Unit 6:28 Being in Arrears

Question 1

Lender obligations (MCOB 13)

Answer 1

• Detailed rules governing fair treatment are set out in MCOB 13
• Lenders must treat customers in financial difficulty fairly
• Lenders must not take advantage of borrowers in vulnerable positions
• Records of people in arrears must be kept for 3 years

Question 2

Direct debit restrictions and lender options

Answer 2

• Lenders must not attempt to process more than two direct debit requests in any calendar month
• Lenders may help borrowers in financial difficulty by:
  -extending the mortgage term
  -changing mortgage type
  -deferring interest payments
  -capitalising payment shortfalls

Question 3

Capatilisation

Answer 3

• Can only occur where you are not hurt by more than more than £50
• Capitalisation is when missed mortgage payments (arrears) are added to the total mortgage balance, increasing the overall debt but allowing the borrower to resume normal monthly payments.

Question 4

Information provision requirements (MCOB 13)

Answer 4

• Lenders must write to borrowers within 15 business days of becoming aware of account arrears
• Letter must include: Money Helper information sheet, list of missed payments, total payment shortfall, potential charges
• Must also detail total outstanding debt (excluding redemption charges) and charges that will apply if shortfall isn’t cleared

Question 5

Pre-possession requirements (MCOB 13)

Answer 5

• Before taking action for possession, lenders must provide a written update of arrears and charges
• Lenders must inform borrowers about contacting local authorities to establish rehousing eligibility
• The repossession procedure must be clearly explained to the borrower

Question 6

Post-repossession requirements

Answer 6

• If a lender sells the property and doesn’t recoup the full mortgage amount, they must advise the customer as soon as possible after sale of:
  
  • The mortgage shortfall
  • Whether another firm (e.g., mortgage indemnity insurer) may pursue the debt
• When recovering a shortfall, lenders must notify borrowers of their intention within six years of sale

Question 7

Lender options for borrowers in difficulty

Answer 7

• For capital and interest mortgages, lenders may accept interest-only payments for a specified period or extend the mortgage term
• Lenders may capitalise arrears by adding missed payments to the outstanding balance (e.g., £50,000 mortgage with £2,000 arrears becomes £52,000 mortgage with no arrears)

Question 8

Surrendering endowment policies

Answer 8

• Means stopping contributions to the repayment vehicle (endowment policy or ISA) that was intended to pay off the mortgage
• Generally a poor financial decision as it reduces the final pot through lost contributions and missed compound growth
• With ISAs, borrowers have more flexibility as lenders cannot force their use to repay mortgage arrears

Question 9

Interest-only mortgage risks

Answer 9

• If borrowers can’t repay the capital at the end of an interest-only mortgage term, lenders have the legal right to demand repayment
• Lenders can seek possession of the property if the loan amount isn’t repaid
• This highlights the importance of having a viable repayment strategy for interest-only mortgages

Question 10

Mortgage rescue schemes

Answer 10

• Organizations may buy the property and rent it back to borrowers, allowing them to stay as tenants paying market rent
• Alternatively, borrowers may sell part of the property, creating a shared ownership situation
• Some schemes allow former owners to repurchase the property if their financial situation improves

Question 11

Equity Clauses in IVAs

Answer 11

• A requirement for borrowers to remortgage their property during the IVA to pay back some of the debt
• Only activates when borrower’s share of equity in the property exceeds £5,000
• The remortgage amount cannot exceed 85% of the property value
• Helps creditors recover more of the debt while allowing borrowers to avoid bankruptcy