Unit 4: Mortgage Applications

What is a guarantee?

A formal agreement to accept legal responsibility for the repayment of a loan if the borrower cannot, or will not, repay it themselves.ending policy is well defined.

How is borrowing capacity assessed?

A ful assessment of affordability

What is a guarantor?

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

What does MCOB 11A require?

An intermediary to submit accurate information obtained from the customer to the lender so that an assessment of affordability can be carried out.

What do the updated MCOB rules require lenders to do with guarantors?

Assess whether they could afford to take on the payments should the guarantee be called upon. & under MCOB 11.6 they must make the same checks on the guarantor as they would on the applicant.

What should the firm ensure its staff do?

Be alert to any use of accounts that does not fit the expected pattern, and understand that they must report this to the firms MLRO.

What 8 issues should a lender consider carefully when reviewing a prospective borrower's financial statements?

Bottom line balance on bank statements Regular Income Regular Payments out Overdrafts Fees & Charges Returned cheques/failed dd Maintenance Payments Mortgage Statements

What expenditure must be deducted in order to establish free disposable income?

Committed expenditure Credit agreements & other contractual obligations which will not be paid off before entering into the mortgage Basic essential expenditure Basic day-to-day needs E.g. food & heatin And non reducible expenditure E.g. council tax, utilities insurance Basic quality of life expenditure Clothing Household & personal items Basic recreation Childcare etc

What are the six FTOC outcome?

Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture. 2. Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly. 3. Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale. 4. Where consumers receive advice, the advice is suitable and takes account of their circumstances. 5. Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect. 6. Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.

What informatio does the adviser need to establish to offer ethical advice? (4)

Customer's: 1. needs 2. circumstances 3. objectives 4. attitude to risk

What are the record keeping requirements relating to responsible lending?

For each customer, a lender must make an adequate record of the steps it takes to comply with the responsible lending rules, must be kept in paper/ electronic and kept for the term of the mortgage?

What is full Liability?

Guarantor is Liable for the entire debt if borrower defaults Guarantor must demonstrate that they can afford at least 100% of the mortgage, in addition to their own existing commitments.

What is a company voluntary arrangement?

IVA for a company/LLP

When is a guarantor used?

If lenders feel that a borrower may be able to afford a slightly higher mortgage than they would normally offer, but are reluctant to lend the higher amount without additional security.

What are the 5 main types of income considered for affordability?

Income from: 1. Employment 2. Self-Employment 3. Directorship 4. Other secure income e.g. maintenance, pensions 5. Secure trust income

What is a Form J Restriction?

It is entered the trustee at the LR & records the trustee's interest in the property, and requires the Land Registry to notify the trustee of any dealings relating to the property. The restriction remains in place until the trustee's interest in the property has been settled. 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.

What 6 issues invalidate a guarantee?

Lack of capacity to contract Undue influence Misrepresentation Misapprehension Mistake Duress

Can affordability assessment be waived for MCD regulated mortgages?

NO

What figure is used to calculate a self-employed income?

Net profit

What info can be gathered from business accounts?

P/L account Balance sheet

What documents are acceptable as proof of an employee's income?

Payslips showing: Basic salary & guaranteed allowances Non-guaranteed income e.g. overtime & commission Quarterly bonuses Self-assessment tax calculation

What are the 4 most relevant principles for business, to the fair treatment of customers?

Principle 2: conduct business with due skill, care & integrity Principle 3: take reasonable care to organise & control its affairs responsibly & effectively Principle 6: due regard to the interest of customers & treat them fairly Principle 7: due regard to the inforamtion needs of its clients & communicate info to them in a way that is not misleading.

What is the Scottish version of an IVA?

Protected Trust Deed - made through an insolvency practitioner, may be required to sell assets, no further credit to be taken out, lasts for 3 years, advertise the proposal in the Edinburgh Gazette - creditors 5 weeks from publish to object, takes automatic effect if no more than 33 per cent of creditors by value object

What is MCOB 11?

Responsible lending

How does credit scoring work?

Scores are given to certain aspects of the application, based on historical data relating to risk. Applications that receive more than a certain score (often known as the cut-off score) are accepted, while those that do not are declined.

What is the Scottish version of Bankruptcy & the differences?

Sequestration The debtor can apply to the court for a sequestration order for a minimum debt of £3,000. One or more creditors can apply for a sequestration order for a minimum debt of £3,000. The debtor must be 'apparently insolvent' - or unable to pay their debts. On the grant of a sequestration order, the debtor's assets are transferred to a trustee to be sold, with any money raised going to the creditors

What are CCJs called in Scotland?

Sheriff Court Judgements - held on a register of sheriff court judgments. Awards for debts are known as 'money decrees'. Also stay for 6 years

What is the declaration?

Signed and dated by all applicants, and confirms that the information given is correct to the best of their knowledge. It also authorises the lender to make all necessary enquiries relevant to the application

What act enables lenders to initiate a prosecution where an attempt is made to obtain a mortgage by deception, whether or not the mortgage is actually granted.

The Theft Act 1968

How does FTOC apply in practice to the advice process?

The adviser must bear in mind at all times that they must do what is best for the client Occasionally recommending a different product to what the client was interested in or advising against a certain product, if they do not feel that the client is knowledgeable or sophisticated enough to deal with it.

What else must be considered about mortgage term?

The age at which the customer would like to have repaid the mortgage. Whether the customer feels there is a possibility of paying off the loan early if there is, mortgages with early repayment penalties should be avoided. If the mortgage term takes the customer near or into retirement, will there be sufficient income to maintain the repayments? is the customer aware that shorter terms require higher monthly payments? In many cases, a customer may want a shorter term, but a longer term will allow higher borrowing

What happens if a couple own a property and only one of them is bankrupt?

The bankrupt's interest in the property does not pass to the trustee innbankruptcy. But 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. The forced sale of the mortgaged property can be delayed for at least one year to allow the family to make alternative arrangements. The joint owner can 'buy out' the bankrupt's interest in the property from the trustee in bankruptcy. If the property is the bankrupt's main residence, the trustee has three years from the date of the bankruptcy order to decide whether to sell the property to pay the debts. If no action has been taken by that deadline, the property reverts to the bankrupt. If the property is not the bankrupt's main residence, the trustee has no deadline by which to take action.

When can the requirement to assess and prove affordability be waived?

Varies terms of an existing regulated mortgage/ replace the exisiting regulated mortgage providing that: amount of borrowing does not increase (except arrangement fees) - no change in terms of the contract - customer has not increased existing mortgage since 26 April 2014 except for fees/essential repairs - its in the customers best interests

State the fundamental principle that underpins the provision of ethical advice

What is best for the customer in view of information known at the time, regardless of the needs of the adviser (e.g. commission)

When does fraud occur?

When a person deliberately sets out to obtain funds from another person or organisation by dishonest means

What is a default?

Where the borrower missed one or more payments, and did not respond satisfactorily to requests to correct the problem.

Do anti-money laundering provisions apply to mortgages?

Yes

Who must agree to an IVA?

creditors representing at least 75 per cent of the debt must agree to the IVA

What happens if the loan isn't repaid within nine months of end of accounting period in which it was made?

have to pay a tax charge of 32.5 per cent on the amount still outstanding. In this case, if the loan is eventually repaid by the director, the tax charge will be refunded nine months after the end of the company accounting period in which it is repaid.

Why is nationality & residential status important?

illegal to discriminate on nationality or race lenders specify that mortgage business can only be accepted on normal terms if the borrower is resident in the UK. as hard to sue a non-resident

What is the benefit of a credit?

individual can withdraw the balance as and when they choose, providing the company has the assets to do so, and the withdrawal will be tax-free. Lenders will look favourably at a director's loan account with a high credit balance

Why might it be in credit?

injected capital property or equipment

What is a debt relief order?

intended to help those living in England and Wales who are struggling to pay their debts, and who: -owe a maximum of £20,000; - have total gross assets not exceeding £1,000 plus a car worth less than £1,000; -have disposable monthly income (after tax, NICs and normal household expenses) of no more than £50

What happens once an IVA is confirmed?

interest and charges on the debts are frozen and the debtor makes fixed monthly payments towards the debts, as set out in the agreement.

What is Limited Liability?

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%. Shown as a % of the mortgage.

How can a CCJ be repaid?

lump sum or regular payments

What figures are important to a lender when deciding to lend to SE?

net profit & personal drawings. If drawings are more than the net profit, the applicant may be living beyond their means by taking more out of the business than it is making by way of net profit

What is a credit impaired customer?

one who: n within the last two years has owed the equivalent of three months' payments on a mortgage or other loan, unless late payment was the result of errors by a bank or other third party; or n within the last three years has had one or more county court judgments, totalling more than £500; or n has had an individual voluntary arrangement or bankruptcy order in force within the last three years

How do lenders view payday loans?

see the need to take out a payday loan as an indication that the applicant cannot budget effectively or may have a regular income shortfall.

What is a CCJ?

when a person is unable to pay their creditor(s), the creditor(s) can bring a civil case to the county court. The court can make a county court judgment (CCJ) against the debtor, setting out how the debt should be repaid

What are the 2 types of mortgage guarantee?

1. full liability 2. limited liability

What 2 things does the information gathered in a fact find establish?

1. how much the potential borrower can afford each month 2. type of mortgage they would prefer

What will the fact find interview cover?

1. intentions - purchase price & type of property 2. income & outgoing - how much they can comfortably afford to borrow 3. deposit & cash availble 4. Employment - current & history, recent redundancies @ work or future promotion 5. Management of finances - good = credit, bad if always overdrawn 6. Budget rates & rises - customer's budget and their ability to cope with potential rate rises in the future 7. Early Repayment - potential / intention 8. Term 9. Protection needs - arise once mortgage is arranged 10. attitude to risk - risk questionnaire --> risk profile

How do directors receive income?

1. salary - Small salary under limit they have to pay NI or Income Tax 2. Dividends - must be paid quarterly, otherwise monthly = "disguised income" and taxed as income 3. Directors loan

When is credit scoring best applied?

1. the institution has a well-developed database on its existing mortgage book; 2. It is built into a centralised processing system, such as a telesales-based operation; 3. Dealing with high volumes of business; 4. Lending policy is well defined.

How long must evidence of identification & supporting evidence of transaction be retained?

5 years after end of customer relations & 5 years after execution of transaction

How long do CCjs stay on register for?

6 years, unless they are paid in full within a month of the judgement. If they are paid after one month, they are shown as satisfied on the register. CCJs that have not been paid are shown as 'unsatisfied' for the six-year period. This also shows on a credit report

What happens when the trustee in bankruptcy becomes the legal property owner?

A bankruptcy restriction notice is entered at the Land Registry against a property.

What 6 specific factors will lenders consider when credit scoring?

- age -income -occupation -existing commitments -conduct of any existing bank or loan accounts with the lender -credit searches

What is the mortgage advice process?

1. factfind 2. research 3. present 4. implement

What 4 pieces of information are not revealed by references & statements?

1. Action for maintenance / child support claim 2. Pending court hearings 3. Borrowings yet to be drawn down 4. Purely cash transactions, eg undeclared income or cash borrowings from the family

What are the 2 elements of the directors loan account?

1. Director is in credit Company owes them money 2. Director is in debit They owe the company money withdrawals are tax free

How do lenders corroborate income from self-employment?

1. HMRC tax calculations - past 2/3 years - Confirms the figure for taxable profit & calculation of income tax liability 2. Accountants certificate - confirms business income for past 2/3 years must be member of a professional body and hold specified qualifications 3. Full business accounts for the past 3 years

Give 9 Examples of mortgage fraud

1. Incorrect income on app 2. False salary reference 3. Omission of outoings on app 4. Details of exisiting debt withheld 5. failure to disclose relevant information 6. attempts to obtain a mortgage on non-existant properties 7. Fraud instigated by dishonest intermediaries, solicitors and accountant 8. Bogus financial accounts 9. Bogus valuations

What does the lender need to know about the loan required?

1. LTV 2. Deposit availble Repayment method 3. B&C Insurance Requirements 4. Other insurance requirements

What 9 general pieces of information are required in a mortgage application?

1. Name & address of applicant 2. Nationality & residential status 3. Marital (civil) status, and age & number of dependents 4. Occupation & nature of employment 5. Employers name & address 6. Length of time in current employment 7. Income 8. All regular expenditure 9. Information on debts, bankruptcy and CCJs

What is a directors loan?

Directors loan = part of Directors capital account: record of money owed to the company by participators & of money owed to participators by the company. Can include unpaid wages, money injected by directors to start the business & cost of business items paid for personally by the director & straightforward loans between director & business

What more general factors are considered important when credit scoring?

Does the applicant have experience of managing credit? - existing mortgage with no problems score higher than FTB - never applied for any form of credit --> low score Has the applicant shown poor debt management in the past? - min cc payments shows problem with debt and reduce score - apply for multiple credit cards/ loans = poor management

Outline the 7 general considerations for an adviser when assessing suitability

Does the customer... Meet the lenders eligibility criteria Require repayment/interest-only/part & part Have a preference for a particular mortgage term Have a preference or need for stability of monthly payments? Have a preference or need for reduced initial payments? Intend to make early repayments Have a preference or need for any other mortgage features?

What are the 4 consequences of a default?

The lender can issue a notice of default to the borrower The credit record shows the default for six years from the date of the default notice, even if the arrears are paid off The record will show the amount of the original default and the balance at the date of the report, including any payments made since default - lenders will be wary of providing a mortgage & if they do, offer a higher interest rate

When can income multiples be used to assess borrowing capcity?

They can be used as a guide to the maximum borrowing potentially available.

What does a bankruptcy restriction notice do?

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

Why should fimrms understand the purpose of a customers relationship with them?

To collect sufficient information to form a complete picture of the risk associated with the business relationship and provide a basis for subsequent monitoring

How is net profit calculated?

Turnover - cost of raw materials needed to do business = gross profit gross profit - routine business expenses = net profit

What measures can be taken to deal with fraud?

a rigorous approach to corroboration of income and outgoings, with written confirmation and telephone follow-up where necessary; special attention to applications from sole traders and partnerships to ensure that information supplied is signed off by a qualified and reputable accountant and double-checking details with bodies such as HMRC lenders dealing only with reputable intermediaries; engaging in ongoing dialogue on fraud prevention measures with professional bodies use of credit bureaux checks for all applications; use of other searches, such as the Companies Registry for corporate applications; only using solicitors, valuers and other professional advisers with a known track record; having proper systems of audit, control and inspection; adopting a strong approach to detection of fraud, referring cases to the police authorities as necessary; carrying out audits of adviser files to check consistency of information.

What happens upon implementing the recommendation?

adviser does the application, completes it and submits it to the lender. who then has responsibility for underwriting. Adviser will still liaise between the customer and lender & help customer through the process.

What happens at the research stage?

adviser identifies the most suitable product to meet customers needs, preferences & affordability & show clearly how this product meets them.

What is an IVA?

alternative to bankruptcy, supervised by an insolvency practitioner. If the arrangement is agreed, the creditors accept a reduced payment, for example 60p for every £1 owed.

What happens if no suitable documents are available?

an employers reference may be acceptable, if it is: An original On business letterhead Dated recently Unambiguous in respect of permanence of employment & income

What do credit references provide?

an insight into the activities and credit problems of specific individuals based on historical information

What is the general rule regarding mortgage term?

as short as feasibly possible

What happens when the adviser presents the recommendation?

ask the customer to read the information & then explain the key details to them in easily understood language, so that the customer can make an informed decision.

What happens to a bankrupt who is the sole owner of a property?

at least £1000 equity, the property is transferred to the turstee in bankruptcy --> legal owner & can sell it to settle debts.

For which expenditure can statistical figures be used?

basic essential & basic qual of life. actual figures are needed for committed as they are different

When is a directors loan treated as a BIK?

below £10,000 (2018/19 figure) it will not be treated as a benefit in kind, so it could be interest-free more than £10,000 it will be treated as a taxable benefit in kind, unless the director is obliged to pay interest at a rate equal to, or above, the official rate for beneficial loan arrangements

What might lenders require for larger mortgages?

both accounts and an accountant's certificate

What are examples of employees additional income?

car allowance location allowance mortgage subsidy shift allowance overtime commission other sales-related income

What is the capital account?

comprises: n what remains of any capital that was used to establish the business; n any further capital injected into the business since it was established; n any surplus profits from previous trading years. It also includes a figure for personal drawings.

What is a key difference between a sole trader & director?

sole trader pays income tax at their highest marginal rates on net profits, regardless of whether they take the money or leave it in the business. A company, on the other hand, pays corporation tax on profits after salaries have been paid to employees (directors)

What are customer due diligence procedures?

specific initial steps to ensure that they obtain evidence of a client's identity & evidence of the source of funds deposited e.g. deposit.

What do credit bureauxs do?

store and maintain financial and public records of people who have received credit.

Where are CCJslisted?

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

Recommendations of a sub-prime mortgage to a prime customer should not be made unless...

the adviser can demonstrate that the costs, terms and conditions of the contract will not disadvantage the customer when compared with suitable standard mortgages

What impact can FTOC have on certain specialist home finance products, e.g. Islamic Finance?

the adviser needs to take into account the motives behind selecting such a product e.g. borrowers beliefs

What must a firm take into account when the mortgage is for debt consolidation?

the costs incurred by increasing the term of the debt repayment; n whether it is appropriate to secure previously unsecured debts; n if the customer is known to have payment difficulties, whether negotiating an arrangement with their creditors would be more appropriate than consolidating through a mortgage

What happens if the terms of a CCJ aren't met?

the creditor can go back to court for further action, which may result in an 'attachment of earnings' order

What happens if a DRO is granted?

the creditors listed in the order are subject to a 'moratorium' on debts owed to them, usually lasting for 12 months, during which they cannot seek repayment or enforcement of debts owed to them. At the end of the moratorium, assuming the debtor has met the terms of the DRO, the debts are written off and they are discharged.

What will the taxable benefit be?

the difference between the official rate and the interest actually paid by the director. The director will have to pay income tax on the benefit and the employer will have to pay National Insurance on the benefit

What is a attachment of earnings order?

the individual's employer must deduct a certain amount from their pay and pass it on to the court for onward payment to the creditor. Attachment of earnings orders can only be made against employees

If a non MCD regulated mortgage has been increased, when can the affordability be waived?

the property value would be at risk if essential maintenance repairs are not carried out; and n the funds raised are to be spent on that work; and n the lender has evidence that the additional borrowing is no more than the cost of the work.