Promoting The Effective Use Of Credit & Prepare A Loan Application On Behalf Of Mortgage Broking Clients

Task 6: Promoting the Effective Use of Credit

Read the following scenario then answer the questions that follow.

Roslyn qualified as a schoolteacher some years ago, but failed to take up a teaching position after graduating because she became a single mother. Fortunately, she has been able to live with her widowed mother, but now that her daughter has reached school she is taking up a position as a schoolteacher some suburbs away.

Because of the distance of her new school from her parent’s home she will need to buy a car. After careful consideration, she has chosen a small hatchback that has an on-road cost of $15,800.

She will be working full time with a starting salary of $50,000.

She knows little about finance and has come to you for advice. She would prefer to finance the full cost of the car because she has little in savings.

Task 6.1.

Suggest two financing options that Roslyn might consider.
Explain the main features of each.
Choose one of these options and explain your choice. Are there any disadvantages that need to be considered?

ContinuedTask 6: Promoting the Effective Use of Credit Continued Task 6.2.Write a letter to Roslyn letting her know about your preferred, explain how she will make payments and giving your reasons for choosing it as the option more clearly meeting her needs. You should take care to proofread your letter. Task 6.3.Roslyn is concerned that the lender will apply for a credit report. Explain:

The procedure and cost involved in obtaining a copy of her credit file.
The right of a lender to access credit report information.

Task 6.4. Draft a letter to Roslyn providing advice about her plan. Sub-total /10Total /15
Task 7: Prepare a loan application on behalf of mortgage broking clients Case Study — Evaluating and processing a loan application Read the following case study then answer the questions that follow. Ross and Melissa Cooper are a young couple who have been married for five years, during which they have been renting an apartment while saving to buy an apartment of their own. They do not have any children at this stage.After some months searching, they have found a small two-bedroom apartment that suits their needs.

The purchase cost of the property is $480,000, and they have provided a deposit of $60,000. You are recommending a standard variable loan.Ross has been working at Gaines Consulting Pty Ltd. for 12 years and has a salary of $80,000. Melissa has been working at Jackson Equipment Hire Pty Ltd for 8 years and has a salary of $70,000. Neither has had previous employment, apart from casual work when they were younger.The full details of Ross and Melinda that you have collected are as follows: ASSETS AND LIABILITIES Surplus/deficiency: $126,400 OTHER DETAILS:They are seeking a loan term of 25 years. Other requirements are:

proposed settlement date — 6 weeks time
ability to make additional payments from time to time without penalty
monthly repayments
redraw facility.

The applicants will have no other financial commitments other than their monthly mortgage commitments, rates and utility costs and strata fees.The current variable home loan rate is 6% pa.Note: For the purposes of this assignment, any first home purchase assistance should be ignored. OTHER INFORMATIONAPRA is concerned that interest rates may rise and because of this it is requiring all lenders to “stress test” all housing loans at a borrowing rate of 7% p.a.

Task 7.1.Apart from requiring the presentation of a Credit Guide, the NCCP Act says nothing about what a mortgage broker should say about him/herself at the beginning of a client interview. In the space below, make a few brief points about what you would say about yourself and your firm at this stage. Remember that at the outside the client is primarily looking for assurance that the broker is concerned about them and their interests.

Task 7.2.List in point form the important information a Credit Guide conveys to the credit applicant. Task 7.3.Under the Anti-Money Laundering and Counter-terrorism Financing Act 2006 (AML/CTF Act), mortgage brokers are required to establish the identity of their clients. To do this they must cite original copies of at least three primary documents and one secondary document. List three primary documents and one secondary document below.

Sub-total /8Continued Task 7.4.Mortgage brokers should present adequate information to clients to enable them to make a choice between loans. This involves conducting research to determine suitable loans and presenting clients with a choice among, say, three loans that are considered to be suitable for the client’s requirements. The characteristics of the three selected loans are then presented to clients in a way that allows a comparison to be made. The presentation may be made a piece of paper, or other means such as a Powerpoint overhead. You are now required to use the internet or other sources to choose three loans that you believe will meet the requirements of Ross and Melissa. The relevant details should be placed in the spaces provided.

Task 7.5 (a)Explain significant features of the loan products that you have chosen in words that the client would understand. Your answer should be restricted to features relevant to the clients. Sub-total /8Continued Task 7.5 (b)Credit providers always have other fees and charges beyond their stated interest rates. Select one of the loans you have set out in Task 7.4 as the one preferred by Ross and Melinda and explain any additional fees and charges in a manner that your clients can understand.

Task 7.6It is important to verify the information that you obtain from clients, particularly information that relates to income. List the documents that you should ask for and then examine to verify the incomes of Ross and Melissa. Task 7.7In dealing with clients, it is important to explain technical concepts in ‘plain English’ so that they understand them. In the first two spaces below, explain the terms ‘LVR’ and ‘insured’ LVR’ in terms that that your clients will understand. Then, in the third space, explain how Lender’s Mortgage Insurance is normally paid, once again expressing yourself in a way that the clients are likely to understand.

Task 7.8Mortgage brokers assist their clients to complete their preferred lender’s credit application form, as well as applications for the First Home Buyer’s Grant and (where applicable) stamp duty exemption. Examples of these forms are set out over the following pages and you are required to complete them on behalf of Ross and Melissa. Remember that each form must be signed by the client, so facsimile signatures must be attached, Sub-total /23Continued.

Task 7: Prepare a Loan Application on Behalf of Mortgage Broking Clients Continued Task 7.9.It is important to keep clients informed about the steps involved in the credit approval process. Indicate how your organization keeps your client informed as the loan application proceeds. What are the likely normal time intervals for each step that you explain to your clients. Task 7.10Assess the loan application of Ross and Melissa Cooper against the five C’s.

Character

How would you assess the applicants’ character?

Capacity
What will the applicants’ monthly payment be, given the current variable lending rate of 6% p.a.? (Hint: visit a website such as:
Using the ‘income percentage method’, assess the applicants’ capacity to repay the loan (25 words)

Continued Task 7: Prepare a Loan Application on Behalf of Mortgage Broking Clients Continued

Capital
How would you verify the equity the applicants intend to contribute to the purchase?
What should you be careful about regarding this contribution? (50 words)

Collateral
Assuming the valuation placed on the property is $480,000, calculate the loan to valuation ratio (LVR).
Given the LVR that you have calculated, what steps might the bank take to protect its position? (25 words)

Conditions

Using the information that has been presented, identify any ‘conditions’ that might impact on this loan application. How should they be handled? Task 7.11What is your organization’s policy about notifying applicants of the outcome of their application? Sub-total /8Continued Task 7.12The credit application that is forwarded to the credit provider is accompanied by supporting documentation used to verify the information concerning the financial position of the client.

List four types of document that are likely to be forwarded. In the case of Ross and Melissa Cooper. Task 7.13What should be the rules regarding access to client files? Task 7.14There are times that you might suggest to clients that they should have a fixed interest loan for a period. Explain why you would do this. Task 7.15List the information you should include on a client file.

No.		Mark
1.	The two financing options suggested for Roslyn has been considered with taking a car loan and dealer finance.	/1
2.	Some of the main features of the car finance is understood with variable interest rate, fixed interest rate, comparison rate, extra repayments, redraw facility, frequency of payment frequency and loan term. In dealer finance the term varies from three to four-year terms. Dealer finance allows for balloon payment which is payable end of the term. It offers lower interest rates than car loans, however the low interest may be applicable to only specific models and makes of car.	/2
3.	As Roslyn has newly started with her job, the dealer finance usually needs good credit for eligibility. Therefore, car loan is recommended as the main financing option. This will provide a range of competitive loan options and allow for the repayments to be repaid in full amount at the end of LT (Loan Term). However, Roslyn needs to be particularly aware of the higher interest rates than the dealer finance and she may need to pay upfront and ongoing fees during the entire loan period.	/2
Sub-total /5
	Mark
Dear M/s. Roslyn, This is to inform you that based on your decision to buy a small hatchback I would suggest you that you choose the option of taking a car loan. Firstly, with a starting salary of $50,000 you will have several repayment options based on the rate of interest for the loan amount $ 15,800. Secondly, there is no need for balloon payment. The secured car loan needs to be paid with a monthly repayment of $ 317.78 at 6.99% fixed interest rate over a term of 5 years. This is inclusive of the total interest charge of $ 2,967 and loan establishment fees of $ 350. In this way you will need to pay a total loan amount of $ 18,767 over a period of 5 years. In compare to the dealer finance this option will save you $ 3,160 of balloon value charged at 20% rate of interest. Moreover, being new employed in the job there is less scope attaining the eligibility of dealer finance. Henceforth, this car loan option will be the suitable technique to efficiently use the credit amount. Yours sincerely,	/4
No.		Mark
1.	The main information which needs to be maintained for obtaining a copy of credit file includes “Income – gross (before tax) and net salary (after tax), employment details and other income (from shares, rental property”. In addition to this, Roslyn should have the on-hand information of the approximate “values of property, vehicles, savings and superannuation”. Some of the other information needed is seen with “loan balances, repayment amounts, credit card or overdraft limits”. She needs to pay loan establishment fees of $ 350 for obtaining a copy of credit file.	/2
2.	“Credit reporting body (CRB)” is seen as the only authority to give consumer the right to take part in the “consumer credit reporting system”, along with a limited people and organizations. The organizations such as Trade insurers, credit providers and mortgage insurers have the right to access the credit report information.	/2
Further information Roslyn mentions that her mother’s washing machine has broken, and she urgently needs a replacement washing machine. The cost is less than a thousand dollars and she plans to use her credit card for the purchase. She tells you that she will make the minimum required repayment per month until she pays the machine off.
	Mark
Dear Roslyn, I have considered the price of washing machine to be $ 800. The market analysis has suggested that the average rate prevailing in Australia is seen to be 13.5% for credit cards. In case you wish to repay the credit amount with higher repayments, you will be able to save $ 162. This is considered with making a payment of $ 38 each month over a period of 2 years. In this way you will need to pay a total amount of $ 907. In case, you opt for the minimum repayment option then you need to pay $ 20 for a period of 4 years 6 Months. In this way you will be able to need to pay total amount $ 1069 which is higher than $ 907. Therefore, it is recommended to choose the higher repayment option for taking a credit of $ 800.	/2
	Applicant 1	Applicant 2
Loan purpose	Purchase home (owner occupied)
Amount and type of loan sought	$480,00, standard variable rate
Deposit	$60,000
Address	Unit 2, 27 High St., Mackville, NSW. 2080	Unit 2, 27 High St., Mackville, NSW. 2080
	Status	Renting	Renting
Years there	5 years	5 years
Contact details	Phone (W) Phone (H)	02 9200 1111 (w) 02 9400 9900 (h)	02 9310 2000(w) 02 9400 9900 (h)
Mobile	0400 100 156	0418 960 000
Email	[email protected]	[email protected]
Number of dependants	Nil	Nil
Employment	Gaines Consulting Pty. Ltd	Jackson Equipment Hire Pty Ltd
How long?	12 years	8 years
Gross income ( p.a.)	$80,000 p.a.	$70,000 p.a.
Credit history	Personal loan to purchase a car — since repaid. Personal credit card with Central Bank with a limit of $3,000. Current balance: $300 Note: All credit cards are repaid in full when due.	Personal credit card with Northern with a limit of $2,000. Current balance: $300 Store card with Wilson’s Department Store. Current balance: S250 Note: All credit cards are repaid in full when due.
Assets	Liabilities
Details	Market value	Details	Monthly payments	Amount owing
Cash at bank	$15,000	Credit card limit: $2,000	$3,000	$300
Deposit paid on property	$60,000	Credit card limit: $3,000	$2,000	$300
Motor vehicles: 1. 2.	$15,000 $7,000	Other:
Personal effects	$30,000
Business value	Nil
Total assets	$127,000	Total liabilities		$600

	Mark
Some of the important terms and conditions for the clients include: · Despite of the final recommendations the client needs to consider the market risks which are associated to the credit borrowing · The firm is not responsible for compensating any loss as a result of market volatility · The firm is not responsible for assisting with repayment in case of any default of a particular · The client’s needs to be aware of the any previous history of default in the payment which may significantly affect the credit scoring of the present borrowing	/2
	Mark
à Provide Information about the Commonly used lenders (“Commonwealth Bank, ANZ, Westpac, NAB, AFG Home Loans, St George Bank”) à Fees to be paid by the clients to the third party (“credit application (loan) is submitted, you may need to pay the lender’s application fee, valuation fees, or other fees” which needs to be considered even if the loan is ultimately unsuccessful à Payments received by the licensee (The different types of the fees may be received in form of “fees, commissions, or financial rewards from Lenders or Lessors in connection with any finance“ à Fees payable by the licensee to the third parties (Taking note of the credit quote provided by the firm. In case the credit note is not supplied this will indicate consumers are not charged any additional fees). à Volume bonus arrangement with (AFG ltd. and AFG members may be receiving the additional remuneration as bonuses) à Information about the Commonly used lenders by the broker (suggested with 6 most commonly used lenders such as “Suncorp, Macquarie Bank, AFG Home Loans – Edge, ING Direct, ME and ANZ”	/3
	Mark
Primary Document · “Collection of certain minimum ‘know your customer’ (KYC) information” · Providing the verification of customer information · “Provide for the collection of information about the agent of a customer” Secondary Document · “Agents acting on behalf of a customer” · “Incorporated and unincorporated associations” · “Registered Cooperatives”	/3
	Mark
Credit Provider	ANZ	Commonwealth Bank	Westpac	/6
Product Name	ANZ Standard Variable home loan	Commonwealth Bank Standard Variable	Rocket Repay Home Loan
Interest Rate Type (%)	5.20%	5.22%	5.24%
Comparison Rate (%)	5.30%	5.36%	5.38%
Minimum Loan Amount ($)	250,000	150,000	150,000
Maximum Loan Amount ($)	499,999	249,999	249,999
Minimum Loan Term	1 Year	1 Year	1 Year
Maximum Loan Term	30 Years	30 Years	25 Years
Maximum LVR (%)	90%	90%	90%
Maximum Insured LVR (%)	80%	80%	80%
Mortgage Offset Account (Yes/No)	Y	Y	N
Loan Redraw Facility (Y/N)	Y	Y	Y
Split Loan Facility (Y/N)	Y	Y	N
Fixed Interest Option (Y/N)	N	N	N
	Mark
The three loan products range from ANZ Standard Variable home, Commonwealth Bank Standard Variable and Rocket Repay Home Loan by Westpac. The significant features such includes facilities such as redraw, flexibility in choosing the loan term, saving on interest payable by maintaining offset account, making interest only repayments and option to split loans.	/2
	Mark
The selection of the loan stated in the Task 7.4 has been made with ANZ Standard Variable home. The loan needs to have a loan administration charge of $ 5 per month. The loan needs to further have an additional Renegotiation fee of $ 200 or $ 350 depending on requested change. Ross and Melinda need to pay monthly repayment of $ 264 by taking this loan. They also need to pay the “Lenders Mortgage Insurance (LMI)”.	/2
	Mark
Ross and Melinda need to keep the details of their income, expenses, assets and liabilities, driver’s license and An ANZ account number. As per the salary of Ross and Melinda both are eligible to apply for the loan. In order to verify their incomes, the main documents needed are copy of Latest Bank Statement, “Latest 6 Months Salary Slip with all deductions and last 2 years”.	/3
No.		Mark
1.	The loan to value ratio is the lending risk assessment ratio which the “financial institutions and others lenders” examine prior to approving of a mortgage. It is the amount of the mortgage lien divided by the appraised value of the property in terms of percentage. A higher percentage of LVR represents higher risk and such approval is seen with a higher risk. A loan with a high LTV will need the borrower to “purchase mortgage insurance to offset the risk of the lender”.	/1
2.	Lender’s Mortgage Insurance is identified as that condition of borrowing home loan where the mortgage lender may require to make an off payment to protect the lender against the events which might lead to failure in making the loan repayments. Insured LVR is designed to protect the borrower in case of loan default.	/1
3.	In general, the lender will need to pay for a lender to pay for the lender’s mortgage insurance if the home loan deposit is less than 20% of the total value of the mortgage. However, the individual lender may require more or less than a 20% of the deposit to avoid paying LMI.	/1
	Mark
	/15
No.		Mark
1.	The broking firm will ensure that the clients are informed at every stage from the loan application process to the disbursement of the loan amount. The initial 3-4 days will be spent on the preparation of the documents, this will consist of the various document ranging generating a credit eligibility rating based on the previous borrowings. The next stage will involve will involve input of the loan application in into the core banking system of the bank. The customer will be informed when the initial processing is charged as soon as the loan account is opened. This stage will be followed with creating an entry in the memorandum of the bank. The customer will be duly informed about the drawing process of the loan. This will done in the 4^th day from the application process.	/2
	Mark
Both Ross and Melisa are having a good reputation of repaying loans. This is evident with Ross’s “Personal loan to purchase a car — since repaid” and Mellissa’s paying the dues of the credit card amount.	/2
No.		Mark
1.	Estimated monthly payments are $2,877.84, and Ross and Melisa need to pay $556,023.31 in interest over the total 30 years loan period.	/1
2.	As per the income percentage method the monthly repayment is seen with $ 309.26. This calculation is considered on a “loan amount of $48,000 with an interest rate of 6.00% and a loan term of 25 years”. Ross and Melisa cooper both have more the same capability to repay the loan amount	/1
Sub-total / 6
No.		Mark
1.	The verification of the equity is determined with Full-time and part-time employment assessment, Commission, bonuses, overtime and allowances, Self-employed applications, rental income	/1
2.	A deposit of $ 60,000 paid on the property shows that borrowers are having the ability to repay a loan by comparing “income against recurring debts and assessing the borrower’s debt-to-income (DTI) ratio”. However, they need to ensure that the borrower has a sufficient DTI ratio.	/1
No.		Mark
1.	The total Loan to Value Ratio has been depicted as 100%	/1
2.	Based on the high loan to value ratio Ross Cooper needs to apply for insurance LVR. The bank needs to ensure that the loan amount is supported with a guarantor	/1
	Mark
The conditions of the loan are seen to be specific with standard variable loan. The conditions of the loan application process need to be handled with Pre-Qualification, Mortgage Programs and Rates.	/2
	Mark
The updating process of the loan amount needs to be ensured with sending regular emails and SMS in the client’s email id and personal number.	/2
No.		Mark
1.	Valid Proof of Applicant’s Identity	/1
2.	Latest 3 month’s Salary Slips	/1
3	Current Employment Certificate	/1
4.	Latest 6 month’s statement from bank	/1
5.	Proof of Age	/1
6.	Proof of Residence	/1
	Mark
The access to the client’s files needs to be ensured with “confidential information of current and former clients not be disclosed outside the law firm except” in some of the specific ways as stated in Rule 1.05. The client also needs to ensure “TDRPC Rule 1.15(d) of the Texas Disciplinary Rules of Professional Conduct states”.	/2
	Mark
“When a loan is fixed for its entire term, it remains at the then-prevailing market interest rate, plus or minus a spread that is unique to the borrower”. In general, “if interest rates are relatively low, but are about to increase, then it will be better to lock in your loan at that fixed rate”.	/1
	Mark
· “Proof of Identity” · “Proof of Residence” · “Latest 6 months Bank statement” · “KYC Documents: Proof of Identity; Address proof; DOB proof” · “Office address proof” · “Proof of residence or office ownership” · “Proof of residence or office ownership”	/2