CeMAP Mortgage Law and Practice Questions and Answers 1 — Questions and Answers
Question 1: A client has a mortgage on their property with Lender A (a 'first charge') and later takes out a secured loan for home improvements with Lender B (a 'second charge'). If the client defaults and the property is repossessed and sold, what is the order of repayment from the sale proceeds?
- Lender A is repaid in full, then Lender B is repaid from any remaining funds. (Correct answer)
- Lender B is repaid in full, then Lender A is repaid from any remaining funds.
- Both lenders are repaid on a pro-rata basis according to the amount owed.
- The legal costs are paid first, and then both lenders share the remaining funds equally.
Correct answer: Lender A is repaid in full, then Lender B is repaid from any remaining funds.
In UK mortgage law, charges are ranked in order of creation. A first charge holder has priority and must be repaid in full from the proceeds of a sale before any funds are distributed to the second charge holder. This is why second charge lending is considered higher risk and often comes with a higher interest rate.
Question 2: Under the Law of Property Act 1925, which of the following is the most common method for creating a legal mortgage on a registered freehold property in the modern conveyancing process?
- By granting the lender a 3,000-year lease on the property.
- By physical deposit of the property's title deeds with the lender.
- By a charge by deed expressed to be by way of legal mortgage. (Correct answer)
- By an oral agreement witnessed by a solicitor.
Correct answer: By a charge by deed expressed to be by way of legal mortgage.
The Law of Property Act 1925, specifically section 87, establishes the 'charge by deed by way of legal mortgage' as the standard and most common method for creating a legal mortgage today. This method does not involve transferring ownership or a lease but creates a legal interest for the lender which is registered against the property's title.
Question 3: A lender is initiating repossession proceedings against a borrower in arrears. According to the FCA's MCOB (Mortgage Conduct of Business) rules, what is a key principle the lender must follow before taking court action?
- The lender must have made at least ten attempts to contact the borrower by phone.
- The borrower must be at least six months in arrears before proceedings can begin.
- Repossession must be treated as a last resort after all other reasonable options have been considered. (Correct answer)
- The lender must offer to buy the property from the borrower at the current market value.
Correct answer: Repossession must be treated as a last resort after all other reasonable options have been considered.
The FCA's MCOB sourcebook is clear that lenders must treat customers fairly and that repossession proceedings should only be initiated as a last resort. Lenders are required to explore other options with the borrower, such as extending the mortgage term or changing the mortgage type, before commencing legal action.
Question 4: The Mortgage Credit Directive (MCD) was implemented into UK law in March 2016. What was one of the most significant impacts of this directive on the UK mortgage market?
- It introduced the requirement for all mortgage advisers to hold a university degree.
- It banned the sale of all interest-only mortgages across the UK.
- It brought the regulation of first charge and second charge mortgages under the same FCA regime. (Correct answer)
- It mandated that all mortgage offers must be valid for a minimum of 12 months.
Correct answer: It brought the regulation of first charge and second charge mortgages under the same FCA regime.
Prior to the MCD, first charge mortgages were regulated under the FCA's mortgage regime (MCOB), while second charge lending was regulated under the Consumer Credit Act. A key change brought by the MCD was to bring both first and second charge mortgages under the same regulatory framework, the FSMA regulated mortgage regime, to create a single, consistent market.
Question 5: A borrower wishes to repay their fixed-rate mortgage in full during the initial benefit period. The lender applies an Early Repayment Charge (ERC). According to MCOB rules, this charge must be:
- A fixed percentage set by the Bank of England.
- No more than three months' interest.
- A reasonable pre-estimate of the costs the lender incurs due to the early repayment. (Correct answer)
- Calculated using the 'Rule of 78' to determine the outstanding interest.
Correct answer: A reasonable pre-estimate of the costs the lender incurs due to the early repayment.
The FCA's MCOB 12.3 states that an Early Repayment Charge must be a reasonable pre-estimate of the cost to the lender resulting from the customer repaying the loan early. The rules specifically prohibit the use of the 'Rule of 78' as it is not considered an appropriate or fair method for calculating the lender's cost.
Question 6: When a legal mortgage is created on a property with a registered title, the lender's interest is recorded at HM Land Registry. Historically, what document was issued to the lender as proof of their charge over the property?
- A Share Certificate.
- A Charge Certificate. (Correct answer)
- A Debenture Certificate.
- A Title Insurance Policy.
Correct answer: A Charge Certificate.
For registered land, HM Land Registry used to issue a Charge Certificate to the mortgage lender (the mortgagee) as evidence of their registered charge over the property. While these certificates are no longer issued for new charges following the Land Registration Act 2002, they may still exist for older mortgages.
CeMAP Mortgage Law and Practice Questions and Answers 1
A client has a mortgage on their property with Lender A (a 'first charge') and later takes out a secured loan for home improvements with Lender B (a 'second charge').
If the client defaults and the property is repossessed and sold, what is the order of repayment from the sale proceeds?