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RB-123/ > Week 3 > Flashcards

Week 3 Flashcards

1
Q

Factors influencing a bank’s credit culture could include:

A

Historic level of bad debts
Recent trends
Competition
The economic/political environment.

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2
Q

Additional details if mortgage

A 
1) Property details
Address
Purchase price
Property type and details
Freehold/leasehold
2) Financial details
Special features (stage payments, buy to let, etc.
References needed?
Guarantors?
Deposit source

3) Other details
If renting, landlord details
Solicitor details
Other occupants. Why?

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3
Q

Why information verification is required

A 
Fraud prevention
Ensure correct product is offered
Ensure affordability
Minimise risk
Compliance with PoCA to prevent money laundering
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4
Q

Manual Assessment

A

1) Use of Personal Lending Discretion;
2) Each decision is an individual decision, using skills and experience of lending officer;
3) Many institutions use mnemonics to ensure consistency of approach, if not result;
4) Lending officer seen as being personally responsible and audited on a regular basis. Hence tends to through in the examination of information provided;
As such can take time and be expensive;
5) Potentially open to claims of bias

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5
Q

Manual Assessment

A 
1) Lending Decision
	Purpose	
	Amount
	Repayment Ability
	Terms
	Security
	Character
	Capability 
	Capital
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6
Q

Credit score stability measures

A 
Address
Time at address
Owner/Occupier
Age
Occupation
Employers
Time in employment
Marital status
Phone
Savings
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7
Q

Credit scoring will provide one of three recommendations:

A

Accept
Refer
Decline

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8
Q

Credit Score: Recommendations

A

Accept – the proposal should be accepted the risk is seen as minimal

Decline – the proposal should be declined. The risk is seen as too high

Refer – a manual decision needs to be made. The computer either holds insufficient information or the decision is marginal. In a robust, reliable system these should be few and far between.

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9
Q

Credit Scoring Systems Advantages

A

1) Removes the individual from the process, making this more objective and less prone to mis-judgement due to personal factors (such as?);
2) The speed of processing increases and speed of decision making is improved. Especially important when declining an application;
3) Costs reduced – less experienced staff needed to administer the system;
4) The system can be used to reflect the risk appetite of the organisation (what are the implications of this?)
5) The system can be assessed for effectiveness and improved where necessary – for example if bad-debts are greater when a certain factor is weighted heavily.

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10
Q

Credit Scoring Systems Disadvantages

A

1) Can be difficult for staff to explain a rejection, especially when they expected the application to be accepted
2) The customer could have a perception that they have been rejected by the computer
3) Can be seen as inflexible, with little consideration of the individual
4) Can be manipulated and multiple applications are a danger

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11
Q

Behavioural Scoring

A

1) Allows live information to support the static information used in credit scoring
For example it could include salary received to the account, the number of excesses in the past two months, the lowest and highest balances

2) The addition of live information can mean that the results can change from month to month. In fact interviewers keep records of declined applications and re-score them each month to look for potential new business

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12
Q

Positive factors on the score

A

1) Improved account conduct
- Fewer excesses, increased average balance, increased credit to the account (e.g. salary)
2) Removal of one party to the account
3) Change in residential status
4) Register on Electoral Roll

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13
Q

Recent enhancements- Risk Based Pricing

A

1) The ability to price the lending based on the perceived risk
2) The higher the risk – the higher the price (risk/reward)
3) Given rise to ‘Typical APR’ in advertisements and invitation to treat
4) An ability to grade the accept recommendation. For example to offer a loan with a repayment of £xxx per month. This is mainly due to a mature, well trusted, well tested system being implemented consistently.

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14
Q

Other uses of credit scoring

A

Can also be used to:

1) Predict future bad debts
2) Highlight marketing opportunities
3) Within the Internal Rating Model for Basel Capital Adequacy calculations
4) Segment the customer base (see customer segmentation, Customer Relationship Management next week).

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15
Q

Security

A

1) Security is the taking of an asset to reduce the potential loss should the borrower default;
2) It can result in a reduced rate of interest for the borrower;
3) Gives the bank certain rights of actions in order to recover their debt;
4) Results in lower Basel retained capital requirements;

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16
Q

Security Realisation Options- The remedies of a legal mortgage are known as SAFE

A

1) Sue – this is the right of any lender, not only a secured lender
2) Appoint a Receiver – under the Law of Property Act 1925 to manage the property (e.g. collect rents) on behalf of the lender
3) Foreclose – takes away the borrower’s “equity of redemption” and is unlikely to be granted by the courts
4) Enter into Possession – not taken lightly as the bank becomes legally liable for the property and must evict any occupier. Strong possibility of damage to the bank’s reputation
5) Sell – the most likely option, with or without the owner’s consent. But MUST receive the market value – usually satisfied by auction. See Cuckmere Brick v Mutual Finance 1971.

17
Q

Attributes of good security

A

Effective insurance and good security needs to be:

1) Easy to take,
2) Easy to value,
3) table in value, and
4) Easy to realise.

18
Q

Items available for security for personal advances

A

1) Property (land)
2) Life policies
3) Stocks and shares
4) Guarantees.

19
Q

Problems with a floating charge

A

1) Obtaining a reliable valuation
2) Can be at the lowest value (stock and debtors) just at the time the lender looks to realise;
3) Bad debts
4) subject to judgement creditors
5) Subject to reservation of title clauses – see Romalpa case
6) Problems taking charge over book debts if control is not maintained – see Spectrum v Nat West
7) Debtors can be used by Factoring company as security with a fixed charge over book debts
8) Must be registered at Companies House within 21 days of creation s395 Companies Act.

20
Q

Specialist support departments: Customer Support

A

1) Mainly for larger exposures
2) Where they could benefit from specialist one on one support
3) Aim to keep the customer in the “Good Book” of the bank, still under the control of the original Relationship Manager.

21
Q

Specialist Support Department: The Collections Department (1)

A

1) First point of reference from the branch network
2) Aim to “repair and return”
3) Referral to the collections team tend to be automatic and computerised
- No credit for 60 days
- 21 days in excess
- Returned items
- Loan payment 21 days late.

22
Q

Specialist Support Department: The Collections Department (2)

A

1) Upon receipt in collections the branch staff cannot discuss the case with the customer, who must now liaise directly with collections (usually by telephone).
2) The collections team will assess the situation and take action from there.

3) What form do you think this assessment will take?
- Security review
- Income/expenditure
- Possible refinance/restructure.

23
Q

Specialist Support Department: The Collections Department Debt Consolidation (3)

A

Criteria

  • Affordability
  • Long term situation
  • Security
  • Maximum term
  • Maximum amount
  • Interest to reflect risk

Benefits to customer

  • Loan is affordable
  • No default action by bank
  • Security not realised

Benefits to Bank

  • Interest reflects risk
  • No write off
  • Positive Basel implications
  • Retention of customer
24
Q

Specialist Support Department: The Collections Department (4)

A

1) Options available to collections department:-
- Debt consolidation
- Short term suspension of interest
- Repayment plan to clear arrears/excess
- Acceptance and continuation of arrears/excess position
- Upon decision being made/outcome delivered the account is viewed to have returned to profitability and returned to branch control.

25
Q

Specialist Support Department: The Recoveries Department (1)

A

If the collections team are unable to return the account to “good book” it is passed to recoveries. They aim to recover the maximum amount possible and sever the relationship.

The recoveries team will access third party data and instigate legal action against the borrower.

26
Q

Specialist Support Department: The Recoveries Department (2)

A

Third party involvement?

  • GAIN
  • CAIS
  • Tracing agents

Considerations?

  • Level of assets held by borrower
  • Security held by bank
  • Possible adverse publicity

Potential actions?

  • Sue the borrower (CCJ?)
  • Sell to collection agent
  • Charging order
  • Enforce security (SAFES)
  • Bankruptcy/ administration/ winding up
27
Q

Bankruptcy Terms- Petition- £5,000 MIN as a liquidated sum

A

The start of the bankruptcy process. Submitted to the courts by a creditor, the debtor themselves, the supervisor of a voluntary arrangement

28
Q

Bankruptcy terms- Order

A

The courts agreeing to make the debtor bankrupt. This is the start date of the bankruptcy

29
Q

Bankruptcy terms- Trustee in bankruptcy

A

The licenced insolvency practitioner that deals in the bankruptcy.

30
Q

Bankruptcy terms- Distribution of assets

A

This is the trustee deciding who gets the money in the state . Distributed in strict order

31
Q

Bankruptcy terms- Term

A

Bankrupts are normally discharged after 12 months, can be longer if it is a repeated bankruptcy or involves fraud.

32
Q

Bankruptcy terms- Effect on individual

A

An undischarged bankrupt loses their power to contract. If applying for credit they must declare their bankruptcy. Once discharged it stays on their credit file for six years

33
Q

Order of distribution in bankruptcy

A

1) Secured Creditors
2) Costs
3) Preferential Creditors (unpaid wages, collected taxes)
4) Unsecured Creditors
5) Deferred Creditors

34
Q

Implications of bankruptcy

A

1) For individuals
- Lose all assets
- Disqualified from being a company director
- Cannot incur debt, enter into contracts for 1/5 years
- Appears on credit file for up to six years after discharge
- Making it very difficult to obtain substantial credit in this period, such as mortgage etc.

2) For companies and LLPs
- The company no longer exists
- Assets sold
- Employees lose jobs

35
Q

Debt Relief Orders

A

1) Introduced in 2007, updated in 2015.
- You must be unable to pay your debts.
- Your total debts must not be more than £20,000 (up from £15,000). This does not include unliquidated debts (debts where the amount due is not yet known) or debts that cannot be included in a Debt Relief Order (DRO).
- Your total assets must not be more than £1,000 (from £300).
- Your disposable income after deducting all normal living expenses, must not be more than £50 per month.
- You must be living in England or Wales, or at any time during the last 3 years have been resident or carrying on business in England or Wales.

36
Q

Debt Relief Orders (continued)

A
  • You must not have been subject to a DRO within the last 6 years.
  • You must not be involved in any other formal insolvency procedure at the time of application for a DRO.
  • If you have presented a petition for your own bankruptcy and are awaiting a hearing date, you must have been referred to the DRO procedure by the court.
  • If you have been notified that a creditor has presented a bankruptcy petition against you, then you must get that creditor’s permission to apply for a DRO
  • At the end of the 12 months the debts cited in DRO are written off

RB-123/ (5 decks)

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