Using Campari To Assess The Lending Proposition Finance Essay
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Where the arrears raise, the bank, as mortgagee, can handle them rely on legal options and the Council of Mortgage Lenders Statement of Practice on Handling of arrears and Possessions and the Mortgage Code. Mortgage Code assists with protection for the mortgage borrowers. The registration of the lenders to the Code is regulated by The Council of Mortgage Lenders.
The Statement gives the general guidance for lenders how they can deal with mortgage arrears. There should be individual treatments of each case; procedures for handling each case are flexible and should help the borrower as much as possible in certain situations.
There are few measures which lenders can use to assist borrowers in case of default:
Extend the Term of the Mortgage - it is to prolong the loan term, however, the monthly based payment would not be changed a lot;
Change of Mortgage - for example, unit-linked mortgage could be changed on capital mortgage; in this case borrower should be advised to get professional consultation;
Defer Payment - it means that the payment towards to interest will be deferred for a period. This could be useful in case of shortfall in income (because of temporally illness) or a rapid increase in interest rate and if it is in interest of both the lender and the borrower;
Capitalise interest - it is related to third measure. This could be used when arrears have built up; nevertheless, the full monthly payment could be started again.
In case if no of the measures could be agreed and debtor could not serve the loan lender can obtain the possession of a property and its subsequent sale.
In Statement it is clearly stated that "possession of property will be sought only as a last resort", that is they should try and use all possible measures to help borrowers in their repayment difficulties.
Yet there are legal options which are available as remedies for lenders who take the land as security in event of default, but few of them are not mentioned in the Council of Mortgage Lenders Statement. They are as following:
These are options on which the Council of Mortgage Lenders Statement is silent.
Sue. Lender can sue the borrower in event of default for unsettled debt. It is the right of any creditor to sue for unpaid debt. But in some circumstances this remedy would not be exercised:
There is charged security and lender can wish to proceed against security rather than the individual;
In case if borrower does not have any other assets, then to sue him is a useless exercise.
Appoint receiver. In case if block of flats or hotel (anything which give the rental income) have been given as security, receiver will be appointed by lender to collect rents. Theses rents will be used to pay the receiver fees, running the business, towards to insurance of property as well as towards to capital and interest as regards to loan.
Foreclose (may say that it does not happen in real). It is the most severe option which lender can use. The debtor will no longer own the property in case if foreclose order is granted. The property will belong to lender and after house/land is sold the debtor would not get the equity sum. That is why the foreclose orders are unlikely ever granted.
Next two legal options are also stated in the Council of Mortgage Lenders Statement.
Possession. In case when borrower has no bounded property the lender must get the court order to obtain and sell the property with vacant possession (Protection from Eviction Act 1977). In order to obtain the order for possession and accordingly the Administration of Justice Act 1970 and 1973 the lender ought to produce evidence that all possibilities to help borrower with arrears had been exercised and they are failed. The Council of Mortgage Lenders Statement in December 1991 reaffirmed that "it is the policy of lenders to take possession only as a last resort, and to handle arrears problems effectively and sympathetically".
Sell. A lender has right to sell the property charged in eventuality of default under Section 101 Law of Property Act 1925. Prior to sell property the order of possession should be obtained. There is no need to delay the sale of property in the expectation of higher price (Bank of Cyprus v Gill). At the same time the best price must be obtained selling the property, if a bank failed to do so, bank becomes liable for deficit (Standard Charted Bank v Worker). The Council of Mortgage Lenders Statement agreed that it is lender's duty to obtain the best price reasonable obtainable and it is not necessarily to suspend sale in anticipation of price rise at some future date. Also it provides that: property should be professionally valued before sale; special staff will be responsible for reviewing the offers from potential buyers, checking-up the condition of property and valuation; estate agent might be specifically asked not to put property as "repossessed property"; property could be sold via auction to a higher bidder.
Thus, from comparison of legal options and the Council of Mortgage Lenders Statement of Practice on Handling of arrears and Possessions and the Mortgage Code can be seen that they rather supplement with each other than argue. But at the same time they look at problems from a bit different point of view. Legal options give more possibilities to lender to recover in case of borrower's default, while the Council of Mortgage Lenders Statement is designed more to protect the borrower in case of default.
To assess any lending proposition banks can use the set of good lending principals. They are known as "Canons of Lending", which all lenders apply when examine information and some extra data, which are relative to lending proposition, in details. There are many points to be covered during assessing so lenders use a mnemonics to check if they looked at all areas.
Most commonly used is CAMPARI:
Character: of course it is difficult to value individual if you meet him just for first time. Lenders would like to assist person who are honest. The very important key issues will be: how long this individual has been a customer? Does he have good record on his account (how his account have been conducted in past, how did he/she serve previous loans)? If the individual is not a bank customer his profession could be guidance to his/her character, bank might require the bank statement from bank where an account is held.
Ability: main relevant factors here are age, health, technical ability. In case if the borrower is going to set up the physically demanded business (for example, pub) he should be healthy and relatively young. If engineer is about to set his own construction company it would be good if he also has done management related courses. The ability to restrict expenditure and accumulate savings over years may show that person is able to serve loan well
Margins: the rate of interest, which will be charged, is the price of money and the reflection of the risk (higher risk - higher rate) involved in lending. There is also possibility that bank will charge an arrangement fee to repay the work involved in assessing proposition. Bank is the organisation that is aimed to make the profit, in this way there are many cross selling opportunities for bank such as life-insurance or house-insurance, arranging which bank will get commission from the company whose policy was chosen.
Purpose: surely it is what a person is borrowing for. It should be legal. But still some legal purposes, like gambling, would not be looked favourably or if the loan to company could give rise to bad publicity and such effect bank.
Amount: it is of importance to establish if the amount requested is correct and that all costs (stump duty, legal costs, and arrangement fee) are considered. Cash flow forecast could be needed if lending to a company in order to value the exact borrowing requirement. The amount borrowed should be agreed with bank policy that is bank could lend to individuals to purchase the house only 3-4 times person's gross income. In ideal contribution from band and borrower should 50 % from each side.
Repayment: this is the most important principle. Repayment is usually coming from individual's income, so lender should make enquires in order to obtain details on how long individual has been employed, his salary, is job permanent or temporary, if bounces are guaranteed. Possible it is useful to prepare income and expenditure account to establish if person is able to serve the borrowing without any difficulties. If it is clear that individual can not serve the loan bank should refuse loan in spite of securities being offered.
Insurance (Security): is the secondary importance. Security is necessary in case if income as a primary source of repayment has failed. Land, guarantee, life-policy and stocks and shares are common types of security.
As we see the CAMPARI involves lots of human attention. But as our life is becoming more and more computerised the same is happening with assessing the lending proposition.
Credit scoring is the process which assists lenders to decide if individuals are creditworthy using the specially designed questions form and mathematical formula adding up all scores for each answer. By calculating the score the lender will get the snapshot of individual's credit risk picture at certain point in time. Every score is individual and may fairly identify level of person's future credit risk. The total score will be also compared with millions of past credit files. If total score has approached certain figure or above it then lender is likely to grant loan.
Five main factors are used to determine credit score, namely: payment history, length of credit history, new credit, amount owed, types of credit in use. They could be varied but the basic will be kept the same.
For example, a person who has been resident at same current address or with same employer for long period will get more scores than a person who change addresses or jobs very often. So, person will lose scores if: is self-employed, have changed job recently or did it frequently in the past, have moved home recently of often, is not electoral register, never had a mortgage or any other loan, is single or cohabiting with a partner.
Credit scoring is used not only to help with lending decision, even if you want to open account in bank credit scoring will help bank worker to assess which current product could be offered to individual according his credit score.
Accordingly, the CAMPARI and credit scoring generally speaking use the almost same factors when assessing the lending proposition. Yet, CAMPARI is method that uses more human resources and thus is more expensive (specialist in lending should be involved in evaluation of proposition) than credit scoring (lower level staff could put information in computer). But lack of human involvement in credit scoring sometimes could lead to turning down good customer just because he changed work recently even if his salary is quite high; nevertheless, the same "lack of human involvement" means that proposition would be estimated without favour and bias by credit scoring. CAMPARI is longer process; credit scoring, by using computer, takes just merely few minutes to calculate and value the proposition, so .
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