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CeMAP 2 - MORT > Topic 11 > Flashcards

Topic 11 Flashcards

Checking the applicant's credit status (73 cards)

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1
Q

What is credit assessment in mortgage lending?

A

Credit assessment is the process lenders use to evaluate an applicant’s financial situation and creditworthiness using references, financial statements, credit searches, and scoring systems.

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2
Q

What information can financial statements reveal during credit assessment?

A

Financial statements can show regular income and payments, overdrafts, fees, returned cheques, maintenance payments, mortgage arrears, and whether there is a surplus or deficit.

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3
Q

What key factors should a lender look for in bank statements?

A

Regular income, regular outgoings, overdrafts, unauthorised charges, returned cheques, maintenance payments, and any inconsistencies with application details.

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4
Q

What types of information are not shown on references or statements?

A

Pending court hearings, undrawn borrowings, cash transactions (e.g., undeclared income), family loans, and maintenance/child support claims.

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5
Q

What is the purpose of a credit search in the credit assessment process?

A

To verify the applicant’s residence and to review financial history such as defaults, CCJs, and insolvency using credit bureaux data.

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6
Q

Which agencies provide credit reference information in the UK?

A

Experian, Equifax, and TransUnion.

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7
Q

What is a ‘default’ in the context of credit assessment?

A

A missed payment that was not resolved, leading to a notice of default, which remains on the credit file for six years.

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8
Q

How might payday loans affect a mortgage application?

A

They may signal poor financial management or income shortfalls and may be viewed negatively, even if not always visible on standard credit checks.

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9
Q

What is a payday loan?

A

A short-term, high-interest loan intended to be repaid on the borrower’s next payday.

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10
Q

What is credit scoring in mortgage lending?

A

A system that allocates points to various application factors to assess risk and decide whether to approve or reject an application.

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11
Q

What factors influence a credit score?

A

Age, income, occupation, existing commitments, credit history, use of credit, and account conduct with the lender.

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12
Q

What general behaviours can reduce an applicant’s credit score?

A

Making only minimum payments, never having credit, multiple credit applications, and poor past debt management.

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13
Q

What happens to applications near the cut-off score?

A

They may be manually reviewed by a supervisor or lending officer for further consideration.

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14
Q

Why do lenders use different credit scoring models?

A

Because each lender has unique lending policies—some accept higher risk with higher rates, while others aim for lower risk to maintain competitive rates.

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15
Q

What are the limitations of credit scoring?

A

It’s a statistical tool that highlights probabilities, not guarantees, and can’t predict individual behaviour with certainty.

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16
Q

What makes credit scoring effective?

A

A large, accurate database, integration with mortgage systems, high application volumes, and a well-defined lending policy.

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17
Q

Why should applicants check their credit score before applying for a mortgage?

A

To identify and resolve potential issues and understand their likelihood of approval.

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18
Q

What is the main role of a guarantor in a mortgage context?

A

A guarantor provides a written undertaking to repay the mortgage if the borrower cannot, offering additional security for the lender.

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19
Q

Under which Act is a guarantee legally defined?

A

The Statute of Frauds Act 1677.

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20
Q

Who typically acts as a guarantor?

A

Often parents for their child’s mortgage, or company directors guaranteeing business loans.

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21
Q

What are the two types of mortgage guarantees?

A

Full liability and limited liability guarantees.

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22
Q

How much must a guarantor usually demonstrate they can afford?

A

At least 100% of the mortgage amount, plus their own existing commitments.

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23
Q

How is a limited liability guarantee calculated?

A

It’s the shortfall between the mortgage offered and needed, plus possibly an extra 10%.

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24
Q

Why must lenders ensure guarantors get independent legal advice?

A

To reduce the risk of the guarantee being challenged due to misrepresentation or undue influence.

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25
What could render a guarantee invalid due to the guarantor’s personal circumstances?
Lack of capacity to contract, such as being a minor or having a mental illness.
26
Give two examples of undue influence in a guarantee situation.
Parent and child, or husband and wife relationships where pressure may exist.
27
What did Barclays Bank v O’Brien (1994) establish?
That a guarantee could be invalid due to misrepresentation and lack of independent legal advice.
28
What was the ruling in Lloyds Bank v Waterhouse (1991)?
The guarantee was unenforceable because the illiterate guarantor was misinformed about the nature of the guarantee.
29
What rights does a guarantor not have?
No right to the property, no access to mortgage documents, and not informed of missed payments unless they ask.
30
When must a guarantor be informed about mortgage changes?
If a further advance is requested or the mortgage term is extended.
31
Can a guarantor be released from their obligations?
Only if the lender believes the borrower can manage without the guarantor.
32
What does MCOB 11.6 require regarding guarantors?
That lenders assess guarantors' affordability as thoroughly as they do for the borrower.
33
What is a ‘guarantor mortgage’?
A mortgage where a relative guarantees the loan, often requiring a savings deposit with the lender as security.
34
What is a Joint Borrower, Sole Proprietor (JBSP) mortgage?
A family member is a joint borrower but not a property owner; their income supports affordability, but they have no ownership rights.
35
What are the SDLT benefits of a JBSP mortgage?
Avoids the second home SDLT surcharge and preserves the first-time buyer SDLT exemption.
36
What is insolvency?
Insolvency occurs when a person’s liabilities exceed their assets and they cannot meet their financial obligations as they fall due.
37
What is a County Court Judgment (CCJ)?
A CCJ is a court order in England and Wales setting out how a debt must be repaid, either in full or by instalments.
38
What happens if a CCJ is not paid?
The creditor may apply for an attachment of earnings order, requiring the debtor’s employer to deduct payments from their wages.
39
How long do CCJs stay on the Register of Judgments?
They stay on the register for six years unless paid in full within one month, in which case they are removed.
40
What is the consequence of concealing a CCJ on a mortgage application?
It is a criminal offence to knowingly conceal a CCJ or sheriff court judgment from a prospective lender.
41
What is bankruptcy?
Bankruptcy is a formal legal process to deal with personal insolvency, typically involving the transfer of assets to a trustee to settle debts.
42
What happens to a property if a bankrupt individual has at least £1,000 equity in it?
The property transfers to the trustee in bankruptcy, who can sell it to repay debts.
43
What is a bankruptcy restriction notice?
It is entered at the Land Registry, preventing the bankrupt from dealing with the property; only the trustee can.
44
What happens if a joint owner is not bankrupt but the other is?
The trustee may apply to sell the property if the bankrupt’s share exceeds £1,000. A Form J restriction is placed on the title.
45
What is a Form J restriction?
It records the trustee’s interest in a jointly owned property and notifies the trustee of any dealings with it.
46
How long does a trustee have to act on the bankrupt’s main residence?
Three years from the bankruptcy order; after that, if no action is taken, the property reverts to the bankrupt.
47
What is an Individual Voluntary Arrangement (IVA)?
A legally binding agreement supervised by an insolvency practitioner, allowing debtors to repay part of what they owe.
48
What percentage of creditors must agree to an IVA?
Creditors representing at least 75% of the debt amount must agree to the IVA.
49
What is the effect of an IVA on interest and charges?
Interest and charges on the debts are frozen once the IVA is confirmed.
50
What is a Company Voluntary Arrangement (CVA)?
It is the corporate equivalent of an IVA, available to limited companies or LLPs if all directors/partners agree.
51
What is a Debt Relief Order (DRO)?
A DRO is a low-cost alternative to bankruptcy for individuals with low income, low assets (under £2,000), and debts up to £30,000.
52
What are the eligibility criteria for a DRO?
Debts under £30,000, assets under £2,000, and disposable income no more than £75 per month.
53
What happens during a DRO moratorium period?
Creditors cannot enforce debt repayment during the 12-month period.
54
What happens at the end of the DRO moratorium if conditions are met?
The listed debts are written off and the individual is discharged.
55
Are individuals with DROs likely to get a mortgage?
No, they are unlikely to qualify, and lenders are typically unwilling to lend.
56
What is fraud in the context of financial services?
Fraud is when someone deliberately seeks to obtain funds from another person or organisation by dishonest means.
57
What are some common examples of mortgage fraud?
Incorrect income stated, false salary references, omission of outgoings, withheld debts, bogus accounts, fake valuations, and organised fraud attempts.
58
Which other areas, besides mortgages, should advisers be alert to for fraud?
Money laundering, life assurance, household insurance, and general insurance.
59
Name three key measures to help combat mortgage fraud.
Corroborating income with follow-up, dealing only with reputable intermediaries, and using credit bureau checks.
60
What legislation covers the offence of false representation and non-disclosure?
The Fraud Act 2006.
61
Under which law are mortgage fraud proceeds treated as proceeds of crime?
The Proceeds of Crime Act 2002.
62
What are the potential penalties for mortgage fraud?
Community service, large fines, or prison sentences.
63
What legislation governs the handling of customer data in mortgage applications?
The Data Protection Act 2018, enacting the GDPR.
64
What is the purpose of the GDPR?
To strengthen data protection rules and protect individuals’ rights regarding their personal data.
65
What acts and regulations govern money laundering in the UK?
The Proceeds of Crime Act 2002 and the Money Laundering Regulations 2017 (updated in 2019).
66
Why might money laundering via mortgages seem unlikely, yet still occurs?
Mortgages tie up money long-term, but they can still be used to conceal criminal proceeds.
67
What is Customer Due Diligence (CDD)?
The process of verifying a customer's identity and assessing the risk they pose.
68
Give three examples of acceptable identity documents under CDD.
Passport, driving licence with photo, recent utility or council tax bill.
69
What is financial exclusion?
When individuals cannot access financial services due to lack of standard ID documents.
70
What can be accepted as ID if a customer lacks conventional documents?
A letter from a responsible person like a solicitor, doctor, or minister.
71
When can a lender rely on a mortgage adviser’s assurance of identity?
When the adviser or authorised intermediary provides written assurance they've obtained proper ID.
72
How long must evidence of customer identity be kept for anti-money-laundering purposes?
At least five years after the customer relationship ends.
73
How long must transaction records be retained?
At least five years after the transaction was executed.

CeMAP 2 - MORT (14 decks)

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