Chapter 6: Credit and Consumer Lending

Question 1

what are the 4 C’s of credit

Answer 1

character, capacity, callateral, capital

Question 2

the integrity of the bprrower is paramount which is why interviews and disscussions with them are so important - what Cof credit doe this refer to?

Answer 2

Character

Question 3

Refers to the borrowers ability to repay the loan - what C or credit does this refer to?

Answer 3

Capacity

Question 4

refers to the assets being provided to secure the loan. It is typically required as a way to reduce the lenders risk. - what C of credit does this refer to?

Answer 4

Collateral

Question 5

theThe amount of ……, is often refered to as the deposit of equity provided by the customer can indicate their commitmment to the purpose of the loan

Answer 5

Capital

Question 6

what is a customers net worth

Answer 6

the difference between their total assets and total liabilities

Question 7

under CCCFA 2003 lenders can harge various fees , however these must be reasonable and the lender must have told the consumer about them at the outset of the contract. If a fee is unreasonable what can be done

Answer 7

an application can be made to the district court to have it reduced or cancelled

Question 8

when the NZ courts are deciding whether a credit fee or default fee is reasonable what rules apply to establishment fees

Answer 8

Establishment fees should generally be no more than the lenders reasonable costs in setting up the credit contract, processing the application, documentation and advancing the credit

Question 9

when the NZ courts are deciding whether a credit fee or default fee is reasonable what rules apply to break fees

Answer 9

teh CCCFA refers these a ‘prepayment fees’ and cannot be ore than a reasonable estimate of the lenders loss resulting from the early repayment

Question 10

when the NZ courts are deciding whether a credit fee or default fee is reasonable what rules apply to default fees

Answer 10

these fees should generally be no more than is needed to “reasonably” compensate the lender for any costs or losses they incurred because of the default

Question 11

when the NZ courts are deciding whether a credit fee or default fee is reasonable what rules apply to Thrid party fees

Answer 11

lenders can pass on any fees they have been charged by others in relation to the credit contract such as a credit check. iThe lender cannot mark up these fees.

Question 12

from april 2021 lenders are required to keep records to substantiate how each credit and default fee is calculated and demonstrate that it was not unreasonable at the time it was calculated or reviewed, according to which piece of legislation

Answer 12

The credit contracts legislation Amendment Act 2019

Question 13

The RBNZ (MPC) meets seven times a year to decide amongst other things, whether to change the Official Cash Rate (OCR). What is the OCR?

Answer 13

The rate banks pay the reserve bank when they need to borrow money

Question 14

The CCCFA does not set interest rates but states that the interest rates must not be ………. and usually interest must not be charged .. ……

Answer 14

• oppressive, in advance

Question 15

what is the Loan to Value Ration (LVR)

Answer 15

it reflects the size of the borrowing compared to the value of the asset being purchased

Question 16

How is LVR calculated

Answer 16

Loan amount /asset value *100

Question 17

when calculating LVR the asset value should be the lower of ……..

Answer 17

of the cost of the assets or bank valuation

Question 18

The LVR is a primary measure of what for bankers

Answer 18

risk

Question 19

loans with a higher LVR, which typically means over ..%, are often viewed as having a higher risk for the lender, and to compensate fo rhtis what is normally done?

Answer 19

• 80%
• a higher interest rate may be applied to the borrowing. (the borrower may also be asked to provide more capital to reduce the LVR)

Question 20

Banks are permitted to make no more that …..% of their residential owner occupied mortgage lending to high LVR (<20% deposit) borrowers

Answer 20

20%

Question 21

Banks are permitted to make no more that …..% of their investor lending to high LVR (<30% deposit) borrowers

Answer 21

5%

Question 22

with residential loans what is the max period they are taken over and how many years can they be interest only at max

Answer 22

30 yrs and 5 yrs IO

Question 23

when going for a mortgage what are the 3 principles for verifying a customers financial situation

Answer 23

1. recency of documentation (ie pay slips no older than 30 days)
2. consistency of information (from exisiting records or previous applications)
3. benchmarking (using experience and knowledge of other customers to validate info provided)

Question 24

What are the 3 essential qualities in good security

Answer 24

simplicity of ownership
stability of value
saleability or realisation

Question 25

when the descirbing good security what does stabilitt of value mean

Answer 25

how much the lender can rely on the value of the security
Easiest types of security to value:
- cash lodgements or term deposits
- residential property
- listed shares

more difficult to value:
- specialised or commercial property
- furniture, fixtures, and fittings
- unlisted shares
- managed investment funds

Question 26

what is considered to unacceptable residential security

Answer 26

time shares or large rural properties

Question 27

what type of interest rate loans allow a customer to lock in an interest rate, and provide certainty of knowing what their repayments will be over the agreed period, typically 1 to 5 years. Safeguards against future rate rises but removes the potential to take advantage of and rate declines . May also have restrictions on making any additional repayments and have a break fee

Answer 27

fixed rate interest loan

Question 28

in a floating or variable rate loan why may the interest rate fluctuate

Answer 28

mainly in response to the changes in the OCR but also potentially due to other commercial considerations by the credit provider such as competitor rates, regulatory changes and funding costs.

Question 29

what are the advantages of a floating rate loan

Answer 29

• flexibility
• no restrictions on making additional repayments
• excess repayments may be withdrawn on some loans (ie the CARL - repay and redraw facility)
• savings account can also be attached to a floating rate loan and if it holds a positive balance would decrease interest rate charges

Question 30

what is a mixed rate or hybrid loan

Answer 30

where you can split your loan into fixed or floating portions

Question 31

What is a discounted interest rate

Answer 31

it means the interest paid by the borrower will be lower than the floating rate - whichever way it move - for the length of the discount period.

Question 32

How does a capped rate work

Answer 32

if the floating rate rises above the cap the interest rate that applies is the capped rate. If the floating rate drops below the cap it is the actual rate that applies.

Question 33

what 9 things can affect interest rate?

Answer 33

1. loan term (fixed rates will typically be higher over a longer term due to the bank locking in a rate for a longer period ie 1yr fixed rate is less than 3 yr)
2. amount of overall borrowings against the asset base(LVR)
3. customer relationship
4. competitor interest rates for comprable products
5. admin costs, including default and recovery management
6. govn taxes
7. prior borrowing history and credit conduct of the customer
8. the financial institutions funding or borrowing costs
9. regulatory change

Question 34

lender mortgage insurance is one of the ways to help customers acheive home ownership soner, without having a 20% deposit. how does this work

Answer 34

the lender (ie the bank) is the insured party, not the borrower or guarantor. it protects the lender against a loss should the borrower not be able to make the repayments.

Question 35

what legislation protects NZ consumers when they are borrowing money

Answer 35

the Credit Contracts and Consumer Finance Act 2003 (CCCFA)

Question 36

how doe the CCCFA help to protect NZ consumers

Answer 36

it helps to ensure consumers make informed borrowing decisions, know what they are agreeing to and helps them to keep track of their debts.

Question 37

what types of transactions does the CCCA cover?

Answer 37

where money is being loaned for personal use including, consumer credit contracts, consumer leases and buy-back transactions.

Question 38

what are the 4 key lender responsibilites under the CCCFA

Answer 38

• must clearly and accurately disclose key info about a contract
• must disclose any fees and make sure they are reasonable
• unable to enforce contracts in an oppressive way
• unable to impose oppressive requirements on borrowers

Question 39

What are the borrowers rights under the CCCFA (3)

Answer 39

• able to cancel their contract in the first few days after receiving it
• have the right to repay what they owe on their contract early
• can ask lenders to change their contract if they are suffering unexpected hardship

Question 40

what 5 types of contract are NOT considered to be consumer credit contracts and are therefore NOT covered bythe CCCFA regulations

Answer 40

1. credit is provided for commercial or investment purposes
2. the total amount to be paid is due within 2 months and the debt equals the sale price of the products or services
3. a borrower goes into overdraft without the lenders prior agreement
4. the borrower is acting as a trustee of a family trust
5. a student loan under the student loan scheme

Question 41

If the lender uses any other reason other than those 5 previously listed to state that the CCCFA does not apply the lender may be in breach of what ACT

Answer 41

the Fair trading Act 1986

Question 42

why did the Credit Contracts Legislation Amendemnt Act 2019 come in

Answer 42

to amend the CCCFA 2003

Question 43

all lenders must comply with the lender responsibility principles when providing credit. The lender responsibility principles impose obligations when …. (3)

Answer 43

• advertising,
  before entering a loan,
• during all subsequent dealings with borrowers and garuantors

Question 44

what are the 2 lender responsibility principles

Answer 44

Principle 1: lenders must exercise the care, diligence and skill of a responsible lender in all its dealings with borrowers and guarantors
Principle 2: lenders must comply with the specific listed lender responsibilities set out in the CCCFA

Question 45

what is credit scoring

Answer 45

credit scoring can take the form of a credit scorecard - a set of rules that generate a numeric score for the various elements in a credit application. Each score is added up to produce an overall figure that represents the risk for the application and indicates whether or not the loan should be approved.

Question 46

The CCCFA applies to people or businesses who… (3)

Answer 46

Provide credit
Lease out goods
Operate or promote buy-back schemes

Question 47

A contract where a borrower is provided credit for personal use is called a…

Answer 47

Consumer credit contract

Question 48

Consumer leases are

Answer 48

A lease contract where someone is leasing goods for personal use and either has the option to purchase the leased goods or the term of the lease is more than one year

Question 49

Where a home owner transfers their home (or an interest in their home) to a transferee, who typically pays their debts or gives them money. The former owner (the occupier) has the right to continue living in the home and to buy it back at some time in the future is a called a …… transaction

Answer 49

Buy-back transaction