Topic 10 Assessing the Applicant's Financial Status

Question 1

The assessment of affordability is the responsibility of the lender subject to the requirements of which MCOB rule?

Answer 1

MCOB 11

Question 2

An Intermediary would submit information to a lender under which MCOB rule?

Answer 2

MCOB 11A

Question 3

When obtaining the names & address of applicants how many pieces of identification are required?

Answer 3

2 (at least)

Question 4

In regards to the nationality & residential status of an applicant most lenders general specify the lender should be resident where?

Answer 4

UK

Question 5

If the applicant has dependants over the age of 17 what would the lender ask the applicant to complete?

Answer 5

“Consent to Mortgage Form”

Question 6

If an applicant has been employed by their firm for less that 3 years what will the applicant also need to provide?

Answer 6

Previous employer details

Question 7

These are all what in relation to a mortgage applicant?

• Advance required (LTV)
• Deposit available
• Repayment method
• Buildings & contents insurance requirements
• Other insurance requirements

Answer 7

Details of the loan

Question 8

What must be signed by applicants when an application form is completed. That also authorises to make all necessary enquiries relevant to the application?

Answer 8

Declaration

Question 9

What does the FCA say about Income/salary multiples?

Answer 9

They can use it as a guide but a full assesment of income should be carried out

Question 10

What is a “flexible approach” to assessing a Borrow’s capacity?

Answer 10

A person on a career path with a good potential for a salary increases might be considered for higher borrowing

Question 11

These are what in relation to a borrowers capacity?

• Employment
• Self- employment
• Directorship
• (Secured Income) Maintenance, Pensions etc
• Secure Trust Income

Answer 11

Types of acceptable income

Question 12

These are examples of what in relation to employed income?

• Car allowance
• Location allowance
• Mortgage subsidy
• Shift allowance
• Overtime
• Commission
• Other sales related income

Answer 12

Types of additional income an employed applicant can receive

Question 13

In relation to assessing income the below are what?

• Basis salary & guaranteed allowance
• Non-guarnteed income (overtime & commission)
• Bonuses
• Self assessment tax calculation

Answer 13

Examples of employed income

Question 14

What are the below in relation to employed income that cannot be proved but the customer is looking to use in an application?

• An original letter written on business letterhead
• Dated recently
• Unambiguous in respect of performance of employment & income

Answer 14

Employer reference that may be acceptable

Question 15

What area of assessing income from self-employed is this?

Total amount of business income received from sales or providing services

Answer 15

Turnover

Question 16

What area of assessing income from self-employed is this?

Business’s gross turnover minus raw materials required to carry out trade or goods bought to sell for business

Answer 16

Gross profit

Question 17

What area of assessing income from self-employed is this?

Gross profit less routine business expenses

Answer 17

Net profit

Question 18

Which example of how lenders corroborate income from self-employed is this?

• HMRC tax calculations from the last 2 years
• Taken from Individuals self assessment tax return & confirm the figure for taxable profit & show calculation of tax liability

Answer 18

HMRC tax calculations

Question 19

Which example of how lenders corroborate income from self-employed is this?

• Confirming business income from last 2 or 3 years
• Lender requires accountant to be a member of a professional body & hold qualifications

Answer 19

Accountant’s Certificate

Question 20

What is the other way a lender would corroborate income from self-employed?

Answer 20

Full business accounts from the last 3 years

Question 21

What is a “Short tax return” in relation to sole traders?

Answer 21

Sole trader with turnover below a small threshold only need produce

• Statements of turnover
• Total business expenses
• Net profit

Question 22

What does a “Profit & Loss account” show?

Answer 22

• Income & expenditure for that trading year
• Show gross & net profit for that year

Question 23

What does a “Balance sheet” show?

Answer 23

Business assets & liabilities at the end of a trading year

Question 24

In relation to self employed customers the below is what?

• What remains of any capital that was used to establish the business
• Any further capital injected into the business since it was incorporated
• Surplus profits from previous trading years

Answer 24

What a “Capital account” comprises

Question 25

A "Capital account" also comprises what?

Answer 25

- Figure for personal drawings - Amount withdrawn from the business that year

Question 26

Directors of public companies are treated as what for application purposes? Employed or Self-employed

Answer 26

Employed

Question 27

What percentage of business shares does the director of a small business need to own to be classed as self-employed for application purposes?

Answer 27

20-25%

Question 28

These are what in relation to a directors pay? - Salary (If they are employed) - Dividends - Director's loan balance

Answer 28

What comprises directors pay

Question 29

What is a Close Company?

Answer 29

Company owned by 5 or fewer participants OR **by any number of participants if they are all directors**

Question 30

What is a "Participant or Participator"?

Answer 30

Any individual who holds an ownership stake in a close company

Question 31

A "Participant or Participator" can be regarded as who?

Answer 31

- Shareholder - Director - Investor

Question 32

Family of a "Participant or Participator" are also called a "Participant or Participator"? True or False

Answer 32

True

Question 33

What is a "Director's capital account"?

Answer 33

Record of money owed to the company by participators and vise versa

Question 34

How does a "Close company" & it's "Participator" lend & borrow money to each other?

Answer 34

Through a "Director's loan account"

Question 35

When a director is owed money by the company. They are called what?

Answer 35

In **credit**

Question 36

When a director owes money to the company. They are called what?

Answer 36

In **Debit**

Question 37

What is a benefit of to a director withdrawing a credit that is owned to them from a "director's loan account"?

Answer 37

The withdrawal is tax free

Question 38

These are steps a lender must take when assessing affordability according to what? - Lender has taken account of the borrower's ability to repay the mortgage - Must take into account that the borrower (or guarantor) can make mortgage payments - Information from the customers is proportionate & limited to what is required

Answer 38

MCOB 11: Responsible Lending

Question 39

The record keeping for a mortgage should include information used to make an assessment but how long should it be kept?

Answer 39

The term of the mortgage

Question 40

These are circumstances are what according to MCOB 11.6? - Level of borrowing does not increase other than to cover the product or arrangement fees for a new mortgage contract - No change to the term of the contract that is likely to affect affordability

Answer 40

Circumstances that a mortgage contract can be changed/modified without a **full affordability assessment**

Question 41

MCOB 11.9 allows lenders to adapt rules to help customers of which type of mortgage? - If lender decides to adapt the rules for one customer it must allow them for all customers - Lender must have established internal switching policy to allow more affordable arrangements

Answer 41

Customers Re-mortgaging

Question 42

MCOB 11.9 allows lenders to adapt rules to help customers of which type of mortgage? - Borrowers must have an existing regulated mortgage with the lender or a different lender & must be on the same property - New mortgage cannot exceed outstanding amount of existing mortgage other than fees - Must be no shortfall of payment at the time of the application or in the last 12 months

Answer 42

Customers Re-mortgaging

Question 43

MCOB 11.9 allows lenders to adapt rules to help customers of which type of mortgage? - New arrangement can be of different type etc provided (**not more expensive or changing to interest only**) - Can disapply expenditure requirements if new arrangement is more affordable

Answer 43

Customer Re-mortgaging

Question 44

If a customer is Re-mortgaging to a different lender if the application runs into retirement does an affordability assessment need to be done?

Answer 44

Yes

Question 45

What type of expenditure is the below? Credit agreements & other commitments that will continue after the new mortgage is entered into

Answer 45

Committed Expenditure

Question 46

What type of expenditure is the below? - Spending to meet basic day to day needs (food & heating) - Non-reducible expenditure (council tax, utilities, insurance)

Answer 46

Basic Essential Expenditure

Question 47

What type of expenditure is the below? Clothing, household & personal items, recreation, childcare etc

Answer 47

Basic quality of life expenditure

Question 48

Some lenders won't allow mortgage payments to be more than what disposable income?

Answer 48

80-85%

Question 49

What must a lender do to assess the impact of future rate rises on customers?

Answer 49

Interest rate stress test

Question 50

What must a lender use as their starting point when conducting a stress test on a customer ability to repay a mortgage?

Answer 50

Reversion rate (SVR) at start of the mortgage

Question 51

With the exemption of a term of 5 years or the mortgage is on a fixed rate for more than 5 years. How long should a lender consider interest rate rises for?

Answer 51

5 years minimum

Question 52

The minimum interest rate rise a lender must use when stress testing a mortgage is what percentage?

Answer 52

1%

Question 53

What is the "Loan to Income Flow Limit" (LTI) introduce by the PRA in 2014?

Answer 53

Strategy to prevent households becoming overdurdend with mortgage debt

Question 54

What does the "Loan to Income Flow Limit" (LTI) limit lenders to doing?

Answer 54

Selling to many mortgages that exceed 4.5 times the income of joint borrows

Question 55

What percentage of a lenders new residential mortgages are restricted by the "Loan to Income Flow Limit" (LTI)?

Answer 55

15%

Question 56

What type of mortgage would this type of customer be applying for that the lender would need to consider? - Costs incurred by increasing the term of the debt repayment - Whether it is appropriate to secure previously unsecured debts - If customers is know to have payment difficulties whether it is more appropriate to come to an arrangement with the Creditor's rather than a mortgage

Answer 56

Debt Consolidation

Question 57

For a customer to be considered "credit impaired" within the last 2 years how many payments would they have needed to have missed

Answer 57

3 months

Question 58

For a customer to be considered Credit impared they would need to have country court judgements within the last 3 years totalling how much?

Answer 58

£500 or more

Question 59

For a customer to be considered "credit impaired" they would have a Individual Voluntary Arrangement (IVA) or bankruptcy order in within how many years?

Answer 59

3 years

Question 60

If a debt consolidation mortgage is being applied for the lender does not need to include the debts as committed expenditure in the affordability assessment? True or False

Answer 60

False (they do)