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QFA Loans2019/2020 Lecture
Please note that the material is intended for educational purposes only and should not be relied upon as a legal interpretation or industry approved text. We have used our best endeavours to ensure the information is accurate as of the date of lecture. We do not accept any liability if it is used by you for any other purpose than educational purposes. If you would likefurther information, please refer to our 2019-20 textbook.
Welcome Loans
Workshop Day
Look at Chapters
Slides and manual
Questions
Your questions
Examples
Calculations
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Important Things
Finish
Breaks
Smokers
Phones
Fire
Fun
QFA Loans Examination
Multiple Choice Questions
100 Questions
2 hours to complete examination
40% Pass rate
How many marks?
For each correct answer a candidate will score 3 marks
For each incorrect answer a candidate will score ‐1 mark (minus one mark)For each unanswered question a candidate will score 0 marks (Option E on the MCQ Sheet)
The exam will be marked out of 300 marks (100 x3 =300)
40%= 120 Marks
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Home reversionary schemes are normally only provided to individuals who are:
A Renting their current dwelling home.
B First time buyers.
C Over the age of 65
D Moving out of their property into long term nursing care.
E I don’t know.
Enda wanted financial security and took out a repayment mortgage with a five‐year fixed rate of 4.75%. When the fixed period ended, the variable rate was 5% but had been over 5.5% for the previous four years.
Which of the following statements is CPRRECT?
A Enda has saved money by fixing the rate for the first five years.
B Enda was unwise to fix the rate for the first five years.
C Enda has lost money by fixing the rate for the first five years.
D Enda has neither gained nor lost as a result of fixing the rate.
Patricia has a freehold interest in a property. This means that she:
(i) owns the land on which the property stands.
(i) Has free use of the land for a specified period.
(ii)Has a lease on the property, but not the land, for a specified period.
A (i) only.
B (ii) only.
C (i) And (ii) only.
D (ii) And (iii) only
E I don’t know.
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Marks
100 x 3 =300 100%
80 x 3 =240 – 20 = 220 73%
60 x 3 =180 ‐40 =140 47%
55x3 = 165 ‐45 = 120 40%
50 x 3 = 150 ‐50 = 100 33
40 x 3 = 120 …none wrong 40
The exam
• Strategy • Reading the question • Low hanging fruit • Eliminate answers• Think what chapter you are on • Read first 10 questions …….
– Go back and answer ones you are happy with – Mark and leave others – Then read next 10 .ie 11 to 20 and repeat process– Repeat this process with 100 questions – Add up all correct answers and see how you stand – Go back over the questions you left and if happy answer and if not mark I don’t know
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Other Help
Given
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Summary
Preparation
Practice questions
Prioritise your time
Read the question and focus
Study Regular Study (Early
morning)
Make Notes
Use Coloured Markers
Join a study group
Use Mind Maps
Think how it affects your
life
Use Technology
• Bryan Johnston QFA FLIA
Progressive Life.
Sales / marketing
Management.
Training.
Irish Permanent.• Business Champions• QFA
• Public Lectures• Webinars • In house • Personal coaching
Consultancy
Sales
CPD events
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Are you under pressure
• ..\..\Fun items\dolphinStress.pps
Chapter 1
Introduction
Slides
• Please note these slides are only an aide to the manual, workshops , webinars and practice questions
• They need to be used in conjunction with the Textbook
• Questions are based on manual not the slides
• Updated October 2019
• Good luck with your studies
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Introduction
In this chapter we will learn about:
• The various loan needs of an individual
• Who provides, or assists in the provision of a loan
• Terminology used in relation to loans
• Key obligations imposed on credit institutions, mortgage intermediaries by legislation and codes
• The main elements of a valid contract
QFA Loans 2019 / 20
Chapter 1
Introduction
Financial Need
• Savings – build a lump sum from reg savings
• Investment – lump sum earning return
• Protection – providing for unpredictable events
• Retirement Funding – replacement income
• Loans – borrowing capital to meet expenditure need
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Client Loan Needs
• Car
• Temporary overdraft
• Credit cards
• Apartment/home
Housing loan under Consumer credit Act 1995
• Investment property
Scale Term & Cost
Scale ….Biggest
House
Term
20 / 30 years
Cost
3/ 4% APRC
Scale…..small Payday loans
Term Weeks / Months
CostUp 2000%
Terminology
• Mortgage;
– charge over a property – not the actual loan – conveys the interest to the lender
• A secured loan –
– gives lender entitlement to enforce security – repossession in event of default
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Different Forms of Loans
• Housing Loan under Consumer Credit Act
i. Having a house constructed as PPR
ii. Improving a house used as PPR
iii. Buying an already constructed house as PPR
iv. Provision of credit on security of a mortgage ‐ RIP
Different Forms of LoansLifetime Loan
• Housing loan to over 65s+
• Equity release
• No loan repayments
• Repayable in full plus interest on death
Home Reversion
• A property transaction rather than loan
• Over 65s+ usually
• Sells a reversionary interest – heavily discounted
Different Forms of Loans
• Cash loans – short term, unsecured – banks
• Credit sale agreement – buy goods from retailer e.g. Harvey Norman with help of loan, ‐ finance company – consumer owns goods from outset.
• Hire Purchase – hires goods from finance co. – over period (at least 3 months) – at the end consumer has option to buy – not obliged.
• PCP – form of HP – made up of 3 elements – deposit, monthly repayments & guaranteed min future value GMFV – the amount due at the end to own goods.
• Conditional sale agreement – similar to HP but goods obliged to pass to consumer at end
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Development of Residential Market pre 1990’s
• Mortgages through Building Socs – save 10% with them
• Usual loan multiple of 2.5 times salaries (1 time for other joint applicant)
• Low demand due to high rates – 11.5% in 91
• Average house price 3.6 times household income
After 1990s
• Economy grows
• More competition in mortgage market
• Emergence of mortgage brokers
• 100% mortgages
• Multiple of salary replaced by “nets”
• Interest only loans
Recent Years
• Shortage of housing
• Rents increase
• Office rents at historic high
• Demand from UK funds as part of Brexit strategy
• Overseas funds acquiring distressed loans portfolios
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The Mortgage Process• Client
• Makes initial enquiry
• Finds a property
• Apply for loan approval
• Meets solicitor
• Meets advisor to choose loan
• App processed
• Review insurance needs
• Formal loan offer issued
• Sign contracts
• Advisor
• Issue Terms of Business and complete Fact Find needs
• Advise on costs involved
• Review all documentation
• Record solicitors details
• Review product options
• Ensure costs advised
• Advise on insurance needs
• Review & explain loan offer
• Ensure all insurance in place and check anticipated closing date
Regulatory Bodies
Central Bank
Main regulatory body in Ireland
Regulates activities of Banks, Life Co, Credit Servicing Firms, Mortgage Credit intermediaries & Credit Unions
Ensures a fair financial services market
Monitors & Enforces protection through CPC & CCMA
Competition and Consumer Protection Commission
• Statutory protection for consumers
• Formed Oct 2014 – amalgamation of NCA & Competition authority
• Regulates supply of goods and services to consumers including financial services
• CCPC shares compliance with Central Bank
• Authorises Credit intermediaries
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Financial Services & Pensions Ombudsman
• Amalgamated in 2017
• Independent Person
–Investigates disputes between consumers (CPC def) & Financial Services providers
–Mediates on disputes
–Adjudicates on disputes
–Free service
FSPO Complaints Process for Financial Services• A complaint can be made by a “consumer”
i. Private individual
ii. Unincorporated body
iii. Company with turnover of less than €3m
• Consumermust be:
i. A customer of the financial services provider
ii. A person to whom the provider has offered a service
iii. A person who has sought a financial service from the provider.
FSPO Complaints ProcessA complaint can also be made by:• A surviving dependant of a consumer• A legal rep of a deceased consumer• Widow/er of deceased consumer• Any person contractually entitled to benefit from a long term financial service
• An employee or former employee entitled to benefit from an income continuance plan
• A consumer whose credit agreement has been taken over by a credit servicing firm
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FSPO Complaints Process
• Every entity must have written complaints procedure
• Must attempt to resolve complaints within 40 days
• If not resolved within time frame consumer has right to approach FSPO
• Consumer must submit claim form along with final response from the provider.
FSPO Complaints Process – Final Response
• Contains a detailed account of the dispute• Addresses all issues outlined in complaint form
• Quotes any relevant T & C’s• Gives details of any redress offered• State that this is the final response of the provider
FSPO Complaints Process• FSPO cannot investigate:Any complaint that the provider has not been notified ofBeen the subject of legal proceedingsOccurred more than 6 years ago or 3 years from the date the complainant found out about it if the product concerned is a long term product.
A long term product is defined as a product with a term of more than 5 years and 1 month.
e.g. a mortgage would be a long term product and health insurance would not.
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Consumer Credit Act 1995–Covers Banks, Building socs, intermediaries etc.
–Greater transparency for borrower re interest rates, consumer contact, arrears, documentation etc.
–Regulates ads for credit
–Personal loans, HP , housing loans
–Consumers ….natural person
–Provides Regulations for mortgage and credit intermediaries
–Some powers held by CB , some held by CCPC and some shared
Consumer Protection Code 2012
• Applies to most Financial Services Providers
• Established in Ireland and authorised by the Central Bank
• Includes EEA States when providing services to Irish consumers
• Natural Person, unincorporated body, Co with turnover of less than €3m
Providers covered• Banks • Life and General insurance• Mortgage intermediaries• Insurance intermediaries • Investment intermediaries • Stockbrokers providing insurance type services• Retail Credit Firms and Home Reversion Firms • Credit Unions
–Outside core activities
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Does not apply to
• Services outside state• Moneylenders• Reinsurance companies• Hire purchase and Consumer Hire • Bureaux de Change • MIFID Services
–Stockbrokers, Fund managers Credit Institutions for MIFID type services
Code
• General principles apply to all providers covered by the Code
• Common Rules – have exceptions on application in each case
Consumer Protection Code 2012
Provision of Consumer Credit
Principal private residence or investment property
Same rights under the code – secured against a property
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Consumer Protection Code 2012 • Arrears
–More protection –Credit cards , personal loans , buy to let
• Consumer Contact –Personal calls restrictions –Telephone contact restrictions
• Know the Consumer –Much more information needed Suitability Statements
Vulnerable Consumers• A natural person, who…
–Has the capacity to make his or her own decisions, but who, because of individual circumstances, may require assistance to do so, and/or…
–Has limited capacity to make his or her own decisions, and who requires assistance to do so.
“3.1 Where a regulated entity has identified that a personal consumer is a vulnerable consumer, the regulated entity must ensure that the vulnerable consumer is provided with such reasonable arrangements and/or assistance that may be necessary to facilitate him or her in his or her dealings with the regulated entity.”
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The Mortgage Credit Directive
Ensure that responsible lending becomes the norm across EU1. Better info to consumers re:2. Real costs involved in mortgage3. More time to decide – cooling off4. Heightened creditworthiness assessment standards5. Business conduct rules6. Early repayment as general right
Directive does not coverEquity release agreements, preferential loans to EE’s, interest free loans, overdrafts, terms of less than 1 month, court agreed settlements
EU (Consumer Mortgage Credit Agreements)Regulations 2016
• Started March 2016
• Covers personal recommendations to consumers relating to credit agreements
• Objective is to “ develop a more transparent, efficient and competitive market, through consistent, flexible and fair credit agreements relating to residential property, while promoting sustainable lending and borrowing and providing a high level of consumer protection”
EU (Consumer Mortgage Credit Agreements)Regulations 2016
• The main provisions include:Consumer information requirementsPrinciple based rules and standardsConsumer creditworthiness assessment obligationsProvisions for early repaymentProvisions for foreign currency loansProvisions for tied practicesPassporting of servicesMinimum competencyDetails in ESIS sheet (later)Formula for APRC
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Family Home Protection Act 1976
• Protect spouses in family home
• Family home Cannot be sold or remortgaged without both spouses agreement
• Family Home
–Main dwelling
–Residence is the key …..not own 1.7.1
–Does not create joint ownership for non owning spouse
–Owner cannot sell / remortgage without consent
–No stamp duty on transfer to joint ownership
Civil Partnership and Certain Rights and Obligations of Cohabitants Act 2010
• Same sex and entered civil partnership agreement
• Shared Home
– Normal residence
– If held in one name only cannot be sold / remortgaged with consent of other
– No Stamp duty payable on transfer to joint names
– can also just inform Property Registration Authority (applies to spouses too)
Cohabitants
• Family Home Protection Act 1976 does not apply to unmarried couple
• New system for redress for unmarried couples in certain circumstances
– Property rights
– Lived together for 5 years
– 2 if they have a child
• Must apply to Court
– Compensation not automatic
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Criminal Justice Act 2013
• New Money Laundering regulations
• Obligations On certain financial institutions
– Customer Due diligence
– Reporting
– Tipping off
– Internal policies / procedures / training
What is money laundering
• Engaging in
– Concealing / disguising
– Converting / handling
– Removing etc
– Property that is proceeds of criminal conduct.
• Criminal conduct
– Drug crime
– Theft / fraud
– tax evasion
Identification
• Identify and verify before
1.Starting a business relationship
2.Occasional transactions
3.Perceived risk of money laundering
4.Doubt the documents already supplied
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Documents
• Risk based approach
• Evidence of DOB and address
• One plus one method
– Photographic id
– Non photographic
• Non face to face contact
– Additional checks
CCMA 2013
• Applies to borrowers in arrears or pre arrears
• Principal Private Residence only
• One PPR allowed
Examples
Property occupied by borrower
Was occupied by borrower but now moved in with relatives to earn rent to pay mortgage
Emigrated to work or moved in Ireland to work and unable to sell
Purchased but fell into negative equity and rented property out
KLP‐ bought with the intention of living in it
Personal Insolvency Act 2015
• New laws for personal insolvency
• Lessen difficulties and consequences
• Law reform Commission
• 3 new non judicial debt resolution processes
• Chapter 8
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Law of Contract
• Loan is a legal contract
Five Elements:
1. Offer
2. Acceptance
3. Consideration
4. Intention
5. Capacity
Offer
• Firm offer & other party accepts
• Invitation to treat – not an offer
• Word or document
• Offer not ‘till communicated
• Loan Offer
Acceptance
• Acceptance must be words or conduct
• Acceptance prescribed or not
• Offer not legal until accepted
• Conditional Acceptance does not amount to acceptance
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Consideration
• Some requirements for’ Form’
• Something for nothing – by deed (signed, sealed & delivered),
• Consideration, must have some value
• Need not be adequate
Intention
• Parties must be “ad idem” (of the same mind)
• Social/domestic
• Business agreements
Capacity to Contract
• Minors
• Unsound mind
• Drunk
• Companies – Memo & articles of Association
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Consent to Contract
Examples of mistakes or obstacles
• Common Mistake – item not for sale
• Mutual mistake – cross purposes
• Unilateral Mistake – one party makes mistake
• Mistaken Identity – signed between wrong parties
• Fraudulent Misrepresentation – untrue statement
• Lawfulness of the contract ‐ hitman
Termination
• Contract can be discharged in a number of ways:
• Performance
• Agreement – both agree to destroy
• Frustration – impossible to carry out
• Breach – one party fails
Mortgage Lending
• Loan offer not binding until conditions are complied with
• Lender has right to withdraw
• Once purchaser signs contract they are legally bound
• Solicitor will advise to get finance first
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Chapter 2
Housing Loans
Learning
The housing loan life cycle
The definition of a housing loan
Property ownership
Interest rates
Types of housing loans
In this chapter we will learn about
Housing Loan Segments
First Time Buyers – never previously owned a property
Trading Up/Down – already own a property
Remortgage – equity, different lender etc.
Lifetime – over 60 no mortgage, no repayments
Home reversion – usually late 60s or older, no mortgage, selling a % of property for a discount, no repayments
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Housing Loan
CCA has 4 references
1. Loan to cover purchase of principal residence
2. Refinancing existing home
3. Remortgaging
4. Loan to buy investment property
References to Home Loans CCA 1995
Housing Loan – specific term under CCA, 1995 in relation to:
1) Defining mortgage intermediaries
2) Regulatory obligations on mortgage lenders, intermediaries
CCA allows lenders to Scale their terms & conditions between ... Different types of loans …. Higher or lower LTV etc.
Regulated Entities
• Credit Institutions
–Accepts deposits/provides loans
–Banks and Building Societies
e.g. AIB
BOI
EBS
KBC
PTSB
Ulster Bank
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Retail Intermediaries
• Mortgage credit intermediary – arranges and advises on housing loans
• Mortgage intermediary – arranges and advises on housing loans outside EU Consumer Mortgage credit Agreements e.g. equity release loans
• Insurance Intermediary – life and general insurance
• Investment intermediary – investment products
• Credit Intermediary – car finance etc
Credit Servicing Firms
• Purchased portfolios of mortgage loans
• Vulture funds
• Manage or administer credit agreements
• Regulated service since 2015
• 2018 Consumer Protection of Credit Servicing firms
–Includes vulture funds
Retail Credit Firms
• Authorised by CB
• Does not include – credit intermediary
• Examples of retail credit firms
–Haven Mortgages
–Pepper Finance
–Start Mortgages
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Credit Unions
• Now offering mortgages
Rebuilding Ireland Home Loan
• New or second hand house
– 90% LTV max
– Max loan €320,000 in Cork, Dublin, Kildare, Louth, Meath & Wicklow
– €250,000 elsewhere
3 products –
1. 2% fixed up to 25 years
2. 2.25% fixed up to 30 years
3. 2.30% variable up to 30 years
Rebuilding Ireland Home Loan
• First time buyers only (aged 18 – 70)
• Two years continuous employment
• Not MORE than €50,000 p.a. income as single app
• Not MORE than €75,000 joint income
• Evidence of refusal from 2 lenders
• Not had a house before and must be PPR
• House cannot be above 175 sq mtrs
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Security
• Legal Mortgage – Prime security
• Guarantor – collateral security
• Insurance – collateral security
Legal Mortgage
• Mortgage = charge on property
• Allows lender power to repossess
• Borrower still responsible for any shortfall
• Any excess will be repaid to borrower
• Last resort
Mortgage Deed
• Document that transfers ownership to lender.
• Deed sets out;
Terms of the mortgage
Borrowers covenants
Powers of the lender
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Terms of the mortgage
• Details of lender and borrower
• Description of property
• Amount of loan and term
• Rate of interest – fixed or variable
• Fees payable, penalties, costs
• Terms & conditions
Borrowers Covenants
• To repay the loan
• To keep property in good repair
• Not to make alterations without consent
• Comply with leasehold provisions
• To carry out obligations of local authority
• Not to let out without consent
• Keep property insured
Powers of Lender
• Ensure the borrower repays
• In the event of default to enforce security
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Personal Guarantee
• Lender may require a third party guarantee on loan
–Often referred to as ‘going guarantor’–If borrower defaults, then guarantor is responsible–Sometimes guarantor only required for part of loan
–If more than one guarantor, each are jointly and severally liable for full amount of guarantee
–Guarantors notified of any changes
Property Ownership
“Ownership is the right to exclusive ownership of something and does not necessarily depend on possession”
• Freehold Estate:–As near as possible to absolute ownership
Leasehold1) Lease of land
1) Possession
2) 99 or 999 years
3) Lessee/lessor
2) >99 years = long lease…..Pays ground rent
Rights and Interest
• State Rights – State ultimate owners, compulsory purchase orders
• Statutory Rights ‐ Guards and Custom & Excise have right to enter with warrant.
• Wayleave ‐ Right of way for gas pipes, cables, pylons etc.
• Easement – right over the land of another e.g. right of way to water
• Covenant – Restrictive or positive,
• Profits a Prendre – Hunting or fishing rights
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Registering Ownership Rights
• Each time property sold a new deed of title is drawn up. Two systems for recording.
• Registry of Deeds 1708
–Documents – Unregistered title
• Land Registry 1892
–Registered Title to property
–Fees
Both systems are under the control of the Property Registration Authority
Title
• Right to ownership – land registry folio
• Folio – page has map, name & address
• Allows to confirm ownership without going to registry of deeds
• Registry of deeds – only docs relating to title registered – deed returned to owner
• Registry of deeds referred to as unregistered title
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Property Ownership
Personal Ownership
‐ purchased in sole name on death reverts to estate
Joint Tenants
–In the event of death other person automatically becomes entitled to full ownership
Tenants in Common
–On death does not automatically pass to other person may go to estate
Inheritance Rights
– Inheritances subject to CAT
– Thresholds and exemptions
Succession Act 1965
Spousal/Civil Partners ‐ tax free
–Automatic rights to surviving spouse or Civil Partner
– Legal share right
–Regardless of any Will
• Cohabiting couples
–No automatic rights
New v Second Hand
Advantages of new
Scarcity of suitable second hand properties
New builds covered by Homebond
New property built to specific building standards
Advantages of Second Hand
Can buy in area with transport, schools etc
Maybe lower cost
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Options to Purchase
Private Treaty
Offer made and accepted (usually via estate agent/auctioneer)
Booking deposit paid
Contracts drawn up
Loan offered
Contacts signed
Off plans – not yet built
Options to Purchase
Auction
Pre contract checks done – valuation, survey, solicitor review contracts, finance in place
Bid at auction
Contracts exchanged
Deposit paid immediately
Types of Housing Loans
Capital Repayment –
1. Capital & Interest
2. Repayment mortgage
3. Standard mortgage
4. Annuity mortage
• Interest only with capital paid at the end of the loan term from …..
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Capital and Interest
0
50,000
100,000
150,000
200,000
250,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Capital Outsanding
0
50,000
100,000
150,000
200,000
250,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Capital Outsanding
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1 3 5 7 9 11 13 15 17 19 21 23 25
Proportion of each repayment - 3.5% interest rate
Capital
Interest
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1 3 5 7 9 11 13 15 17 19 21 23 25
Proportion of each repayment - 3.5% interest rate
Capital
Interest
Interest Only
• Client just pays interest during mortgage term
• Therefore full sum borrowed remains outstanding
• Two main types – Pension Mortgage or Endowment Mortgage
• Level Term Assurance required
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Interest Rates
• Standard Variable rates
Buying and selling money
–Cost of money + margin
–Deposits
–Borrowing from other banks
–Loan to deposit ratio LTD
• EURIBOR
–Euro interbank offered rate
–Higher than ECB rate
CPC Requirements 1/2/17
Regulated entity must show consumer how the variable rate is set including –
1. Factors that may result in changes to rate
2. Procedures and criteria used in setting rate
3. Reasons different cohort of borrowers have different rates
4. Be published on lender’s website
CPC Requirements 1/2/17Post sale – info must be supplied to variable rate holders
1. Summary of other available mortgage products
2. Details of how to access these products
3. A statement that personal consumers should keep their mortgage arrangements under review
4. A link to the CCPC website relating to switching lenders
5. A warning that rates could change
6. 2019 …for variable rate customers inform them they might get a better rate if LTV dropped
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Interest Rate Discounted Variable Rate:
– 6 – 18 months –
– New business usually
– At the end of term reverts to normal variable
• LTV
Interest Rate
Fixed Rate:• Tend to be more than current variable rate• Longer the fixed rate >interest• Substantial redemption fee• Good if variable rates rise & vice versa
• CPC – Worked example of penalty – 60 days notice when fixed period about to expire
Split Rate
• Half of the loan is fixed and half is variable
• So if rates go up then only half of the repayment increases
• If rates go down then only half of the repayment goes down
• Steers mid course between fixed and variable rate loans
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Tracker Rate
• Not available now to new borrowers
• Formal link between variable rate and ECB rate
–EG rate will not exceed ECB + 1%
• Usually fixed time for increases or reductions
• LTV had influence
Housing Loan Interest Rates
1. New Business ‐ <rates2. Discounted variable rates3. >LTV >interest rates
1. Reflects >risk for lender4. Owner Occupier v Investment Property5. Top up loans v loans to new customers• CPC requirements
‐ Changes in rates
Charging Interest1. Simple – short period – eg 30 days
2. Compound – is accrued interest
• Housing Loans
–Compound interest – APRC
• Interest Accrual
– Yearly , Monthly , weekly , daily
–APRC
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Repayment Capacity
• Income of borrower – Prime Consideration• Substantiate income by1. Evidence of earnings2. Evidence of savings3. Employment status4. Other loans5. Savings & spending habits6. ICB – evidence of missed payments, undischarged debts7. Stress test against future rate increases8. Loan to Income (LTI) now says 3.5 times annual income limit
LTI Restrictions
• E.g. Individual earning €40,000 is restricted to max loan of €140,000 (40 x 3.5)
• LTI restrictions do not apply to :
1. Switchers or refinancing existing loan
2. Loans entered into to address pre arrears or arrears
Insurance
• Two main types required
1. Insurance on property – cost of rebuild
2. Insurance on borrower – cost of loan
Chapter 5
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Mortgage Risks
Variable rate loans Risk?
Fixed rate loans Risk?
All housing loans Risk?
Chapter 3
Taxation and Relief
Learning outcome
In this chapter we will learn about:
Taxation relating to housing loans
Mortgage interest relief
Inheritance /CAT
Refund of DIRT
Local property tax
Tax relief on residential investment properties
Capital Gains Tax
Stamp Duty
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Introduction to tax reliefs and taxes
• First time buyers – Help to Buy incentive, refunds income tax and DIRT on deposits used to build up a deposit.
• Home Movers – mortgage interest relief for home loans before 2012, LPT and inheritance/gift tax – later
• Investors – tax relief on the interest paid
• All – stamp duty, some may be liable to CGT
Mortgage Interest Relief 2019
• Allowed on appropriate % of qualifying interest paid
1. Qualifying loan
1. 1st January 2004 to 31st December 2012 only
2. How much interest is relievable
1. Maximum limit
2. Depends ..First time buyer …..married
3. What % is allowed
Taxation
• Relief can be claimed from income tax on the interest paid on monies borrowed solely for the purpose of the
1) Purchase
2) Repair,
3) Development or ...
4) Improvement of a qualifying residence or in paying off another loan or loans used for such purpose
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Qualifying Loan
• Here
• Northern Ireland and UK
• Main residence of
– Borrower
– Former or separated spouse
– Dependant relative
First time Buyer
• First became entitled to claim home loan interest between 2004 and BEFORE 31/12/2012
• Keeps it for 7 years even if moves home but
• All tax relief on home loans finishes 31/12/2020
• Tax relief normally allowed at source
Tax relief • For home loans tax relief normally given at source . TRS
• Others claimed through tax relief
• Thresholds for 2019 are as follows;
• First time borrowers*
• Single relief to maximum €5,000
–Married relief to maximum €10000
– Tax relief given as a credit
• Non first time buyers €1500 and €3000
• Look at examples
* As someone has first time buyer status for 7 years since max 2012, in 2019 there are no first time buyers
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Example #1Peter purchased his first home in 2003 and obtained a 20 – year mortgage. He still resides in the property, which is his main residence.As the property was purchased and the loan taken out prior to the 1st Janaury 2004, this mortgage is NOT a qualifying loan.
Example #2• Alan purchased his main residence in 2003 with no mortgage attaching.• In 2007, he raised a mortgage on his main residence for €100,000, and uses the
money to add on an extension to the property.• Revenue will allow tax relief on the proportion of the loan, which is being used to
purchase, repair, improve or develop the borrower’s sole or main residence.• Therefore, subject to Revenue agreement, relief will be allowed on mortgage
interest on the €100m000, within relevant limits and restrictions up to the end of 2020.
Example #3Mary purchased her first property in 2013 by way of a mortgage.Mary will not be able to claim mortgage interest tax relief on this loan as interest on home loans taken out after 31st December 2012 do not qualify for mortgage interest tax relief.
Maximum Thresholds for Interest• First Time Buyers
2017 2019
Single €10,000 €5,000
Married or CP €20,000 €10,000
Maximum Thresholds for Interest
• Non First Time Buyers
2017 2019
Single €10,000 €5,000
Married or CP €20,000 €10,000
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Example
• Peter and Mary are married to each other and taxed under joint assessment. They both have first‐time buyer status.
• In 2012, they purchased their first home with a mortgage of €180,000.
• Therefore, the loan qualifies for mortgage interest tax relief based on their status and the year in which they bought the property.
• In 2018,(year 7) they paid €6,120 in mortgage interest (that is, €180,000 x 3.4%).
• As they only paid €6,120 in mortgage interest, the relief will be based on €6,120 (the actual amount of interest paid, which is lower than the threshold) and NOT the €15,000, which is the maximum threshold for first‐time buyers who are married.
• In 2019 they also paid €6,120 in interest. But now because they are in year 8 they are no longer FTB and therefore the max relief in 2019 is €3,000
Where interest is less than threshold
2017 2018 2019 2020
100% 75% of 2017 50% of 2017 25% of 2017
Example• James and Laura are married to each other and taxed under joint assessment. They
are non‐first time buyers. The maximum threshold allowable in their case in 2019 is €3,000.
• In 2008, they purchased their home with a mortgage of €250,000. Therefore, the loan qualifies for mortgage interest tax relief based on their status and the year in which they bought the property.
• In 2017, they paid €4,000 in mortgage interest, which was below their threshold of €6,000(2017 threshold)
• As they only paid €4,000 in mortgage interest in 2017, the relief for 2019 will be based on 50% of €4,000 and not the €3,000, which is the maximum threshold for married FTB’s
• Therefore in 2019 the maximum threshold they can use to claim mortgage interest relief is €2,000
• And next year 2020 it will be max 25% of 2017 = €1,000
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Determine the rate of tax relief
• Individuals who purchased first home between 2004 & 2008 will get 30% on the relievable interest
• FTB who purchased in 2009, 10 & 11 will receive 15% in 18,19 & 20
• FTB who purchased in 2012 will receive 20% in 2018 and 15% in 2019 and 20
• Non FTB between 04 and 12 get 15% up to 2020
% of relievable interest paid in 2019 for FTB
Mary & Tom are married and taxed under joint assessment. In 2012 they bought their first house to live in as their sole residence with a mortgage. They have first time buyer status in 2012 and had that status up to 2018. In 2019 their status will change to “other borrower”, however they are still entitled to mortgage interest tax relief at 15% up to 2020
• As they have moved to “other borrower” status their threshold reduces to €3,000 from €20,000
2019 Non FTB €3,000 15% €3,000 x 15% = €450
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How is tax Relief Granted
• If on borrowers residence – TRS
2014 changes
Based on interest actually paid – if in arrears cannot claim on interest not paid
If not secured on borrowers residence – not TRS but tax return
Claim online – PPS number required, account no. & any previous loans on property
Only on PPR not investment property
Years are calendar year not from date of purchase
Summary
• First time buyer for 7 years even if borrower moves home
• 2004 to 2012 only
• Tax relief finishes 2020
Capital Acquisitions Tax (CAT)
• Inheritance Tax–A tax on benefits received on a death, other than for full consideration
Tax rate of 33% in both casesNo tax for spouse or Civil Partner
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CAT Thresholds
€310,000 Beneficiary is child of person providing benefit
€32,500 Beneficiary is brother or sister , niece or nephew or other ancestor or descendant.
€16,250 All other cases
Example Group A
• John left €1m to son Tom
• Inheritance €1,000,000
• Threshold € 320,000
• Taxable € 680,000
• Tax @ 33% € 224,400
• Payable to Tom €1m ‐ €224,400 = €775,600
Example 2 Group A
• Father left €1m to son Paul who has already received €200,000 inheritance from mother in 2010
• Inheritance €1,000,000
• Prior Gift/inheritance € 200,000
• Total since 91 €1,200,000
• Threshold € 320,000
• Taxable € 880,000
• Tax @ 33% € 290,400
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Example 3 Group B
• Ann Marie receives inheritance from Grandmother of €50,000
• Inheritance €50,000
• Threshold €32,500
• Taxable € 17,500
• Tax @ 33% € 5,775
Example 4 Group C
• William receives inheritance from partner Sam of €250,000. Not married/civil partner
• Inheritance € 250,000
• Threshold € 16,250
• Taxable € 233,750
• Tax @ 33% € 77,137.50
Dwelling House exemption for CAT • Spouse no tax
• No tax if passed on death and
– House occupied by beneficiary for at least 3 years prior to death of owner
– Beneficiary has no other home or interest in other home
– If under 65 must live in house for at least 6 years
– The inherited house was the only or main home of the deceased.
Example 5
Caroline receives property €250,000 on death of boyfriend. They had been living together for last 3 years. Caroline has no other property and this is her family home – no tax
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Capital Acquisition Tax
• Gift Tax
• Small gift exemption of €3,000 p.a.
• Philippa receives gift of €25,000 from friend.
• Taxed as she received €22,000
• Threshold for friend is €16,250
• Balance of €5,750
• Taxed at 33% €1,897.50
Help To Buy• First time buyers – new build or self build 19th July 2016 – Dec 2019
• Provides for refund of DIRT or income tax paid over previous four years to a max of €20,000
• The amount claimed is the lesser of:
1. €20,000
2. 5% of purchase price
3. The amount of income tax and DIRT paid by FTB in the previous 4 years
Help to Buy
• If a couple both must be FTB
• Doesn’t have to be 50/50 split
• Must get a mortgage of at least 70% of the purchase price
• Property must be valued at €500,000 or less
• Applicants must be tax compliant for previous 4 years
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Example 1
• Stephen & Anna first time buyers
• Paid deposit on new property value €350,000 in Jan 2016
• Signed contracts in May 2016
• As signed before July 2016 they do not qualify for HTB
Example 2
• Angel & Mary first time buyers
• Paid deposit on property value €375,000 in Jan 17
• Obtained a loan of €250,000
• Loan is less than 70% of purchase price
• They do not qualify for HTB
How it works
• Up to €400,000 purchase price up to 5% relief to a max of €20,000
• Between €400k & €500k – max relief €20k
• Over €500k – no relief
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Local Property Tax
• Tax based on market value of property
• Administered by Revenue
• Self declaration but fines if undervalued
• Fund local services
Exempt Properties
• Property purchased in 2013 and used as PPR exempt until 2019
• Unsold new houses
• New and previously unused properties purchased from a builder or developer between 1 January 2013 and 31 October 2019 are exempt until the end of 2019 (even if sold again in that period).
• Ghost estates
• Pyrite damage
• Houses used by charities to provide accommodation
• Nursing homes
• Mobile homes
• Commercial properties
• Properties used by incapacitated
Calculating the LPT
• Bands
• .18% to mid point value of relevant band
• Over €1million
– actual market value
– .18% first million
– .25% balance
• Market value in May 2013 used until end 2019
– Improvements will not affect valuations
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Deferrals from LPT
• For people that cannot afford LPT – not an exemption just deferral.
• 4% interest added annually – remains a charge on property if sold.
• Subject to income limits
• Full and Partial
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Full and Partial
Other tax relief
• ‘Rent a Room’ relief up to €14,000
– No personal income tax to pay
– However if over the €14000 limit full amount liable to tax
• Restrictions
– a parent renting a room to their own child.
– an individual renting a room to their employer or to a person connected with their employer.
– Short term rents – Airbnb anything under 28 days does not get relief
Other tax relief• Tax Relief on Investment Property Loans 100% of interest
allowed
• Example:
• John Borrows €250,000 to buy & let out apartment
• Interest in 1st year €15,600 &
• Rental income €12,000
– Interest offset against rental income
– John will not be taxed on the rental income
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Deductible expenses for landlords
• Rents payable – ground rent
• Rates or levies – water rates, refuse collection
• Services or goods provided – gas, electricity etc
• Maintenance
• Insurance
• Management
• Legal Fees
• Accountancy Fees
• Wear & Tear
• Repairs
CGT
• Principal Private Residence exempt
• Rental Property
– 33% Tax on gains
• Deduct Acquisition cost
• Add on Allowable expenditure on property
• Indexation to January 2003
CGT Rental Property
• 2002 Joe buys investment property for • €250,000• Associated costs €30,000• 2003 extended premises cost €45,000• 2012 sold property for €650,000• Associated sale costs €12,000• Chargeable gain as follows:
Bought €250,000 Sold €650,000Costs € 30,000 Costs € 12,000Total € 280,000 €638,000
Index @ 1.049 €293,720 €338,720Extension € 45,000 Gain €299,280Total €338,720 Taxed @ 33% = €98,760
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Rental Property CGT exemption
• CGT exemption
• Property purchased between
–7th December 2011 and 31st December 2014
–must hold for at least 4 years and not more than 7 years
Stamp Duty Rates
• Based on purchase price
–First €1,000,000 1%
–Excess over €1,000,000 2%
• Applies to owner / occupier and investor
• Must be paid with 30 days of execution of deed of transfer
Stamp duty on non residential property
• Housing sites with no property
• 6% on everything
• So a site with no planning permission attached attracts 6% stamp duty
• Bought with planning permission 1% of site plus cost of build
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Chapter 4
Comparing Housing Loans
Learning outcomes
In this chapter we will learn about:
How lenders assess a loan app
Upfront costs
Ongoing costs
Interest rates and APRC
Comparing Housing Loans
• In attempting to recommend an appropriate housing loan, the following factors should be considered when comparing competing loans:
Upfront Costs
Maximum loan
Affordability
Flexibility
Investment risks
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2015
• New Rules on lending !!
• High LTV’s a factor in financial crisis
• Leading to negative equity
• FTB had limited deposits from own resources
• Now limits the LTV offered by using loan to income ratio
Assessing Loan Apps• Two main factors
1. LTV
2. Affordability
Different segments now have different rules
FTB
Non FTB
Buy to Let
Regulations do not apply to switchers, negative equity borrowers and loans to address arrears
Loan to value ratio
• Amount of loan /value of the property
• Value of property is the lower of
1. Purchase price
2. Lenders valuation of the property
Lenders must do credit assessment
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LTV Limits
• New CB rules since 2016
• Now different categories –
• FTB ‐ 90% max
• Non FTB ‐ 80% max LTV
• Buy to Let ‐ 70% max LTV
• Lenders have some discretion
Loan to Income:
– Lenders approach ‐ setting maximum loan
– Imposed by CB
– Borrowing limit of 3.5 times gross annual income – lender allowed use discretion
– Patricia FTB single earning €55,000
– Wants to purchase property valued €220k
– LTV limit 90% x 220k = max loan €198k
– LTI limit 3.5 times salary = €192,500
– Therefore max loan = €192,500
– Lenders have some discretion
Net Disposable Income –
– The amount of income a borrower will have left after mortgage payment is made.
– E.g single 1000 – 1300
– Married 1,900 – 2,100
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Stress testing
• The CPC requires a stress test of current variable rates +2% for personal consumers
• Includes introductory offers – test to be applied to rate after offer period
• Intermediaries must be notified of results
• Doesn't apply to fixed rates of 5 years +
Example
• Capital & interest loan @ 4.5%.
• Cost per €1,000 borrowed
20 years 25 years 30 years
€6.32 €5.55 €5.06
Same repayments @ 6.5% (2% stress test)
20 years 25 years 30 years
€7.45 €6.75 €6.32
Loan terms
– Longer the term lower the repayment amount
– But more interest repaid
– e.g. 20 years €5.88 per thousand per month
– 25 years €5.09 per thousand per month
– 30 years €4.58 per thousand per month
– 35 years €4.23 per thousand per month
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Upfront Costs
Loan App fee – not common now
Valuation fee ‐ €120/200, refunded if refused – valuation must be within 4 months of drawdown
Now subject to CMCAR – valuation standards set by professional bodies
Structural survey – older property
Acceptance fee – not common
Stamp Duty – 1% or 2%
Solicitors fees ‐ % of the VALUE
Legal outlay – land registry fees etc
Auctioneers fees – 1‐ 1.5%
Ongoing Cost
• 3 factors used to describe the cost of a housing loan:
1) the ‘nominal’ rate of interest, e.g. 3.5% pa ‐ does not reflect the frequency at which interest is charged or allow compulsorily charges which may be made
May only refer to the initial rate of interest charged e.g. a special ‘discounted’ year 1 rate & will increase after 1st year
2) The APRC far more reliable indicator of the cost as:
‐ it takes account of the frequency & ...‐ any other charges & fees levied by the lender
Annual Percentage Rate Charge
APRC allows for ...
1. Frequency of repayments
2. Duration
3. All fees & charges e.g. an acceptance fee, not refundable
• Example:
• A lending institution quotes a Variable H.L. rate of 4.85% pa but interest charged monthly ‐ if allowance is made for monthly payment of interest APRC
= 4.9% pa, i.e. monthly rate of 4.85% pa = 4.9% paying interest annually
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Annual Percentage Rate
Not taken into account – APRC
• Stamp Duty, legal fees, tax relief
• Cost of insurance (mortgage protection, household insurance)
• APRC not actual cost
• Current variable assumed to remain
• Fixed loan ‐ same assumption
• APRC – no allowance for interest relief
• APRC – no account for mortgage protection & household insurance
• Primary use of APRC IS AS A METHOD OF COMPARISON
Cost per Thousand CPT• Not an interest rate – monetary calculation of cost of loan
Nominal APRC CPT
LTV variable ≤ 50%4.09% 4.16% €6.10
LTV variable ≥50% ≤ 80%4.29% 4.37% €6.21
LTV variable ≥ 80%4.49% 4.57% €6.31
One yr Fixed (new)4.09% 4.44% €6.10
One yr Fixed (existing)4.55% 4.50% €6.34
CPT
• Using previous figures
• €250,000 over 25 years
• Assuming ≥ 80% LTV
• Interest rate 4.49%
• APRC 4.57%
• CPT €6.31
• 250 x €6.31 = €1,577.50 per month
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Interest Only
• Using previous figures
• €250,000 over 25 years
• Assuming ≥ 80% LTV
• Interest rate 4.49%
• APRC 4.57%
• CPT €6.31
• €250,000 x 4.49% = €11,225 p.a./ 12 = €935.42 per month
Insurances Required
• Mortgage Protection
• Household Insurance
• Chapter 5
Risk/ Reward Trade Off
Variable rate loans Risk/Reward?
Fixed rate loans Risk/Reward?
All housing loans Risk/Reward?
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Chapter 5
Housing Loan Insurances
Learning outcomes
In this chapter we will learn about:
Different insurance required
Features and benefits of generic types of insurance
Limitations and risks of different types of insurance
Insurances
• Compulsory
– Mortgage protection
– Household insurance
• Other insurances
– Contents
– Payment protection
– PHI
©
Consumer Credit Act
• Any insurance required by lender can be taken out with any insurance company
• Lender must offer facility to take out insurance with lender through group policy
• Lender cannot impose a different insurance requirement just because with different insurance co.
• Lender cannot impose a fee on borrower because using different insurance co.
Consumer Protection Code
• Lender must provide quote for insurance
• No small print
• Must explain consequences of non disclosure
• Must advise of exclusions, etc
Mortgage protection
• Pays off loan on death
• Lender must arrange under CCA1995
• Two types
– Individual mortgage protection
• Policy assigned to lender
– Group mortgage protection
• Policy owned by lender
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Group Mortgage protection
Not Interest rate sensitive
Lender owns policy – block policy
No Choice of company
Free cover
Accidental death
Premiums vary
Less underwriting requirements
Cover ceases when loan finishes
Individual Policy
Individual policy
New/Existing policy
Match loan term and amount
Interest rate sensitive
Cost varies
Individual ownership Assigned to lender
Choice of company
Lender can not impose a particular Life company
Individual policies
• Advantages • Choice of co
• Borrower owns policy and can use again
• More optional benefits
• Disadvantages • Set at interest rate level
• Arrears may not be covered
• Often more underwriting
• Must be assigned
• Separate direct debit
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Group policies
Advantages • May be cheaper?
• Less underwriting
• Free cover
• One direct debit
• Not interest rate sensitive
Disadvantages • May be more expensive?
• Cover stops when loan paid off. May be difficult to get same cover
Specified Illness Cover
• Not compulsory
• Many Mortgage Protection policies now offer ‘accelerated’ Serious Illness cover
• Pay off mortgage in the event of diagnosis of certain specified illnesses
• Additional security for both lender and borrower
Income Protection
• PHI
– Provides an income
– Paid after a deferred period 13,26 or 52 Weeks
– Tax relief up to 10% of income but not USC\PRSI
– Benefits subject to PAYE
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Household Insurance • Cover:
– Block policy arranged by the lender & premium collected by lender who pays on to the insurer, OR
– Individual arranges & lender’s interest is noted
– Claim cheque issued jointly to borrower and lender ‐protects the lending institution from the borrower not using claim proceeds properly
Household Insurance – CCA ‘95 Obligations
Keep insurance effected on the property ‐
may be effected by the borrower with any insurer & through any intermediary of borrower’s choicer
• Lender notify borrower of above
• A lender can not impose insurance which differs from that arranged by the borrower themselves
• All to offer choice and stop restrictions
Household Insurance
Definitions: (Can be detailed and differ from co to co)
Buildings
Combined policy– Single policy with a optional extras
Contents
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Building Insurance
Cover – damage to building: Perils including
– Fire
– Riot
– Storm
– Water etc.
– Theft
• Forcible entry
– Subsidence
– Legal fees
– Loss of Rent
Household Insurance Sum Insured – buildings:
• = cost of rebuilding
• Reinstatement
• Not market value which could be more
• Guide lines from Surveyors
• Lets take a look !
Exclusions:
– Terrorism
– Wear & tear
– Flood ‐ area where prone to flooding
– Excess
Household Insurance Contents
• Contents:
• A lot of Competition
• Most insurers base cover % of SA on buildings
• The client has only to establish the rebuilding cost of his/her home assume it is €200,000:
• ‐ A ‘Household 20’ product gives 20% cover on contents at € 40,000• ‐ A ‘Household 30’ product gives 30% cover on contents at € 60,000• ‐ A ‘Household 50’ product gives 50% cover on contents at € 100,000
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Household Insurance Contents
Limits:– Single article – 5% of total contents (art, stamp collection, jewellery
etc.)– Valuables limit – 1/3rd total contents
New for old:– Some offer replacement value & not 2nd hand value
Contents exclusions:– Vacant usually >30 days– Not forced entry (money/valuables)– Deeds/bonds/bills of exchange etc.
Household Insurance
• Index Linking
–System employed by all insurers
–Ensuring that sums insured are maintained at up to date valuations
–Client does not have to recalculate value of property–Correct valuation at inception is vital– Increases in accordance with House Building Cost Index–Premium is increased accordingly
– Insurers must be told of any increases in value
COST
• Usually reinstatement value for buildings
– Area – Dublin city rated higher
– Occupancy – standard rate owner occupier of private dwelling
– Loading – business in house may attract loading
– Let ‐ students?
– Guests – 1 or 2 >8/10 Commercial Guest House Insurance
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Household Insurance Costs
• Discounts – can include:
• Smoke Alarm (discount 2 or >) • Burglar Alarm• Age discount 55+• No Claims Bonus • Neighbourhood Watch • Two policies (discount off home insurance if
the client has a motor policy with the same insurer)
Claims
• Duty of policyholder
• Express
– In contract
• Implied
– Look after property
• Claims procedures
– Notification
• Onus of proof lies with Insured
• CPC 2012 …Notify claimant may appoint a loss assessor
Household Insurance Claims
• A claim may be only partially met:
• Limiting the maximum amount recoverable
• Operation of the average clause ‐ under‐insurance for household insurances e.g. ...
• Client declares the full value of property to be €100,000 of € 200,000 – 50% paid formula ...
• Sum insured: € 200,000 Value at Risk: €400,000
• Loss: €125,000
• Claim paid: €200,000/€400,000 x €125,000 = €62,500
• Voluntary or compulsory X/S
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Claims Professionals
Loss Adjusters:
– Appointed by the insurers where claims are larger and/or more complex
– Investigate the circumstances of claim and negotiate settlement
• Loss Assessors
– Appointed by claimant
Structural defect Cover
• Insurance to cover new homes against major structural defects in first 10 years
• Homebond since 1978
– Underwritten by Allianz PLc
• Insurance between buyer and insurance company
• Lenders normally insist on one
Home Bond Insurance:
– The National House Building Guarantee Company Ltd set up in ‘78 with Government approval to provide a regulatory framework for private house‐building
– Home Bond Warranty:1. Guarantees homes for major structural defects for 10 years2. Guarantees homes against water & smoke penetration for 1st 5
years3. Mechanical& Electrical faults in 1st 5 years4. Guarantees cover against the loss of stage payments
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Deposits and Stage payments
• Covers loss of deposits or stage payments if developer
– Insolvent
– Goes into liquidation / examinership
– Commits fraud
• Stage Payment loans
– Funds released in stages
Course of Construction Insurance
• Self Builds
• Covers risks to property during build
• Public liability
• Once off premium valid for 12 months
• Renewed in blocks of 3 months
Chapter 5
Arranging a Housing Loan
©
Learning outcomes
In this chapter we will learn about:
Individuals and entities that can arrange loans
The regulatory requirements under the CCA, the CPC and CMCAR in relation to interaction with consumers
Outline the knowing the consumer requirements and suitability requirements when processing an application for a housing loan
the underwriting process and discuss the subsequent mortgage documentation that needs to be forwarded to a borrower
The conveyancing process
Offering Mortgages
• A Mortgage Intermediary
• Mortgage Credit Intermediary
• A Tied Agent
Mortgage Intermediary• The EU Consumer Mortgage Credit Agreements Regulations
2016 – CMCAR – changed the definition
• Now defined as a person who in return for commission or other form of consideration;‐Arranges or offers to arrange, or acts as an introducer for a mortgage lender to provide a consumer with a housing loan which falls outside the scope of CMCAR‐ In other words a mortgage intermediary arranges equity release products like lifetime or reversion
• Mortgage intermediary authorised by the CB under the CCA• Must have an agency agreement with each lender they act
on behalf of
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Mortgage Credit Intermediary MCI
An MCI:
Must be ‘authorised’ by the Central Bank under CMCAR to
• Present or offer or conclude credit agreements to consumers
• Appointments In writing for each lender represented
• Revenue Tax Clearance Certificate
• Display copy of the authorisation & lenders
Tied Agents
• Tied mortgage branch agent
• Legally binding agreement with one mortgage lender to;
• Arrange housing loans with one lender only
• Not permit premises to be used by any other lender
• State on letter headings etc that they act solely on behalf of one lender
• Not deal with any housing loans that are referred to them by a mortgage intermediary
• Display the name of the lender on any premises used
Tied Agents
• Disclosure of tied status
• Intermediary may enter into agreement to represent only one lender
– Mortgage intermediary must disclose its tied status at the first reasonable opportunity and in any event, before any commitment is made
– Lender must disclose its tied status if tied to one insurer
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Independent
Obligations for Public Registers
• Publicly available register of all appointed mortgage intermediaries and mortgage credit intermediaries
• On terminating an agency the lender must inform CBI
Advertising Loans
• Consumer Mortgage Credit Regulations
– A clear and ‘prominent’ statement of the APRC
– Security required, e.g. mortgage over property and/or insurance
– Restrictions must be clearly indicated in the advertisement
– Maximum loan to value
– CPC Rules also apply
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Disclosure of regulatory status
• Stationery
– But only for regulated products
• Advertisements
• Electronic communications
• ‘ ABC’ trading as XYZ is regulated by the Central Bank of Ireland ’
Contact – not for arrears
• Personal visits Never to an individual
– Only if person has given permission in writing
– Separate document for each visit
• Consent from an individual
– Purpose of call
– Type of product to be discussed
– Time and date for visit
Unsolicited visits about arrears
• Borrower in arrears and not responding to Post / Phone calls
• Can happen
• Full details chapter 8
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Unsolicited Telephone Contact
• Telephone ( Existing consumers )
– Ok if an individual and existing consumer and if
1. Similar product within last 12 months
2. A product that requires contact
3. Protection products
4. Permission given
Unsolicited Contact• Telephone contact non customers
1. Signed statement within last 12 months
2. In yellow pages etc or Director
3. Referral from another authorised provider
4. Protection policies
• All referrals recorded
• Calls 9 to 9 generally and Monday to Saturday
• If a consumer asks not to be contacted must be recorded and complied with
General Requirements
• Personal Visits and Telephone Contact
• Identify him/herself
• Identify company
• Commercial purpose of contact
• If call is being recorded, inform consumer
• If a referral, disclose source of lead, and
• Establish if the consumer wishes to proceed with call.
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Terms of business
• Given on a stand alone basis before providing first service includes– Name or part of Group– Status– Description of services– Charges– Conflicts of interest policy– Complaints procedure– Compensation scheme
• Material changes– Consumer must be notified
Knowing the consumer
• Must fact‐find in order to assess suitability
– Fact‐find must gather and record information appropriate to the nature and complexity of product or service
–Code has specific requirements• Needs and objectives
• Personal circumstances
• Financial situation
• Attitude to risk (where relevant)
–Only need information that is relevant in assessing suitability
Knowing the Consumer
• Fact‐finding
– Needs and objectives including, where relevant:
– the length of time for which the consumer wishes to hold a product,
– need for access to funds, need for emergency funds,
– need for accumulation of funds.
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Personal circumstances including, where relevant
• age, health,
• knowledge and experience of financial products,
• dependents,
• employment status,
• potential future changes to his/her circumstances.
Fact Find
• Financial situation including, where relevant:
– income,
– savings,
– financial products and other assets,
– debts and financial commitments
–Attitude to risk
–Need for capital security
• If a consumer refuses to provide information
–Product cannot be offered
Collecting Client Information on App• Fact‐finding ‐ application forms seek the following:
– Name, sex, date of birth, marital status– Current job (how long with current employer, etc.)– Income & variable (e.g. commissions, bonuses,
overtime, etc.)– Assets, e.g. current home value, investments, etc.– Existing debt and financial commitments– Credit history– Type & amount of loan– Property purchased or re‐mortgaged – Direct Debit – Declaration & signature
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Supporting Documentation
• Proof of identity & address ‐ prevent fraudulent loan applications required under the Criminal Justice Act, 2010
• EE:
P60
3 most recent payslips
Employer letter
• SE:
3 years accounts
Projected income
Tax up to date
Supporting Documentation
• If applicant has an existing housing loan: Statements Bank statements
Evidence of savings
Accuracy of information CPC
• Consumer certify the accuracy
• Usually a declaration
• Entity must also assess the reasonableness of the information supplied
• Ensure documentation is legitimate
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Identifying the Client
• New Money Laundering regulations
• Criminal Justice Act 2018
• Obligations On certain financial institutions
– Customer Due diligence
– Reporting
– Tipping off
– Internal policies / procedures / training
Due Diligence
4 requirements
1.Identifying the customer
2.Identifying the beneficial owner of a customer
‐ Risk based measure to verify identity
3.Getting information on the purpose and nature of the business relationship
4.Monitoring the on‐going business relationship
Documents
• Risk based approach
• Evidence of DOB and address
• One plus one method
– Photographic id
– Non photographic
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Valuation Report
A housing loan lender must:
• Independent Valuation Report
• Refund the cost of the valuation report & ...
• Give the applicant a copy of the valuation report where ...
• Lender must have sight of original valuation before loan is drawn
• Valuation lasts 4 months
Assessing suitability
• Must consider
– Does the product meet the need
– Meets needs and circumstances
– Can bear the risks
– The persons attitude to risk
• Any top ups for personal consumers further affordability and suitability must be undertaken
Reasons Why Statement
• Must look at
– needs and objectives,
– personal circumstances, and
– financial situation
• Also if relevant
– how the risk profile of the product is aligned with the consumer’s attitude to risk; and
– how the nature, extent and limitations of any guarantee attached to the product is aligned with the consumer’s attitude to risk.
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Reasons Why
• Paper or durable medium
• Copy to consumer prior to arranging
Suitability requirement
• Only suitable loan products may be considered
• ‘Most suitable’ if only one product recommended
• Range of products–Each must be ‘most suitable’
Reasons Why
• Written statement before providing the product
–Why it is considered to be suitable
–Why a selection of products are considered to be suitable
–Why a recommended product is considered to be the ‘most suitable’
• Copy given to customer and copy kept
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Consumer Protection Code
Guarantors:
• Warning: As ... you will have to pay off the loan, interest & all associated charges if the borrower does not
• Before you sign ... get independent legal advice
• Advised of any changes to loan agreement
Completing the Loan application form
• Mortgage application forms
• Reviewed by credit teams and mortgage underwriter
• Assessment
– ICB
– Employer
– Loans
–Bank statements
• Mortgage intermediary ‐ signed declaration sight of all original documentation includes
Building the Picture
• A quantitative and qualitative evaluation to lender
• Personal details
• Proposal sought
• Income
• Cost and Funding
• Pros and cons
• Recommendation
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Application Timelines
• Since Jan 2019 the CPC has made mortgage applications a timebound process.
• Lenders must acknowledge receipt of app within 3 business days.
• Following receipt of all required info, lender must make decision within 10 business days.
• If it is not possible to make a lending decision within 10 days the borrower must be informed why within 10 business days
Underwriting‐ the principles of prudent lending
Character – credit history
Ability to repay – income
Margin – profit adequate for the risk
Purpose – Residential, Buy to Let etc
Amount – LTV
Repayment – LTI
Insurance ‐ security
Underwriting
• Salary matches application
• Rent payments
• Savings
• Short term credit
• Cash withdrawals on credit cards
• Overdraft
• Utility payments
• Lifestyle
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Mortgage Intermediary
• Lenders must get signed declaration from intermediary confirming sight of all original documents
• Insurance
– Mortgage Protection
– Buildings
Consumer Credit Act, 1995
• Prohibition of linking services – e.g. effect a PPPInsurance …..conditional lending
1. Life– Mortgage Protection – Waiver of Life cover– Not a legal requirement but prudent – next slide
2. Buildings insurance – A particular company cannot be imposed
3. Optional Benefits – Must be positively indicated
Exceptions for MP
No need for mortgage protection if
Not principal residence
Not acceptable or high loading
Over 50
Existing arrangement i.e. person arranges individual policy
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Approval
• Approval in Principal:
• Prior to issuing a formal letter of offer ‐ ‘approval in principle’, or ‘pre loan approval’
• Prepared in principle to advance a certain level of loan to the applicant
Mortgage AgreementLoan offer
• Principal details of the loan
• Impact of stress test notification
• European Standardised Info Sheet
• Warnings
• Conditions
• Suitability Statement
• Acceptance form
• Solicitors Pack
• Distance Marketing if applicable
Loan Offer
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Stress Testing
• Additional page setting out effect of 2% increase in rate
• Shows additional repayment amount per month if rate increased
• Also sets out redemption fee on fixed rates and how it’s calculated
ESIS
• EU requirement that enables borrowers to compare mortgages and includes:
• Lender
• Main features
• Interest rates and costs
• APRC
• Amount of Credit
• Duration
• Number of payments etc
Conveyancing
• Property goes from seller to buyer
– Only done by Solicitor
– Ownership passes
– Mortgage drawn up in favour of lender
– Stamps and registers title deeds
– Forward any outstanding docs to lender
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Contract of sale
Legally binding agreement and includes
• Names and addresses
• Purchase price , deposit
• Freehold or leasehold property
• What planning and search documents go to sellers solicitor
• Special conditions
Title Documents
• Documents that transfer property
• Reviewed by Solicitor• Title docs include
– Description of property
– Searches
– Family home declarations
– Declarations
– Deeds of charge/mortgage
Title Documents
Once the preceding docs have been received the solicitor carries out the following:
1. Pre Contract enquiries
2. Purchase deed drafted
3. Contracts signed
4. Good Marketable title is confirmed1. All ok and can be sold by lender if borrower defaults
2. Lender has first legal charge
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Mortgage Documentation
• Solicitor responsible for mortgage in favour of lender
• Reviews loan offer
• Prepares mortgage deed to be lodged in land registry
• Make sure Family Home dec signed if family home
• Make sure no other parties have an interest in property – deed of confirmation
• Assign life policy
• Returns Solicitors Undertaking and certificate of Title to lender
• Cheque released
Solicitors Undertaking
• Standard document
• Legally binding promise
• Good marketable title
• Confirms the solicitor has executed mortgage deed
• Deed of confirmation signed if any third parties have an interest in property
• If property is a family home
• Money to pay stamp duty
• Confirmation that solicitor will send on all documentation
Loan refusal
28 days to ask lender reason under CCA 95
EU CMCA …..without delay
Irish Credit Bureau:
The ICB is an electronic library or database that contains information on the performance of loan agreements between lending institutions & borrowers
Includes housing loans, credit cards, car loans, personal loans but not overdrafts unless they have been subject to legal proceedings
24 month repayment history
Information kept for 5 years after loan is closed
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Credit Reporting Act 2013
• Established Central Credit Register
• Reporting obligations apply to over €500 credit information providers (CIPs)
• Data base of credit applications and credit agreements
• Aims to help lenders make informed lending decisions
• Operated by the Central Bank so allows them to gain insight into financial markets
• Legal obligation on CIPs to submit info on loans over €500 and to access the CCR when considering applications for credit in excess of €2,000
Central Credit Register
• Records loans such as credit cards, mortgages, overdrafts and personal loans over €500
• To comply with GDPR all info submitted must be accurate and up to date
• Provides a credit report for lenders on applicants for new loans.
• An application for a credit report by a lender will be recorded but deleted after 6 months
• Consent of the applicant (Credit Information Subject) is not required.
Credit Information Subject Rights
• 4 key rights
1. Insert an explanatory statement on a credit report of no more than 200 words
2. Apply to have information amended if they believe info is inaccurate, incomplete or not up to date.
3. Report and be informed of suspected impersonation
4. Obtain a credit report free of charge (subject to not being excessive). For credit information subjects that are not individuals (companies) the first request is free subsequent requests within the year are charged €6.35
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Chapter 7
Remortgaging
Learning outcomes
In this chapter we will learn about:
Loans used for debt consolidation and equity release
Calculating the total cost of credit
Home Reversion and Lifetime loans
Remortgaging
• Consolidate debts
• Equity release
• Reduce interest rate
• Costs and paperwork involved
• Debt consolidation loans
– Pay off more expensive loans
– Reduces monthly costs but
– Longer term
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Debt consolidation
–Takes out loan on previously mortgage free property
– Increases a loan already secured on property–New loan is repaid in normal manner
–Sometimes used to ‘consolidate’ short term debts
– Interest rate lower, but term longer!!
–Secured on property–Financial discipline important for borrower
–Under the CPC comparison of existing debt V new loan must be shown over 20 year max
Cost of Credit
• Previous slides shows monthly saving of €687 but at a cost of €11,082
• Diff between previous loans and one loan
• CPC says this must be shown in any ad and warning that it will take longer to pay off than previous loan
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Equity Release 1. Remortgaging
1. New loan
2. Consolidation of loans
2. Life long loan1. Interest only
2. 0ver 60 / 65’s usually
3. Live in house until death
3. Selling a reversionary interest1. Selling part of your home
2. Over 65 / 70 usually
Negative Equity
• Value of property less than amount of loans outstanding
• Negative equity loans
– Can afford repayments on current loans
– Carry negative equity to new home.
– Individual basis
Negative Equity Loans
• Borrowers in negative equity with no arrears
• Can afford payments but want to move home
• Sell property and carry negative equity to new loan
• Loan must be affordable and suitable according to CPC
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Lifetime Loans
–Older homeowners
–Mortgage free property
–Funds borrowed on security of property on interest only basis–Usually at fixed rate–No repayments
– Interest ‘rolled up’–Loan is therefore continuously increasing– ‘Rule of 72’
• Approximate way to guess how long it takes a lump sum to double at a given rate of interest
Equity Release
• Lifetime Mortgage (ctd)–Equity to dependants can increase or decrease–Some providers guarantee ‘no negative equity’
–Loan can be lump sum or instalments or both • May be draw down fee
–Reversible or irreversible–Usually only available to homeowners in 60s
Home Reversion
– Owner sells part of property to a financial institution
– Discounted value
– Owner is allowed to stay in property for life, or earlier if going to long term care
– No repayments or rent payable
– On death (or long term care), property is sold
– Financial institution get share with balance going to next of kin
– Fixed share contract or variable share contract
– Usually only for owners in 60s
– Discounting important!!
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Consumer Protection Code
Lifetime Mortgages AND Home Reversion
Total costs advised
Independent legal advice
Early redemption costs at 5 year intervals
Warning statements
Lifetime Mortgage V Home Reversion AgreementLifetime Mortgage Home Reversion Scheme
Advantages
Raising cash: 10- 45% of the value of the property can be granted as a loan, which would otherwise not be available.
10 - 80% of the value of the property can be sold depending on individuals’ age and the property valuation, which would otherwise not be available.
No Monthly Repayments: Individual is not required to make loan repayments during their lifetime.
Individual is not required to make loan repayments as they have sold a portion of the property.
The borrower fully owns the property and can continue to live in the property.
The individual sells part of the property but continues to live in the property. They do not have to pay rent.
Property Values: The borrower can continue to benefit for any increase in value of their property.
If property values fall the individual benefits for having received money based on the higher property value.
Entering the Contract: The older the individual the larger the % that can be borrowed.
The older the individual the greater the payment for the same % share of the property.
Lifetime Mortgage Home Reversion Scheme
DisadvantagesRaising cash: The interest rate charged will
be higher than normally charged by a mainstream lender.
Cash received will be far less than the market value of the share in the property.
No monthly repayments: As no repayments are made, interest will be added to the loan. The longer the loan remains unpaid, the larger the debt.
The debt may exceed the value of the property.
An individual cannot buy back in instalments the % share of the property that was sold to the reversionary company.
Property Values: If property values fall the individual may not realise from the sale of the property enough money to repay the loan outstanding.
If property values rise the home reversion company benefit from the increase in their portion of the property and the individuals lose out.
Exit from the contract: The contract can be terminated at any time once the loan and all accrued interest (and any fees) are paid in full.
An individual cannot change or reverse from this type of contract. However they (or the beneficiaries of their estate) may be able to come to an agreement with the Home Reversion company to buy back the share in the property.
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Chapter 8
Arrears and Debt Management
Learning OutcomesIn this chapter we will learn about:
When and why arrears happen
Legislation relating to arrears management
MARP
Alternative repayment arrangements ARA
Life insurance implications for arrears
Repossessions Personal Insolvency Bankruptcy
Introduction
• Most people take out loans with full intention of repaying
• Unfortunately some are unable to make loan repayments
• Difficulty may be short term or long term
• Statutory protection for individuals in arrears
1. Code of Conduct on Mortgage Arrears 2013
2. Consumer Protection Code 2012
3. Personal Insolvency Act 2012
4. Bankruptcy Act 2015
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Secured & Unsecured Debt
Secured Debt – loan given and security provided by borrower. Lender takes lien against the asset in event of default.
Unsecured Debt – loan given without security and lender cannot recover the debt through forcing the sale of an asset
Arrears
When – borrower fails to make a full payment or only makes partial payment by the due date
• Why – Interest rate increase
• Accident, illness, redundancy
• Divorce or separation
• Gambling or other addictions
• Work hours reduced
• Borrowers won’t pay as opposed to can’t pay
Action on arrears
• Contact lender – repayment agreement ??
• Discuss options with lender
• Review monthly outgoings
• Prepare budget plan
• Review any income protection policies
• Contact the community welfare officer
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Regulation
• CCMA – deals with issues relating to the handling of arrears related to the primary residence.
• CPC – deals with arrears handling of all consumer loans except primary residence
• CCA – also makes provisions for entities handling arrears on consumer credit
CPC• Covers all loans provided to personal consumers
• Person acting outside course of their business
• CPC states lender must contact borrower where an account remains in arrears 10 business days after the arrears first arose.
Lender must provide after 31 days
1. Date the loan fell into arrears
2. Number of payments missed
3. Amount of the arrears
4. Interest rate applicable
5. Contact points
CPC and Mortgages
• Code states where a third payment is missed Lender must notify consumer of
1. Potential for legal proceedings
2. Importance of seeking legal advice
3. That consumer will be personally liable for outstanding debt, interest, and any charges
• No more than 3 unsolicited communications in a month in respect of arrears
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CCMA 2013
• Applies to arrears and pre arrears on primary residence only
• Only one residential property allowed in the State
• Covers following situations
• Bought a house, lived in it but now moved in with relatives and rented out house to pay mortgage
• Emigrated for work purposes
• Bought property and immediately went into negative equity, never moved in but rented it out
Definitions 8.1.5.2
• Arrears – borrower hasn’t made a payment or full payment on account as per mortgage
• ASU – Arrears Support Unit manages cases under MARP
• Business Days – any day except Sat, Sun and Bank Hols
Definitions• Non Co‐operating Borrower –
a) Failing to make full disclosure
b) Fails to provide relevant info within reasonable time
c) Three months after not entering into an alternative solution and not paying mortgage.
d) Meets current repayment but has arrears balance
e) Entered into alternative arrangement but not meeting payments
f) Failed to respond to communications
g) Not engaged with lender
h) On receipt of warning letter
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Definitions
Repossession – lenders takes house thru voluntary arrangement or court order
Split Mortgage – mortgage reduced to affordable amount and balance set aside to later date
SFS – documenting borrowers financial info
Unsolicited Visit – any visit not requested by borrower
Voluntary Sale – sale of property to repay loan with agreement of borrower
Voluntary Surrender – giving the property to the lender
General Obligations CCMA
• Lenders must have procedures in place to deal with arrears cases.
• Must have MARP framework
• Arrears Support Unit ( ASU)
• Proper systems to capture info of borrowers
• Training for staff
• Pro actively encourage borrowers to contact lender if they are concerned about arrears at least annually
MARP Process
Lenders must apply MARP in the following circumstances.
1. Mortgage arrears outstanding for 31 days
2. Pre arrears
3. Another arrangement put in place by the lender fails or finishes e.g. interest only for a period.
Borrower above must get MARP booklet immediately
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Not co‐operating
• Very important to engage with lender
– Could be classified as non co‐operating if not engaging – huge implications
Examples of non co‐operating include
Failing to make full and honest disclosure to lender
Failing to provide requested info to lender within reasonable time frame – at least 20 days
Not co‐operating
• Lender must give advance warning of being classified as not co‐operating
– Must take action within 20 business days
– What needs to be done now and on an ongoing basis
– Outline implications of not co‐operating
Implications of not co‐operating
• Lender must outline to borrower
–MARP protection no longer applies
– legal proceedings can start immediately
–Warning how it may impact on eligibility for personal insolvency
–Borrower is still liable for all debts
–Need to get legal advice
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Implications of not co‐operating
• If lender then proceeds to classify a borrower as non co‐operating must write again with various warnings:
Legal proceedings can start immediately
Borrower now loses protection of MARP
Any alternative offers
Estimate of associated costs and charges
Requirement to pay arrears
Impact on credit rating and need for legal advice
Right to appeal lenders decision
Right to consult a PIP
MARPS steps
Lenders Must
1. Communication with borrowers
2. Get financial information ‐ SFS
3. Assessment of SFS
4. Resolution
MARP
Communicate with borrower ‐ booklet
Information on MARP
Lender must explain key features
Charges and additional charges
What lender will do with confidentiality reports
Other possible options outside MARP
Definition of non co‐operation
Appeals policy
Communications policy
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1. CommunicationPersonal visits
• Allowed if borrower not responding to letters / calls
• Unsolicited Visit
– Only if other attempts to contact have failed and borrower is about to be classified as non co‐operating
– 5 business days notice of visit in writing
– Visit must be within next 15 days
– Stress the importance of engagement
– Explain SFS and assist in completion if requested
MARP 2 Financial Information
• Lender must
1. Use a Standard Financial Statement and when completed pass to its Arrears Support Unit
2. Make sure borrower understands MARP
Standard Financial Statement
• Borrowers financial situation
• Debts Family information
• Income
• Expenditure
• Liabilities
• Other assets
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MARP 3 Assessment
• Arrears support unit
• Examine each case
– Personal circumstances
– Overall debts
– Information in SFS
– Current repayment capacity
– Payment history
• Lender may allow a temporary arrangement during this period
MARP 4 Resolution
• Lender must look at all alternative repayment arrangements (ARAs) options
• Must document each option looked at
• Give borrower clear explanation in writing of options offered –Advantages / Dis advantages
–New repayment amount
– Implications for existing mortgage
–How it will affect life insurance
–How often it will be reviewed
–Credit rating
Some possible solutions • Extension of the loan term
• moratorium
• Interest Only Facility
• Payment Agreement
• Extending the term
• Capitalising the arrears
• Mortgage to Rent
• Sale of the Property
• Voluntary Agreement
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Advantages / Disadvantages Alternative Repayment Arrangements ARA
• Advantages include
–Reduce monthly repayments and get back on track
–Consolidate personal loans , reduces monthly payments
–Voluntary sale … control
–Peace of mind – no threat of repossession
• Disadvantages include – Owe more to lender
– loan term extended
– Unpaid balance added to overall debt
– Could be back in the same position as before ARA
Alternatives• Lender not willing to offer alternative
–Provide reasons in writing incl.
–Other available options –voluntary surrender etc.
–Costs involved
–Arrears due
– Impact on credit rating
–Right of appeal
–Consult a PIP/legal advice
–MARPS now not applying
– Legal proceedings may now commence 3 months from date of letter or 8 months from date of arrears whichever is later.
Alternatives
• Borrower not willing to enter alternative
– Lender must write with any other options inc costs
– Inform borrower of right of appeal
– Inform that MARP no longer applies
• Lender cannot classify borrower as non cooperating if the borrower declines lenders offer of alternative repayment solution
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Appeals
• Lender must establish appeals process
– Appeal a decision
– Appeal classification as non co operating
Life Assurance Implications
• Mortgage protection usually on a decreasing term basis.
• Arrears will not be covered by the decreasing term policy
• Capitalising arrears will need extra life cover
• Interest only will need different type of policy – level term
Repossessions
• Every reasonable effort must be made
– CCMA ‐ lender must notify borrower in writing before it applies to courts to commence legal action
– Lender can commence legal proceedings for property that is not principal residence in accordance with terms and conditions of agreement
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MABS
• Government Body
• Service for people in debt and helping people deal with creditors
• lenders will not take court action if borrower dealing with MABS and complying with agreed payments
Abhaile
• New service available to borrowers in arrears
• Operated by MABS
• In conjunction with Insolvency Service of Ireland, Legal Aid Board and Citizens Information Board
• Provides vouchers for free legal and financial advice
• Borrower must be in arrears, insolvent and at risk of losing home due to arrears.
Debt Management Firms
• Negotiate on behalf of borrowers
• Fee based
• Must be authorised by CB
• Provision of info regs
• TOB sets out services, fees, duration
• Helps the consumer understand service
• Contains various warnings for service
• Use reasons why setting out solutions
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Personal Insolvency (Amendment)Act 2015
• Historically if an individual was insolvent the only way to protect themselves against creditors was to declare themselves bankrupt.
• Onerous and costly procedure
• New Act introduced new laws to lessen the difficulties experienced by debtors
• Act introduced 3 non judicial debt resolutions
Non Judicial Debt Resolution
Three processes are:
• Debt Relief Notice(DRN) unsecured debt up to €35,000 subject to 3 year supervision period
• Debt Settlement Arrangement (DSA) – agreed settlement of unsecured debt over €35,000 for debtors who may have income & assets
• Personal Insolvency Arrangement (PIA) ‐ agreed settlement of secured debt up to €3m and unsecured debt
• No court appearance – just signed off by court
Entering into insolvency arrangement
An individual can be considered insolvent if:
• In respect of a debt incurred by a natural person through personal use or in the course of that persons business they cannot repay a debt when it falls due
• Their assets are worth less than their liabilities
• Where there is no realistic prospect of being able to repay the debt in the foreseeable future.
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Insolvency Service of Ireland
• Establish & monitor operation of insolvency arrangements
• Consider applications for Debt Relief Notices
• Processes applications for Protective Certificates – issued by court to protect debtors from creditors whilst going through process
• Establish registers open to public of various arrangements entered into by debtors
Debt Relief Notice (DRN)
Permits the write off of unsecured debt subject to conditions below.
• Qualifying debt is less than €35,000
• Debt is unsecured and 25% of debt has not been incurred in the last 6 months
• Must have net disposable income of €60 or less per month after reasonable living expenses.
• Assets or savings of €400 or less
• Individual must be insolvent & no realistic prospect of paying off debt within next 3 years
• domiciled in Ireland or Ordinarily resided in Ire at least 1 year before application
Debt Settlement Arrangement ‐DSA
Suitable for individuals who:• Have large unsecured debts and no prospect of repaying in the foreseeable future
• Are above the threshold for DRN i.e. €35,001 or their income/assets would make them ineligible for DRN
• They may have both secured & unsecured debt but cannot service unsecured debt.
A DSA will allow a creditor to enjoy protection against unsecured creditors while maintaining payments on secured debt such as mortgage.
Debtor agrees to an affordable amount on debt over a five year period – may be increased to six
Example 8.13.4
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Personal Insolvency Arrangement ‐ PIA
• Aimed at debtors with large unsustainable secured & unsecured debt
• PIA is not a write off of debt but rather an arrangement to pay something off debt in return for a write down.
• Differs from a DSA because includes secured debt
• Period of protection is 6 years with possible 1 year extension.
• Debtor will be released from unsecured debt at the end of the period but secured debt remains probably on restructured terms.
PIA EligibilityDebtor must :
• Be Insolvent
• Be Resident in the State or within one year etc.
• Have at least one secured debt up to €3m
• Engage a PIP
• Confirm that they have explored other options and attempted to reach a settlement with creditors
• Confirm there is no likelihood of becoming solvent within 5 years
• Confirm that if the debt refers to Principal Residence, they complied with MARPS for at least 6 months
Summary of Personal Insolvency ActKey Responsibilities Debt Relief Notice Debt settlement
ArrangementPersonal Insolvency Arrangement
Type of debt covered Unsecured Unsecured Secured and Unsecured
Value of Debt Up to €35,000 No Limit No Limit on Unsecured. Up to €3m on secured
Duration of Agreement 3 years 5 years (possibly 6) 6 years (possibly 7)Potential for 20 years clawback
Prepare application with Approved Intermediary AI Personal Insolvency Practitioner PIP
Personal Insolvency Practitioner PIP
Issue DRN Circuit Court N/A N/A
Register Protective Cert N/A ISI ISI
Public Register ISI ISI ISI
Administer terms of arrangement
ISI PIP PIP
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Bankruptcy
• To qualify for bankruptcy you must have availed of DSA/PIA
• Property and assets of bankrupt transferred to a trustee
• By request of the debtor or their creditors
• Creditor must give 14 days notice to debtor of application
• Petition must be presented by creditor within 3 months
• Debt owed must be at least €20,000
• Any assets sold are distributed to creditors by assignee
• Allowed to keep necessities to value of €6,000
Restrictions on Bankrupts
• Must disclose bankruptcy if seeking credit of more than €650
• Cannot trade under different name
• Cannot act as director, manager or liquidator/receiver
Subject to a fine of €1,270 or prison sentence of 5 years
Costs
€200 to official assignee
€50 to solicitor to file affidavit on affairs
Release from Bankruptcy
• Automatically released after 1 year
At Any Time during the one year
• All creditors paid in full
• All unsecured creditors give consent
• Paying at least 60% of unsecured creditors
• There is no reasonable expectation that the debtors circumstances will change
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Chapter 9
Consumer Credit
Learning Outcomes
In this chapter we will learn about:
Consumer credit and the range of credit agreements
Regulation of the provision of consumer credit
Advertising of consumer credit
How to compare consumer credit
What is Consumer Credit?
• Forms of Consumer Credit:• credit sale agreements consumer purchases goods
but the seller allows the consumer to pay the purchase price in instalments over a period of time e.g. 12 months
• hire purchase agreements consumer hires goods for a period of time ‐ ownership of the goods may/will pass to the hirer during or at end of the period
• Conditional sale agreements transfer of ownership from finance co to borrower is obligatory if all payments have been made
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PCP• Type of HP agreement
• Consumer does not own car until final payment made
• PCP has 3 parts – Deposit – between 10% and 30%
• Monthly Repayments – between 3 – 5 years
• Guaranteed Minimum Future Value – amount consumer will have to pay to own the car at the end of agreement.
At the end consumer has options –
• Pay the final payment GMFV
• Hand the car back
• Put the car down as a deposit on new PCP
Forms of Consumer Credit contd.
• Personal Loans – usually unsecured
• Overdrafts – an agreed borrowing limit on a current account
• Credit Cards‐ a facility to borrow month by month up to a maximum amount
(credit limit)
Communities Consumer Credit Regulations 2010
• €200 To €75000 only
• Above €75000 or below €200 CCA 1995
• Consumer Credit
• A natural person acting outside the person’s business
– So it excludes:
– Companies
– Individuals acting as partners of a business
– Individual’s acting in connection with their business
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What’s covered • Consumer Credit Act 1995 and European Communities Consumer Credit Regulations 2010
Consumer Protection Act Regulating Credit servicing firms
• Most loan agreements did not contain a clause which allowed original lender to sell the loan to another firm.
• Historically if this happened and the buyer was unregulated then the consumer got no protection.
• Since 2015 this is now a regulated activity
• So CPC, CCMA, MCC apply
Credit Intermediaries
• Provisions apply to providers of credit such as bank finance house but some provisions also apply to
• Credit Intermediaries:– ..a person, other than a credit institution or a mortgage lender,
who in the course of etc.
• State if tied or not
• Disclose any fees or commissions
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Consumer Credit Act, 1995
• Authorisation:
• Competition and Consumer Protection Commission
• Must indicate in any ad their status – tied, independent etc
• Fees must be disclosed before any agreement entered
• Authorisation is for 12 months and annually renewable
• CCPC can refuse:
• Not a ‘fit and proper’ person ...
• Bookmaker, a publican, a pawnbroker or moneylender
• Tax Clearance Certificate
Advertising of Consumer Credit (CCR)
• Any advertising that includes an interest rate must
• Borrowing rate ( nominal rate )
• Total amount of credit
• APR
• Duration
• Total amount payable
• Credit sale agreements
–Cash price
–Any advance payment
Advertising of Consumer Credit (CCA)
• Any other charges
• Security if needed
• Any restrictions
• Prohibits marketing to minors
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Before commencing a credit agreement
• SECCI form
• Standard European Consumer Credit information
– In good time
– Compare different offers
– Before consumer becomes legally bound
– Credit provider and credit intermediary
– Durable medium
• Distance contracts
– immediately after
SECCI
• Before a consumer is bound by credit agreement
• Must get SECCI form on paper or durable medium
• includes;‐ amount of credit, term, contact details of creditor, description of goods, legal info and any other info deemed necessary
Provision of adequate explanations
• CCR says intermediary must provide adequate explanation to consumer before entering agreement
• Must address whether agreement is appropriate to consumers need and financial situation
• Therefore must be personalised not generic
• Consumer can request SECCI form and/or credit agreement ‐ free of charge
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Assessing the creditworthiness
• Must assess creditworthiness of consumer
– Information from the consumer
– Credit score
• Refusal
– Must inform the consumer immediately
– Consumer can correct information if wrong
Refusal of Credit
• Under CCR if app is refused based on ICB info, lender must inform consumer immediately
• Under CCA consumer entitled to ask why refused within 28 days
Cooling off • 14 calendar days later of
– Deal concluded
– Terms and conditions received
• Availing of cooling off
– Writing or durable medium
– Pay any interest
• Early repayment
– Can do so at any stage under CCR
– Entitled to reduction in cost
– Lender can charge compensation in some cases
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APR
• Provider must calculate APR
• Rounded to I decimal place
• APR must allow
– All payments , charges, interest ,commissions ,taxes ,fees and any compulsory insurances
• APR assumes
– Rate remains the same for the full period
– If a fixed rate for an initial period then current variable rate applies at end of fixed rate
Hire Purchase
• Subject to Consumer Credit Act 1995
–Hire Purchase
–Consumer credit agreements more than €75000
–Non ‘consumers’ Companies etc
Hire Purchase Agreement
• A hire purchase agreement is defined in the CCA, 1995 as:
• “...an agreement for the bailment of goods
• So the agreement is for leasing/hiring goods consumer will either have:
• Option during/at end of agreement to purchase goods or ...
• Goods will pass to the consumer at end agreement if all payments made by the consumer
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Consumer Credit Act, 1995
• Hire Purchase agreement
– List of goods to which the agreement relates so to identify them
– Cash price of goods
– Amount of each of instalment
– Date/method each instalment payable
– where agreement is for a specified period—
– (i) number of instalments &
– (ii) total amount payable under the agreement (including taxes)
– Etc.
Hire Purchase Agreement
• Fees & Charges:
– Fees associated with HP agreements include:
– A ‘documentation’ or ‘arrangement’ (circa €50 to €100) to set up the agreement
– ‘Completion’ fee at end of agreement
– Fee (approx. €60) to reschedule term of the agreement
– Repossess ‐ fee circa €300
Hire Purchase price
• Mary buys a car under a HP agreement & cash price is €14,400 & buys it under a HP agreement as follows:
– Initial deposit of €500
– Initial ‘documentation’ fee of €75
– 61 monthly instalment repayments of €298.70 a total of €18,220.70
– Final ‘completion’ fee of €75
– Her total HP price: €500 + €75 + €18,220.70 + €75 = €18,870.75
• Terminating the HP agreement:
1) Return goods & pay a fee, OR
2) Purchase goods, by paying a LS /over
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Hire Purchase
1) Return the goods example HP:
– In the example above, the HP price is €18,870
– After 19 repayments Mary contacts the finance company & arranges to return car ‐ can no longer afford outlay
– She will have to pay to the finance company:
– 50% x €18,870 (the HP price) LESS {€500 + €75 + (19 x €298.70)} = 50% of HP €9,345 – Already paid €6,250. So now due to finance company €3,184.70
Hire Purchase
Consumer can purchase goods HP
– Pay difference between the HP price & repayments already made
– less an ‘interest rebate’ for early repayment of a HP agreement
• Over for example ...
Hire Purchase
Purchase goods example HP:
• In the example above, HP price is €18,870
• After 19 repayments Mary indicates she wishes to purchase the car outright
• May have to pay to the finance company:
• €18,870 (HP price) LESS (€500 + €75 + 19 x €298.70) LESS €1,250 (assumed interest rebate) = €11,370
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Repossession HP
Owner of goods (i.e. finance company) can not repossess goods unless ...
• Court order, where at least 1/3rd of HP price paid
• <1/3rd court order not required
• Must give 21 days notice
Comparing Consumer Credit
• Key factors in comparing personal loans, hire purchase, credit sale etc
– Maximum loan
– Terms the lender offers
– Cost of loan
– Security needed
– PPI
– APR
– Any other fees
– Flexibility
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