some of their debt is written off by their creditors

It is possible for
a homeowner to enter into an IVA, but the IVA is likely to contain specific conditions regarding the property, referred to as an equity clause where it requires the debtor to agree to remortgage their property at a specific point in the IVA, usually during the last year, to make a payment towards their
unsettled debt

To be eligible for such an arrangement what is required?

Answer 18

At the time of remortgage the debtor’s share of the equity in the property must be than £5,000+ (after remortgage costs). If jointly owned it must be £10000+ (The clause cannot be activated if the equity share is £5,000 or less)

The required remortgage cannot be for more than 85% of the property value

The increased mortgage cost must be affordable, cannot exceed 50%
of the ‘normal’ IVA payment

The remortgage term cannot extend beyond the later of state retirement
age or the existing mortgage term

Question 19

It is possible for
a homeowner to enter into an IVA, but the IVA is likely to contain specific conditions regarding the property, referred to as an equity clause. The equity clause requires the debtor to agree to remortgage their property at a specific point in the IVA, usually during the last year, to make a payment towards their
unsettled debt

ONE of the requirements to be eligible for the above is that on the date when the clause is about to take effect, the debtor’s share of the equity in the property must be more than £5,000 (after remortgage costs)

How does this differ for jointly owned property

What happens if both owners are subject to the same IVA?

so on a jointly-owned property the equity

Answer 19

Jointly owned property = debtor has at least £10,000.

If both owners are subject to the IVA then the clause will treat them as one borrower and the £5,000 equity threshold will apply

Question 20

Define the following:

Possession
Rescheduling
Capitalising arrears
Trading down
Mortgage rescue schemes

Answer 20

Possession = The lender takes possession of the property from an owner in arrears or default and can then sell it to settle the mortgage. Requires a court order and the lender must follow certain procedures

Rescheduling = An agreement to settle arrears by making higher payments over an agreed period.

Capitalising arrears = Arrears are added to the capital outstanding on the loan and the repayments recalculated. This increases the mortgage debt and monthly payments for the rest of the term

Trading down = Selling an existing property and buying a cheaper property, as a way to release equity and settle arrears

Mortgage rescue schemes = Two types of scheme offered by local councils, housing associations and other not-for-profit agencies for borrowers facing mortgage difficulty, whereby the provider buys the property from the borrower and then rents it back to them as a secure tenant; or the borrower sells part of the property to the provider in a shared ownership arrangement.

Question 21

George has missed two mortgage payments. What is the maximum number of direct debit payments his lender can process in one calendar month?

One.

Two

Three

Answer 21

Two.

Question 22

A lender cannot automatically capitalise a payment shortfall where the impact on the borrower would be material. MCOB defines ‘material’ as an additional amount that increases the contractual monthly repayment by:

Answer 22

£1 or more

Question 23

Which of the following is true of the letter a lender must send to a borrower when it becomes aware the borrower is in arrears with their mortgage payments? The letter must:

be sent within 15 days of the lender becoming aware of the arrears.

contain the total outstanding debt, including charges that may be levied on redemption.

contain a list of payments missed or paid in part.

Answer 23

contain a list of payments missed or paid in part

The letter must be sent within 15 BUSINESS days of the lender becoming aware, rather than 15 days as A suggests, and must contain details of all payments missed or partly paid. It must detail the total outstanding debt, not including any charges that may apply on redemption

Question 24

When a lender has taken a property into possession, it is true to say that the lender:

can delay marketing the property until the market improves.

must obtain the best price possible, bearing in mind the state of the market and the increasing debt.

has up to ten years from sale to notify the borrower of its intention to claim repayment of any shortfall between the sale price and the mortgage.

Answer 24

must obtain the best price possible, bearing in mind the state of the market and the increasing debt.

The lender must market the property as soon as possible after taking possession, and must take reasonable care to obtain the best price that might reasonably be paid, taking into account market conditions and the increasing debt. The lender has six years from the date of the sale to notify the borrower of its intention to reclaim any shortfall.

Question 25

Rescheduling in relation to mortgage arrears involves:

the borrower clearing arrears by paying more than the normal monthly payment for an agreed period.

full or partial suspension of the mortgage repayments.

extending the mortgage term

Answer 25

the borrower clearing arrears by paying more than the normal monthly payment for an agreed period

Rescheduling is where the borrower clears arrears by paying more than the normal monthly payment for an agreed period, typically up to 12 months, assuming that they can sustain the increased payments..

Question 26

For which of the following borrowers facing mortgage payment difficulties would agreeing to allow interest-only payments for a short period be the most realistic option?

Betty, who is eight years into a pension mortgage.

Harry, who is two years into a fixed-rate repayment mortgage.

Jeff, who is 15 years into a variable-rate repayment mortgage

Answer 26

Making interest-only payments for an agreed period is only helpful to a borrower with a repayment mortgage; it is of no benefit to those already paying interest only. It is most beneficial to those who are well into the term of a repayment mortgage, because in the early years most of each monthly payment consists of interest, so the saving would be minimal

Question 27

Dave, aged 57, has an uncrystallised personal pension fund of £80,000, but has built up arrears of £10,000 on his repayment mortgage. He is wondering whether he could take money from his pension fund to pay off the arrears. What would be a potential disadvantage of this approach?

He may have to pay income tax on some of the cash taken out from his pension.

He would have little time to build his pension fund back up.

He cannot use pension money to pay a repayment mortgage.

Answer 27

He would have little time to build his pension fund back up.

As Dave is over 55 he can take cash from his pension fund. As the amount of the arrears is less than 25% of his fund value, he could take it all as a tax-free lump sum. However, while this would solve his arrears problem, he would have little time to build his pension fund back up again in time for his retirement

Question 28

Money advice centres are authorised to give financial advice as defined by the FCA. True or false?

Answer 28

False. Charities and money advice centres are not authorised to give financial advice as defined by the FCA

Question 29

erry is having problems paying his endowment mortgage and needs advice on how to deal with the debt and whether to cancel his endowment. Which of the following is true?

Citizens Advice can provide him with free general advice on his debt and advise him what to do with his endowment.

StepChange Debt Charity can provide him with free information on his debt and the endowment but cannot advise him on either aspect.

He may find a financial adviser who can advise him on both aspects of his problem but they may charge him a fee.

Answer 29

He may find a financial adviser who can advise him on both aspects of his problem but they may charge him a fee

Citizens Advice and StepChange can provide free help and advice on debt problems, as can a financial adviser who has chosen to offer such advice. Only a qualified financial adviser can provide advice and recommendations about endowments. A financial adviser is likely to charge for their services

Question 30

For how long must a lender keep a record of its dealings with a borrower who is in arrears?

Answer 30

Three years from the date of the dealings

Question 31

Gavin lost his job a few months ago and is now in arrears with his capital repayment mortgage payments. Although he is trying hard, he sees no prospect of finding a job in the foreseeable future. His lender has turned down his request to capitalise his arrears. Why has the lender turned down his request?

Gavin would not be able to afford the higher payments it would create.

The lender is not legally able to grant such a request.

Gavin’s mortgage has not run for long enough for the request to be valid

Answer 31

Gavin would not be able to afford the higher payments it would create.

Capitalising the arrears adds the arrears to the mortgage, thereby increasing the debt and the payments due. As Gavin cannot afford the current payments, he will not be able to afford the higher payments, which will start almost immediately. He may be better asking to pay interest only for an agreed period

Question 32

When George defaulted on his mortgage, the lender took possession of his flat and sold it to pay his outstanding mortgage, but the proceeds did not repay the whole debt. Within what period of time must the lender inform George of its intention to pursue him for the remaining shortfall?

Answer 32

6 years from the sale

Question 33

Which of the following statements is true of mortgage rescue schemes?

Schemes never allow the former owner to repurchase the property if their situation improves.

Some schemes allow the former owner to repurchase the property if their situation improves.

All schemes allow the former owner to repurchase the property if their situation improves

Answer 33

Some schemes allow the former owner to repurchase the property if their situation improves.