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“belgravia95� bible v1

Points of contact John Lloyd 07595953277 john.lloyd@belgravia-group.co.uk Robert Rogers 07914818651 rob.rogers@belgravia-group.co.uk


Contents 1. Background .......................................................................... 2 2. Belgravia Proposition – Top Up Lending........................... 2 3. Addressing the Concerns around 95% Lending ............. 3 4. Belgravia Objective ............................................................ 5 5. Belgravia Lending Proposition ........................................... 6 6. “belgravia95” Backed/Supported/Positively Assessed. 9 7. APPENDIX ............................................................................ 13

Belgravia mortgages - sustainable, responsible 95% lending that makes home-buying affordable again. Privately funded Not shared equity Reduces lender capital requirements Aimed at buyers who can afford repayments but don’t have sufficient deposit – not at those who cannot afford to repay a 95% loan. Supports borrowers, lenders, builders ... and the housing market as a whole!

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1. Background The UK population is growing by over 1,000 per day, with an additional 600 per day due to net migration. Yet new home building cannot keep up with demand. Home Builders Federation research confirms that the average first time buyer is 37 and must save 43% of his monthly take-home pay for 5 years to save for an average deposit on a new home. The real issue, therefore, is the size of deposit required. Lenders are clear as to why this must be the case – capital adequacy, liquidity and risk factors commensurate with high LTV lending. The solution may actually generate far more than just new homes for first-time buyers. Oxford Economics and DCLG have separately concluded that 100,000 new homes will create 200,000 construction jobs with a further 200,000 in supply. Belgravia’s proposition requires no central funding and offers what we believe to be a better option for the borrower and lender in the event of default.

2. Belgravia Proposition – Top Up Lending Validated personal stake of 5% plus a split in the mortgage lending – 80% from the main lender coupled with a 15% top up loan from investors. Ability to repay assessed for the full 95% is at the heart of this product. This assessment is undertaken by both lending sources to ensure responsible lending. The top up loan of 15% is insured against default, protecting the borrower, the investor and main lender. Belgravia has worked with building societies in the North West of England (Manchester and Furness) together with the Coop bank to offer a 90% LTV product supported by top up lending. The pilot in Q4 2011 was stifled somewhat by the launch and heavy marketing of 95% FirstBuy. Furthermore, the swift announcement of the Government 95% MIG scheme served to bolster expectations of a general return to 95% lending. In response, Belgravia had to launch a 95% version of our product, “belgravia95”. Whilst FirstBuy and the Government MIG scheme do not apply to Scotland and Wales, our scheme is open to first and second time buyers across the UK and is available for new and used property purchases.

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This proposition requires lender support. We have spoken with lenders, but the decision to allow a top up loan is one of policy. The bigger the lender, the more difficult it is to secure a meeting or influence policy. We have spoken with Jake Berry MP (PPS to Grant Shapps) and he is doing all he can to support us. We have been asked to present an exemplar to Grant as soon as the 95% scheme has traction. We have invited comment and involvement from Huw Lewis at the Welsh Assembly and Alex Salmond First Minister of Scotland.

3. Addressing the Concerns around 95% Lending 1. Deposit size required by home buyers when purchasing new build Lending policy across most UK High Street lenders has required a minimum 15% deposit for new build houses and more for apartments. Affordability is not an issue with low interest rates, but deposit remains a firm barrier. Belgravia has sought to offer a lending initiative which allows a 5% deposit but at the same time reduces the risk on the prime lender, from 95% to 80% LTV. This month, Halifax opened their 90% product range for the purchase of houses to the top three home builders. Halifax will still have capital adequacy costs and tight underwriting policy. Belgravia95 lending offers a reduction in capital reserve requirements, less risk and enhanced liquidity. Underwriting “ability to repay� is eased when flexing the rate at 80% rather than 90% or, indeed, 95% (interest rate is fixed for the duration of the top up loan). 2. Capital adequacy requirements on lenders The higher the loan to value, the greater the capital requirements. The Belgravia proposition requires the use of less capital, so reducing the cost of funding.

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3. Tightening of liquidity in the UK and European banking system The Bank of England confirmed expectations of a tightening in mortgage funding during 2012. The Belgravia proposition promotes home purchase but with the use of less cash per transaction to the lender. Based on an average loan of £160,000, 15% represents £24,000. For every 1,000 mortgage transactions, this scheme provides the lender with a further £24,000,000 to lend to others. This also represents a huge saving in capital reserve allocation. 4. Risk factors associated with 95% lending Default on high LTV lending has a swift impact when the LTV is 95%. Furthermore, we understand that default rates at 95% have traditionally been higher than 90%. There may be many reasons for this, not least the quality of underwriting in a boom market. Underwriting is far tighter today. On application, the lender is not only exposed to high risk but now must carry the capital cost of such funding, which is considerable. The Belgravia scheme reduces the risk to 80%, insures the top up element to help keep the borrower in his home, and reduces the capital cost of funding. 5. Lenders’ reluctance to allow a second loan a. Lack of control over the transaction: The first charge lender considers a mortgage transaction to comprise their loan and a deposit. Any additional finance raised is deemed to be for the deposit. This is not desirable and is not permitted. Belgravia requires a shift in policy where the loan may be split, 80/15, under a robust and transparent scheme such as this. The lender is given full transparent data to assess the lending proposition. The lender is fully aware of the investor, their terms, rates and conditions. The lender is protected by the top up insurance and has control over repossession proceedings. b. Responsible lending Lenders must justify their lending policy. They must be seen to be lending responsibly. The Belgravia scheme requires expert advice and 4


due diligence; IFAs and solicitors must be accepted onto a panel. The IFA must assess suitability of the scheme and the solicitor must validate the personal deposit. Both main lender and second lender must be satisfied that the borrower can afford total lending of 95%. This promotes responsible lending and responsible borrowing. 6. Default management – second lenders are very aggressive A huge concern about second lending is their aggressive approach to default management due in the main to their exposure to loss. This is not the case here. The top up loan is provided by investors and their investment capital is insured. The Administrators would pursue default and arrears collection policy – agreed in advance. They will inform the main lender and follow FSA guidelines. Where appropriate, a claim may be made against the insurance policy which will protect against loss. This policy removes the aggressive stance and leads towards a more conciliatory and partnership approach with the main lender. The insurance provides the opportunity to keep the borrower in his home.

4. Belgravia Objective: 1. Introduce a top up lending scheme which will reduce the deposit size required. 2. Gain acceptance for a joint venture approach to mortgage lending. 3. Implement a Lender Transparency Agreement. 4. Trial at 90% LTV to assess market acceptance, product assumptions and to test systems. 5. Following Government call for 95% MIG supported lending; prepare to launch the Belgravia product at 95%. 6. Address lender issues re control, transparency and risk. 7. Launch a pilot, at 95%, with a major builder to assess market acceptance, product assumptions and to test systems. 8. Promote lending to all sectors of the UK market, new build and second home, in England, Scotland and Wales.

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5. Belgravia Lending Proposition  5% personal deposit  80% first charge mortgage  15% transparent top up loan (fully insured) 5% Personal Stake. Must be validated by the scheme solicitors. It is essential that the borrower makes a personal contribution to the transaction. Belgravia believes that this promotes responsible lending. 80% First Charge Mortgage. Belgravia95 requires a first charge loan for a maximum of 80% of the property value. The rationale is that this approach will assist both lender and borrower in the current market place. 

The lender utilises less cash per transaction, facilitating liquidity. The lender has more available cash to lend to more borrowers. A greater range of customers spreads risk and increases cross-sales opportunities.

The lender has a lower risk profile (80% LTV), therefore, less chance of loss in the event of default. The crystallised loss must exceed 20% of the property value before the lender is affected. This offers a greater timescale for the borrower to rectify his situation or sell his property.

The lender has less fiscal pressure by way of capital adequacy.

The lender is required to flex repayments to ensure ability to repay in the event of interest rate rises. However, this scheme requires only the 80% lending to be flexed as the top up loan repayments are fixed for the duration of that loan.

It is essential that the lender is fully aware as to the total loan and the ability to repay that total indebtedness. Belgravia requires an understanding between first and second lenders to exchange information in the interests of responsible lending. The applicant/s must complete and sign a Lender Transparency Agreement. This facilitates the ability-to-repay assessment for the total lending.

To be clear, the first lender lends 80% but checks ability to repay 95%.

Lender Transparency Agreement. This agreement contains the details required to enable assessment of the total loan. This promotes responsible lending. The document contains: o Applicant names and addresses 6


o Purchase address o Financial Advisers (must be from a panel agreed by the scheme) o Solicitors (must be from a panel agreed under the scheme) o Lenders (first and second) o Amount of loan – 80% and 15% o Product rates charged o Monthly repayments o Total repayments o Total amount of borrowings A copy of this document may be found in the Appendix. Loan Management. The first line of arrears control is the mortgage application. The first lender must check ability and willingness to repay. This requires effective initial underwriting and later effective default management.  The scheme requires that the lenders communicate in the event of default. Both lenders need to be aware of the problem. 

The procedures adopted by the second lender are the FSA Default Guidelines.

The top up loan from the second lender is fully insured. Any call or claim on the policy must be communicated to the first lender.

The first lender will take the lead regarding any repossession action required. Due to the insurance policy, the second lender cannot lose their capital and will not seek repossession.

15% Top Up Loan. The top up loan is provided by investors, not lenders.  The loan is always 15% of the property value and charged at a rate agreed at the outset. 

The main lender and second lender agree to join the scheme and are fully aware as to the lending terms introduced. 7


The loan terms are enshrined at outset and cannot be changed in the event of a loan sale. This protects all parties to the original transaction.

The rate will remain fixed for the duration of the loan. The loan will be offered over 10 years with options to borrow over 15, 20 or 25 years. The extended term is available to reduce cost. Loan duration will be selected by the applicant following advice from the scheme panel IFAs. Such IFAs will have been subject to due diligence and scheme training.

The capital element of the top up loan is fully insured. The insurance is provided by Belgravia as an integral part of the scheme. The insurance cannot be purchased by the borrower – this avoids mis-selling issues.

The introduction of such cover means that there is a better chance of keeping the borrower in his home. Building societies have confirmed that the majority of their defaulters are “brought back on track” within c.6 months. This helps the borrower, the investor and the main lender. By contrast, MIG will only help protect the main lender after the loan is crystallised, which is after repossession.

The insurance covers: o Accident, sickness and unemployment (for qualifying applicants) o Critical illness o Death o Non-payment

Costs. We invite lenders to offer a product which is economically viable. There is no requirement for the first charge loan to be a fixed rate. The rate may be low with a charge or higher with no charge. The funding proposition requires the use of a panel IFA who must not charge. Any additional fee charged would have to be quoted in the APR. The funding proposition requires the use of a panel solicitor. Panel firms have agreed a special reduced rate for handling both loans. Belgravia requires a fee from the builder / vendor for access to the product. This fee is 2% of the value of the property paid on completion. 8


6. “belgravia95” Backed/Supported/Positively Assessed. a) b) c) d) e) f) g) h)

RICS (David Dalby, Director Residential) Jake Berry MP (PPS to Grant Shapps) Home Builders’ Federation (Stewart Baseley) Barratt Homes, Persimmon Homes, Taylor Wimpey Spicerhaart, Countrywide FSA assessed Sesame assessed Launch product 90%, lender support: Furness BS, Manchester BS, Coop Bank i) Administrators: Ocean Money, Bayonet Ventures a) David Dalby, RICS. Belgravia has consulted with RICS at all stages of this product development. The initial rationale for the top up loan proposition was to support purchasers of new build where valuation has been a major issue due to incentives and “new premium” considerations. Belgravia engaged with lender panel valuers for the pilot region (North West) to discuss pricing and the new build premium. The valuers undertook an assessment of all the developments where the scheme would be offered. This provided a benchmark for valuation. The results were shared with the builders and lenders. The second consideration was whether a top up scheme constituted an incentive which must be recorded on the CML Declaration of Incentive Form. RICS concluded that this proposition was a commercial transaction, not an incentive; as such, the scheme should not be recorded on the Declaration of Incentives. David provided the RICS guidelines which determine when home valuations will be adversely affected by a scheme: 1. Creates a false market: the Belgravia product is available to both first and second purchasers, and is available on new and part exchange units. The product is available across the UK. This reduces the likelihood of creating a false market. 2. Provides an incentive to the purchaser: the product is a commercial transaction facilitated by the vendor/builder and does not offer an 9


incentive to the individual. The product provides access to 95% lending, which is available in the market. There is no preferential rate. 3. Places a restriction on resale: the product does not affect the resale of the home. Note. The first announcement detailing the Government-backed MIG scheme, in November 2011, confirmed that the scheme breached the above criteria. The niche element of the product was deemed by RICS to create a false market which would adversely affect valuation. b) Westminster. Jake Berry MP (PPS to Grant Shapps, Housing Minister). Jake is clearly interested in any scheme which can promote the effective execution of Government housing policy and / or home building in the UK. Jake is keen to support us and has given his time generously to meet with us – to offer guidance and take feedback. It was made clear that the Government would not force publicly owned lenders to adopt this proposition. However, Jake has offered to provide details of his contacts that we should speak with. He will continue to feed back to the Minister who is fully aware of this proposition. Both Jake and the Minister require an exemplar confirming the results of around 50 transactions. c) Home Builder Federation. Stewart Baseley. We have consulted with Stewart and his economic affairs director, John Stewart, from the outset. Whilst it is not their function to recommend schemes, their input has been invaluable. We were asked to present to the committee members responsible for the design of HomeBuy Direct and FirstBuy at the HBF in December 2010. A couple of the committee members sought direct input into the Belgravia proposition throughout 2012. The HBF are kept informed as to all developments regarding this proposition. d) Home Builders. National developers Barratt, Persimmon and Taylor Wimpey, and regional developers Miller Homes, Jones Homes and Seddon Homes have all requested access to our 95% product. The directors of all these businesses confirm that attracting potential buyers is not an issue. 10


Selling to them certainly is an issue. Buyers cannot gain access to lending to facilitate home purchase. The transactions require a large deposit or a shared equity loan. Barratt confirmed that a 95% product would not only facilitate house sales; it would require them to build more homes. All these home builders engaged with Belgravia with a view to selling a 95% product. e) Estate Agents. Countrywide, Spicerhaart and the online business Mousesale all requested access to the scheme. All have confirmed the need for genuine 95% products which are accessible. All would wish to offer the product both to new home and second-hand home purchasers. In the event of second-hand purchasers, the completion fee of 2% would be charged to the vendor in return for the prospect of a quick sale. Both lenders would be fully aware of the transaction due to the Lender Transparency Agreement - which permits access to the product.

f) FSA. As part of their disclosure and “no surprises� policy, David Cowie, CEO, Manchester Building Society, discussed the top up scheme operation with the FSA. Furthermore, The Furness Building Society was inspected by the FSA whilst the scheme was being prepared. The scheme was discussed with the FSA. In both cases, there was no request for further information or clarification.

g) Sesame Network. The scheme investors were keen to ensure that the IFAs would remain accountable for the advice given for the duration of the loan. IFA membership of a network was deemed to offer greater protection to the funders as there was a greater level of compliance supervision. Sesame network assessed the scheme and gave permission to their IFAs to advise accordingly.

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h) Launch lenders. The first version of the scheme required a 10% deposit and a 75% first charge advance. The lenders supporting this were Manchester Building Society, Furness Building Society and Co-op bank. These lenders were prepared to allow a transparent split-loan approach at 90%. Other societies wished to wait and see the results of the scheme before committing funds. Manchester Building Society would only consider limited 95% applications, Furness and Co-op would not at this stage move to 95%. Aldermore have been keen to support 95% and 100% initiatives, and we have engaged with Charles Haresnape to this effect.

i) Administration. Belgravia has engaged with two companies to offer a loan origination, management and collections service: Ocean Money and Keith Howard at Bayonet Ventures. These companies would: 

perform underwriting of the second loan;

the investors do not require a second valuation as this may give rise to a difference in value opinion. There is no desire to increase costs or introduce confusion. The second lender will rely on a copy first charge valuation or statement that the value met the first charge lending criteria;

manage the CCA documentation and procedures;

communicate with the first lender regarding application or default. The administrators will request confirmation that the Equifax/Experian searches meet the first lender criteria;

issue mortgage offers;

collect repayments;

manage arrears protocol.

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7. APPENDIX a) Brochure b) Lender Transparency Agreement c) Process Guide d) Underwriting Guide e) Scheme Risk and Compliance f) Origination Risk Analysis g) IFA - Training h) Panel Conveyancers i) Belgravia Personnel

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belgravia95 Belgravia - offering you a new approach to lending

Only

5%

deposit

With

80%

mortgage

Plus

15% top up loan

Lenders in the UK have very tight lending terms for 95% mortgages. Such high loan to value (LTV) lending presents greater risks. No one likes to take risks any more! To make matters worse, lenders have to put additional funds aside to match the risk taken. The higher the LTV (e.g. 95%), the more cash has to be set aside - cash that could be lent to other borrowers; cash which could earn them money. Belgravia can help. belgravia95 is a scheme where the mortgage lender offers you 80% of the purchase price. This reduces their risk and capital reserves. Belgravia will top up the mortgage to 95% with a separate loan. Don’t forget - you need your own 5% deposit. On a house priced at £100,000, it works like this: Mortgage

80%

£80,000

Top up loan

15%

£15,000

Total borrowing

95%

£95,000

Terms and conditions apply. Belgravia is a trading style of Belgravia Wealth Management Ltd, Pioneer House, Pioneer Business Park, North Road, Ellesmere Port, Cheshire CH65 1AD. Belgravia is not a lender. Belgravia designs, markets and creates delivery channels for specialist mortgage products. All borrowers must take independent financial advice. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR OTHER LOAN SECURED ON IT


belgravia95 belgravia95 is a top up loan of 15% of the property value repaid over 10, 15, 20 or 25 years. The repayments are fixed.

How does belgravia95 work?

Example:

Belgravia has negotiated with a panel of banks and building societies to allow a 95% loan to be provided by two separate lenders. This approach requires absolute transparency.

Purchase Price

Belgravia provides a top up loan of 15%.

The main lender provides a mortgage of 80%, but to ensure responsible lending, checks that the borrower can afford both loans, i.e. 95%.

Applicants complete a Lender Transparency Agreement which details both loans and adds them together. This ensures that both lenders can properly assess the overall transaction and talk to each other about the application. Belgravia has a panel of lenders, financial advisers and lawyers to ensure that the borrower is properly advised.

Do I qualify? 

You must have a deposit of 5%.

You must be accepted for an 80% mortgage granted under this scheme from a participating lender. This lender will ensure that you can afford to pay a total loan of 95%.

You must be accepted for a 15% loan granted under this scheme.

How do I apply? Simply speak to a participating home builder or estate agent or visit www.belgravia-group.co.uk.

£100,000

Deposit required

5%

£

5,000

Mortgage

80% £ 80,000

belgravia95 loan

15% £ 15,000

The top up loan when taken over 10 years is repaid in 120 equal payments of £181.99 including interest, and interest is payable at

APR 8.8% Why belgravia95? Ability to repay is a little easier with Belgravia due to the way the loans are structured. On application, lenders flex their rates to ensure the borrower can afford the repayments when rates rise. However, the top up loan is fixed so the repayments cannot increase. Insurance: The top up loan is insured by Belgravia to help borrowers who fall into arrears. This insurance helps keep borrowers in their homes. Flexibility: Borrowers can choose to repay the top up loan over 10, 15, 20 or 25 years. This means that a large part of the mortgage may be repaid early or the overall monthly cost can be reduced.

You will be directed to a panel financial adviser who can advise whether this scheme is appropriate for your needs and, if so, will help you with the application procedure.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR OTHER LOAN SECURED ON IT


Lender Transparency Agreement belgravia95 Applicant Name/s …….……………………………………… And: ……………………………………………………………. Current Address ……………………………………………………………………………………………………………………. Purchasing

…………………………………………………………………………….………………………………………

Vendor

……………………………………………. Financial Adviser Firm ……………………………….…………

DATA PROTECTION You are applying for two separate mortgages from the lenders detailed below, to help purchase the above property. In order to process your application, the two mortgage lenders and their underwriters need to have access to the information you have supplied to them. Without it, they will not be able to reach a decision as to whether or not to grant you a mortgage. They will not send you information about their other products, or those of other companies, without you giving your prior written consent. By signing this form, you are giving your permission for the two lenders and their agents and underwriters to have access to all the information you provide, along with the results of the property valuation and any credit reference checks that may be carried out. This means that both lenders can disclose to each other information regarding the conduct of the mortgage account at any time. This agreement ends with the repayment of the top up loan. Both lenders will disclose to you, on written request, what information they have on their systems relating to you, how they use it, and they will give you the opportunity to review and correct any information they may hold.

SOLICITORS As this scheme involves two mortgage lenders and two loans, we have created a panel of solicitors offering you specialist knowledge and speed at a reduced cost. By signing this document you agree to a solicitor from this panel contacting you regarding the scheme.

RESPONSIBLE LENDING This document is for lenders to determine affordability for the total lending required. First Charge Lender

Top Up Lender

Total

Name Product Duration Initial rate Loan Monthly Payment Purchase Price Deposit Sum of both loans/ total borrowings

£ £ £ £

£ £

£ £

£

I / We have read this document and understand and accept its terms and conditions. I / We understand that two loans as detailed above are being arranged to help me / us purchase the property which means that I / we will have two monthly payments. If I am / we are unsure about any aspect of this document I / we agree to speak to a Financial Adviser before signing.

SIGNED

……………………………….. (First Applicant)

……………………………………… (Second Applicant)

……………. (Date)

YOUR HOME MAY BE REPOSSESSED IF YOU FAIL TO KEEP UP REPAYMENTS ON A MORTGAGE OR LOAN SECURED ON IT V1.1 01/01/12


“belgravia95” Process Guide V1 (01 01 2012)


Process Guide - belgravia95 Process Flow in 2 Stages: STAGE 1

ADVICE PROVIDED BY THE IFA / DIRECT APPLICATION VIA WEBSITE

STAGE 2

APPLICATION UNDERWRITTEN, MORTGAGE ORIGINATED, CONSUMER CREDIT ACT DOCUMENTATION AND MORTGAGE DEED ISSUED

STAGE 3

COMPLETION

STAGE 1

ADVICE PROVIDED BY THE IFA

1. Sales adviser identifies “need� (example, insufficient deposit). 2. Purchaser referred to panel IFA. 3. IFA provides financial advice, selecting the most appropriate mortgage product for the prospective purchaser/s. 4. Where belgravia95 is deemed appropriate, IFA completes a Lender Transparency Agreement, applies for a First Charge mortgage under the scheme and applies for a top up mortgage under the scheme. 5. IFA must assess overall ability to repay 95% lending. 6. IFA completes application forms: a. Paper-based forms must be signed. Electronic applications are not signed by the applicant; instead, the purchaser/applicant will sign the Offer by way of acceptance. b. A Lender Transparency Agreement (LTA) is completed and signed. c. IFA collects support documentation (ID, wage slips etc). d. All documents are copied and certified; originals are returned to applicant/s. e. IFA sends a set of documents to the First Charge lender and Belgravia, and retains a set for his files. i. IFA documents sent to Belgravia: Second Charge application form, LTA and support documentation. ii. The documents should be emailed to: keith.howard@bayonetventures.com. iii. Postal address: Bayonet Ventures, EuroLink Business Centre, Unit 77A, 49 Effra Road, London SW2 2LP. iv. Note: Where the applicant does not wish to take independent financial advice and/or wishes to apply DIRECT to a lender, then provision has been made for applications via certain lenders through the Belgravia website. The procedure will be detailed on the website. The LTA must be completed, as must the second charge application.


STAGE 2

APPLICATION UNDERWRITTEN, MORTGAGE ORIGINATED AND CCA DOCUMENTS ISSUED

Following receipt of documentation from the IFA (or in the case of website applications, the applicant), Belgravia will undertake the following via its agents: 7. Documentation. Belgravia agents receive the application via computer portal (by fax or post by agreement). The requisite fee must be paid. Belgravia agents will require the following documentation, fully completed and signed, to underwrite the application for the top up loan: a. Second charge application form, b. LTA, c. Support documentation (verification of ID, employment, income, residence), d. Confirmation as to valuation of the property from first lender, e. Confirmation as to acceptability of Experian/Equifax search results from first lender, f. Copy first charge mortgage offer (80% LTV). 8. Underwriting: Check that all required documents meet Belgravia criteria: a. Second charge application form fully completed and signed by all applicants, confirms ability to repay the “top up loan”, b. LTA fully completed and signed by all applicants, confirms ability to repay the total indebtedness (the sum of both loans), c. Applicable fee has been received, d. Support documents (verification of ID, employment, income, residence) meet Belgravia criteria, e. Check valuation confirmation supplied by the first lender meets Belgravia criteria, f. Check that the confirmation of the search results from the first lender meets Belgravia criteria, g. Check that there is a valid first charge mortgage offer for up to 80% LTV under this scheme. 9. Origination: a. Having underwritten the application against criteria, mortgage documentation is prepared under the Consumer Credit Act. b. The CCA Offer and Mortgage Deed are sent to the applicant for signing. c. Documentation is NOT subject to a CCA “cooling off” period. d. Copy CCA documents are sent to the applicants’ financial advisers and scheme solicitors to advise re progress. e. Belgravia agents will chase these documents to facilitate a swift exchange of contracts. f. The following pack of documents are sent to the solicitors for exchange of contracts: i. Signed CCA Offer ii. Mortgage Deed iii. LTA


10. A pack of documents is retained for checking and audit purposes.

STAGE 3

COMPLETION

11. The scheme solicitors will ensure that they have: a. First lender offer and corresponding mortgage deed, b. Second lender offer and corresponding mortgage deed, c. LTA, d. Scheme mandate for the scheme insurance, e. Scheme application fee. 12. The scheme solicitor completes the transaction: a. Draws down funds from both lenders, b. Places the scheme insurance “on risk”. Belgravia will purchase the scheme insurance – solicitor deducts cost from the scheme application fee, c. Transfers appropriate funds to the Vendor, d. Lodges appropriate documentation with the Land Registry, e. Discharges any additional fees/commissions, including legal fees, as per Belgravia instructions, f. Remaining funds to be paid to Belgravia.

End


“belgravia95” Underwriting Guide V1 (01 01 2012)


Contents

The underwriting and processing policy for Belgravia loan applications is detailed in this document. The underwriting requirements are similar for both Belgravia95 and Belgravia90. However, any lending over 90% LTV, ie Belgravia95, requires the top up loan to be insured. Belgravia will provide this cover.

Contents 1. Interest Rates & Loan to Value (“LTV”) Ratios .............................................................2 2. Repayment Terms ..............................................................................................................2 3. Age at Application Date .................................................................................................2 4. Purpose of Loan .................................................................................................................2 5. Residents & Applicants .....................................................................................................3 6. Ability to Repay the Loans ...............................................................................................3 7. Proof of Residence & ID Checks ....................................................................................4 8. Property Type & Occupancy ..........................................................................................4 9 Additional Information .......................................................................................................5 10. General Principles of Fair Business Practice ...............................................................6 Appendix 1. – Lending Assessment ....................................................................................7 Appendix 2. – Fees.................................................................................................................8

Jan 2012

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1. Interest Rates & Loan to Value (“LTV”) Ratios 1.1 Interest Rates Interest is charged to the loan account monthly at a fixed annual rate of 8%. 1.2 LTV Version 1 of belgravia95 requires that:  The top up loan is 15% LTV. The minimum advance is £15,000, subject to first lender discretion.  The first charge loan cannot exceed 80% LTV.  The total indebtedness must not exceed 95% LTV.

2. Repayment Terms Version 1 of belgravia95 and belgravia90 offers 4 options:  10-year term with repayments of capital and interest monthly payments  15-year term with repayments of capital and interest monthly payments  20-year term with repayments of capital and interest monthly payments  25-year term with repayments of capital and interest monthly payments

repaid by 120 equal repaid by 180 equal repaid by 240 equal repaid by 300 equal

3. Age at Application Date  

Minimum age is 18. Maximum age is 55.

4. Purpose of Loan Loans are only provided for the purchase of a principal residence. Such homes may be new build or non-new build. The loan may be secured on a property in England, Scotland or Wales.

Jan 2012

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5. Residents & Applicants Applicants who are joint owners or intending to cohabit are required to be party to the loan. Disclaimers for other residents over the age of eighteen are not required. The maximum number of borrowers on an agreement is two.

6. Ability to Repay the Loans Applicants are required to complete a Lender Transparency Agreement. This document:  Provides details of key parties to the transaction,  Provides details of both loans; lenders, rates and monthly repayments,  Facilitates ability to repay assessment for the top up loan,  Facilitates ability to repay assessment for the total lending (sum of both loans, 95%),  Provides a data protection statement which gives both lenders, and their agents, the right to communicate freely regarding the loans,  The agreement remains in force for the duration of the top up loan. Belgravia will undertake, through its agents, an affordability test for the total lending of 95% to satisfy responsible lending. Applicants are required to complete a Belgravia application form disclosing details of:  Income and employment,  Any existing loans, and  Recent credit history. Belgravia will require:  A copy of the first lender mortgage offer,  Confirmation from the first charge lender that the valuation of the property concurs with the purchase price,  Confirmation from the first charge lender that relevant Equifax/Experian searches have been undertaken and are satisfactory,  Proof of residence and ID checks to be undertaken on all applicants. Belgravia will underwrite the top up loan application of 15%.

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7. Proof of Residence & ID Checks Evidence of three years’ history of residence is required from all applicants. This can be in the following forms:  Voters roll  Utility bills, Council Tax demands, Water rates or Inland Revenue correspondence (all must be dated for the year in question)  Registration at HM Land Registry, under the B register, together with active credit (loans & HP only) showing a balance greater than £0 at the current address will be satisfactory proof of residence from the date the property was purchased. Evidence of proof of residence is retained either via production and copying of original supporting documents, provision of copies certified as such by an IFA directly authorIsed by the FSA, or via a recognised electronic ID verification agency such as Veriphy.

8. Property Type & Occupancy 8.1 Acceptable Property Types Applicants for loans must intend to use the relevant security address as their principal residence. The property against which the charge is registered is required to be a freehold or leasehold interest in a residential building in England, Wales or Scotland. Properties less than 10 years old require the benefit of a guarantee issued in one of the following forms:    

National Home Building Council certificate Premier Guarantee Qualified architect’s certificate LABC New Home Warranty (only in respect of individual new-build houses).

The following property types are not accepted as security:   

Flats and maisonettes Shared ownership properties where the applicant will own less than 100% of the property Properties constructed using steel as the principal material

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 

Properties used principally for business or commercial purposes Properties that contravene the Housing Defects Act 1984 and Housing Act 1985 without a valid Pre-fabricated Reinforced Concrete certificate.

When the loan is approved, the homebuyer’s solicitor is notified. It is the homebuyer’s solicitor’s responsibility to be satisfied with the title to the property, and to be responsible for registering the first and second charges. 8.2 Leasehold Property Leasehold properties are required to have an unexpired term of at least 50 years at the date of application.

9 Additional Information 9.1 Costs • IFAs are not permitted to charge a fee for arranging the 2 nd Charge Loan. This would affect the loan APR. 9.2 Documentation 

 

Applicants are provided with, and requested to sign, a Regulated Credit Agreement in compliance with all Consumer Credit Agency Regulations. Belgravia requires the applicant/s to be advised by a Solicitor or Licensed Conveyancer familiar with this scheme. Belgravia maintains a panel of such solicitors. All applications for a 2nd Charge Loan require a Regulated Credit Agreement to be accepted by the second lender or solicitor acting for the second lender. The Regulated Credit Agreement and Mortgage Deed will be on a single combined document. Applicants are instructed to be present when the Mortgage Deed is witnessed and know the full name of the witness.

9.3 Repayments A completed payment mandate is required to be obtained from the applicant(s). Mandates from business accounts are not accepted. The loan is structured such that the first repayment will be due in the month after completion and on that same date in each subsequent month thereafter. Jan 2012

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9.4 Non-EU Nationals For all applicants who have declared themselves on the application form to be non-EU Nationals, an original currently valid passport is required plus evidence of their permanent right to reside in the UK. 9.5 Additional documentation Belgravia will require “wrap around” insurance cover for the top up loan, where the total advance is greater than 90% LTV. Belgravia may require title insurance.

10. General Principles of Fair Business Practice Guidance issued by the Office of Fair Trading (“OFT”) expects all firms operating within the second charge lending sector to comply with its guidance, in particular: • Applicants are required to be allowed sufficient time to reflect on the terms and conditions of the proposed agreement and are not to be subjected to any high-pressure selling. Applicants should understand the risks associated with taking out a secured loan on their residential property, should be encouraged to take independent advice before signing, and allowed adequate opportunity to do so. • There must be transparency in all dealings with all borrowers, with early disclosure of key contract terms and conditions. All agents of and service providers associated with the scheme are required to comply with these general principles to the extent that they are relevant to their specific responsibility. Belgravia requires applicants to take professional financial advice from panel IFAs and legal advice from panel solicitors. Such specialists are familiar with the scheme and Belgravia has undertaken due diligence on the companies concerned.

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Appendix 1. – Lending Assessment Lending Criteria        

3.75 + 1 or 3 x J 3-year address history P60 & last pay slip Last 3 months’ bank statements (must not have exceeded bank o/d or have returned items) Budget planner showing Income less Expenditure leaving min £200 (mortgage rate = initial rate) Both applicants must have min 6 months’ employment history Clean credit record Previous lender statement showing last 12 months’ payments or bank statement confirming the same

Self-employed   

2 years’ accounts not more than 12 months old Statement of assets & liabilities 6 months’ bank statements

Ability to Repay The applicants must be able to afford total lending of 95% of the purchase price.

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Appendix 2. – Fees 

Payable by the Purchaser/Borrower Belgravia95 requires an application fee of

£275

Payable by the Vendor/Builder Belgravia95 requires a completion fee of

2% of the property value

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“belgravia95� Compliance & Risk Rob Rogers, Compliance Director

V1 (01 01 2012)


Contents Risk and Compliance .................................................................................................................. 2 Role of risk management........................................................................................................ 2 Risk management in the context of “belgravia95� .......................................................... 2 Risk appetite .......................................................................................................................... 2 Risk analysis ............................................................................................................................ 3 Regulatory risk for first charge lenders ................................................................................. 3 Risk weighting of asset values ............................................................................................ 9 Conduct of business risk .......................................................................................................... 9 Responsible lending and the Lender Transparency Agreement ............................... 9 Stress testing affordability.................................................................................................. 10 Arrears management ........................................................................................................ 11 Insuring the top up loan .................................................................................................... 11 Second charge lending ........................................................................................................ 12 General insurances ................................................................................................................ 12 Building and contents insurance ..................................................................................... 13 ASU insurance ...................................................................................................................... 13 Other scheme participants .................................................................................................. 13 Outsourcing risks ..................................................................................................................... 14 External risk factors ................................................................................................................. 14 Competition ......................................................................................................................... 14 Political factors .................................................................................................................... 15 Legal/regulatory factors ................................................................................................... 15 Fiscal change ...................................................................................................................... 16 Property valuation .............................................................................................................. 16 Macroeconomic factors ................................................................................................... 17 Customer demand ............................................................................................................. 17


Risk and Compliance Role of risk management Risk can be defined as the combination of the probability of an event and its consequences. In all types of undertaking, there is the potential for events and consequences that constitute opportunities for benefit (upside) or threats to success (downside). Risk management is increasingly recognised as being concerned with both positive and negative aspects of risk, and in devising its approach to risk management, Belgravia has addressed the management and mitigation of both upside and downside risks. The focus of our risk management is on the identification and treatment of these risks. Its objective is to add maximum sustainable value to all the activities of the scheme, and to all participants in the scheme. We aim to marshal the understanding of the potential upside and downside of all those factors which can affect the scheme. It increases the probability of success, and reduces both the probability of failure and the uncertainty of achieving the scheme’s overall objectives. Risk management will be a continuous and developing process which runs throughout Belgravia’s strategy and the implementation of that strategy. It will address methodically all the risks surrounding the organisation’s activities past, present and, in particular, future. It will be integrated into the culture of the scheme with an effective policy and a programme led by the most senior management. It will translate the strategy into tactical and operational objectives, assigning responsibility throughout the organisation. It supports accountability, performance measurement and reward, thus promoting operational efficiency at all levels.

Risk management in the context of “belgravia95” Risk appetite At its simplest level, risk appetite can be defined as the amount of risk, on a broad level, that an organisation is willing to take in pursuit of value. In other words, the total impact of risk Belgravia is prepared to take in the pursuit of its strategic objectives. Belgravia is currently developing its risk appetite and will articulate its appetite in a risk appetite statement.


Risk analysis Risk analyses have been undertaken at various levels and are an inherent part of Belgravia’s strategic planning process. Standard risk management techniques are used to identify, assess, evaluate and manage both upside and downside risk with the stated aim of deriving the maximum sustainable value from all aspects of the scheme.

Regulatory risk for first charge lenders When considering regulatory risk, it is necessary to consider 2 key areas of risk: 1. Prudential risk; and 2. Conduct of business risk. “belgravia95”, by splitting lending over 2 separate loans with 2 separate lenders, offers an effective mechanism for lenders to manage their capital adequacy obligations under Basel II, the Capital Requirements Directive, and the FSA’s Prudential sourcebook for banks, building societies and investment firms (BIPRU). All firms subject to BIPRU are obliged to undergo an internal capital adequacy assessment process to assess the adequacy of their financial resources. The ICAAP will in turn be subjected to a supervisory review and evaluation process (SREP) by the FSA. The ICAAP will take into account the various types of risks associated with the activities and strategy of the lender concerned, and these will include:      

Interest rate risks arising from non-trading book activities Securitisation risk Residual risk Concentration risk Liquidity risk Business risk (including stress testing)

The FSA provides guidance in Chapter 2 of BIPRU for banks, building societies and investment firms on the sorts of risks which a firm might typically face and on the stress tests or scenario analyses which it might carry out as part of its ICAAP. BIPRU 2.2.49G to 2.2.60G set out the guidance for banks and building societies, and this is reproduced in full below in italics with additional


comment from Belgravia on how the scheme facilitates lenders meeting their regulatory obligations when constructing their ICAAP. BIPRU 2.2.49G The FSA considers that the concentration of risk resulting from concentrated portfolios is significant for most banks and building societies. BIPRU 2.2.50G If a bank or building society chooses to use the CRR1 as a starting point for its capital assessment, it should remember that, when assessing its exposure to concentration risk, the calculation of the CRR is based on the assumption that the firm is well-diversified. BIPRU 2.2.51G In assessing the degree of credit concentration, a bank or building society should consider its degree of credit concentration in a particular economic or geographic area. Where the business of a firm is, by its nature, concentrated (for example, a specialised firm lending to one sector only), a firm should consider the impact of adverse economic factors, such as a rise in unemployment in the area in which it has a concentration of exposures, and its impact on asset quality. A gradual change of cultural environment could also affect a bank or building society and a firm should consider whether this issue should be the subject of scenario analysis. BIPRU 2.2.52G Typically, a building society's portfolio is concentrated. The extent to which a building society can diversify its business is limited. A building society should, nevertheless, consider the impact of geographic concentrations on its capital by, for instance, analysing the effect of local economic factors such as unemployment and its impact on arrears, house prices and loan-to-value ratios. BIPRU 2.2.53G Similarly, a building society should consider the concentration in its portfolio of certain product types that have, inherently, a more than average risk (for example, lifetime mortgages). It should, through scenario analyses in relation to its portfolio, assess the potential impact on its profitability and capital of those scenarios. 1

Capital resources requirement – this is the base capital resource requirement for firms subject to BIPRU.


Comment As is evident from the above FSA guidance, concentration risk is a factor which must feature heavily in the ICAAP of any bank or building society, and consequently this will be an area of focus in the follow-up SREP from the FSA. A key element of concentration risk is based on geographical concentration, and attendant local factors such as high levels of unemployment and consequential impacts on aspects of asset quality such as increased levels of mortgage arrears, depressed property values and therefore risk of negative equity and loan to value ratios. “belgravia95” offers the facility for lenders, including smaller building societies, to spread their risks over a range of developments within their preferred catchment areas so that they can manage their exposure to geographical concentration risk within their preferred parameters. All lenders operate such concentration limits and the scheme facilitates their operation within these limits both geographically and temporally, i.e. if a lender has an exposure limit of 15% on any particular development with 100 plots, then it will not wish to lend on all of the first 15 properties built. To mitigate this risk, Belgravia will operate with panels of lenders in each area. Note: Belgravia has opened this product to the non-new build market. A further dimension of concentration risk is in connection with higher risk products such as lifetime mortgages. “belgravia95” enables lenders to offer their standard products on an 80% loan to value basis. Many lenders are also under a regulatory obligation to ensure that a minimum proportion of their loans are on an administered rate. Administered rate is a term defined in the Building Societies Sourcebook2 as follows: In this sourcebook "administered rate" is defined as a rate of interest (which may be applied to lending or funding) which is, to the extent compatible with regulatory requirements and the general law, set from time to time at the discretion of the society and is not geared automatically to changes in an external reference rate, subject to the following: 1. a society operating under the administered or matched approaches to financial risk management that chooses to set a contractual floor or cap should set nothing other than a floor (minimum rate receivable) on a rate charged on mortgages and/or a cap (maximum rate payable) on a rate 2

The Building Societies Sourcebook is a specialist sourcebook providing guidance to building societies on the key financial and lending risks to which societies are exposed, and sets out the framework within which the FSA will supervise the treasury activities of societies.


payable to retail savers; these are the only limitations that may be applied to administered rate products allocated against the minimum policy limit; and 2. a society not operating on either of the approaches in (1) may choose to include any guarantee in combination with an administered rate; it would however be expected to set appropriate sub-limits to control the level of basis and re-pricing risk taken, and to be able to evidence that it has assessed the cumulative impact of all such guarantees on its ability to vary rates generally as part of its regular stress and scenario testing programme. “belgravia95” facilitates lending by banks and building societies on an administered rate basis and therefore provides the governing body of the lender with the facility to manage interest rates on a discretionary basis, which in turn enables them to manage their financial risk exposures more effectively than if their rates were tied to an external reference rate. BIPRU 2.2.54G In relation to BIPRU 10 (Large exposures requirements), a bank or building society should take into account factors such as future business growth and cyclicality when it assesses the amount of capital which it will need to remain in compliance with those rules. A firm may also consider in its assessment whether any large exposures that it has identified are positively correlated. Comment The bank or building society is able to determine the maximum size of loan that it is prepared to grant under “belgravia95”. The maximum loan granted under the Belgravia scheme will be 80%, thereby capping its exposure. Furthermore, the additional 15% top up provision under the Belgravia scheme is insured against default. Each loan will be made to an individual purchaser under a residential mortgage so the counterparties under the loans are not connected in any way. BIPRU 2.2.55G Where a bank or building society lends to a counterparty which it assesses as representing a high credit risk, it should assess whether compliance with the rules in BIPRU in relation to credit risk is sufficient for it to manage that risk prudently.


Comment “belgravia95” is designed for “prime” lending risks. The second charge market has historically offered a potential solution for borrowers with an adverse credit history, often where they were consolidating existing unsecured borrowings, and securing the resultant loan on property. Second charge lending was therefore characterised by top up loans, with loan to value ratios of no more than 85% and high rates of interest to reflect the increased credit risk presented by the borrowers in this sector. The target market for “belgravia95” is the prime market. The counterparty for the lender under these loans is not therefore assessed as a higher than average credit risk. This also mitigates risk associated with managing a specialised portfolio of products and the increased risks associated with the potential loss of a key member of staff with specialist expertise. This risk would be particularly acute for a small lender. See BIPRU 2.2.56G below. BIPRU 2.2.56G The performance of specialised portfolios may, in some instances, depend on key individuals. This factor exacerbates concentration risk because the skill of those individuals in part limits the risk arising from a concentrated portfolio. The impact of those individuals is likely to be correspondingly greater in small firms. In developing its stress tests and scenario analyses, a bank or building society should therefore consider the impact of losing key individuals on its ability to operate normally, as well as the direct impact on its revenues. Comment The loans issued by first charge lenders under “belgravia95” are designed for the mass market and cannot therefore be considered to constitute a specialised portfolio. The consequence, in the context of BIPRU 2.2.56G, is that the skill level of personnel underwriting and administering such loans is not unduly high. As implied by BIPRU 2.2.56G, the impact of participating in “belgravia95” will not be correspondingly greater on smaller building societies. BIPRU 2.2.57G A bank or building society should assess the sensitivity of its financial position to adverse movements in interest rates. For instance, a bank or building society should assess its sensitivity to interest rate risk arising from interest rate


mismatches between assets and liabilities. A building society is exposed to interest rate risk to the extent that it borrows on a short term basis but lends over a longer period. BIPRU 2.2.58G When assessing the adequacy of its capital, a bank or building society should not only consider the vulnerability of its revenue, but also the sensitivity of its funding and, in particular, its ability to raise additional funding in time of economic stress. A bank or building society should therefore consider whether its funding pool is sufficiently diversified. For example, where a bank is reliant solely on its parent to provide funding, its access to funds may be suddenly restricted should the parent's creditworthiness be downgraded. Similarly, a bank or building society may consider the impact of an increase in bond rates or a rating downgrade, if relevant, on its capital cost and its subsequent ability to raise capital. BIPRU 2.2.59G A bank or building society should assess the impact of its business plans on its capital over the time horizon which it uses in its business plans. A bank or building society should assess the impact on its capital of diversifying its activities and the risk it runs of failing to manage that new business successfully. For that purpose, it may consider the cost of a price war to enter a new competitive market or the risk of mis-pricing some products as a result of not having sufficient expertise in its new area of business. Comment The market for first charge lenders under “belgravia95” is the traditional market for mainstream lenders in the banking and building society sectors. Moreover, the products the first charge lenders are likely to offer under the scheme are a very standard product. The risks associated with entering a competitive new market do not arise when a lender joins “belgravia95” and offers first charge mortgage lending facilities. BIPRU 2.2.60G A bank or building society is also exposed to reputational risk, as its ability to underwrite new business is heavily reliant on the standing of the reputation of the firm. A bank or building society may consider the impact on its financial position of legal disputes which damage its reputation.


Comment Reputational risk is a high profile issue for all participants under “belgravia95”, including banks and building societies providing first charge lending. The management of reputational risk is covered in some detail in the scheme Bible under “Scheme Oversight”.

Risk weighting of asset values If a lender is operating under the FSA’s standardised approach to risk weighting for credit risk, then the risk weighting applied to the portion of residential mortgage loans with a loan to value ratio above 80% results in the capital adequacy obligations placed on the firm increasing significantly. Such lending also attracts much greater regulatory scrutiny under the conduct of business requirements relating to responsible lending. Lenders therefore offer mortgages with high loan to value ratios on a very limited basis and the underwriting criteria for such loans are far more stringent in the light of the increased risk to the lender. By splitting the lending across 2 loans, and by enabling the attendant risk to be spread across 2 lenders, the capital adequacy issues are ameliorated. If a firm is granted permission by the FSA to use the Internal Ratings Based (IRB) approach, then it will be required to apply appropriate ratings to its various risks and the effect on capital adequacy will be broadly commensurate with the standardised approach.

Conduct of business risk Responsible lending and the Lender Transparency Agreement The fundamental regulatory obligation placed on all lenders by the FSA is the requirement to demonstrate that proper account has been taken of the prospective borrower’s ability to repay the loan. All regulated mortgage lenders must put in place, and operate in accordance with, a written responsible lending policy setting out the factors it will take into account when assessing an applicant’s ability to repay.


A central component of the scheme is the Lender Transparency Agreement (LTA). The LTA has 2 key functions: 

To facilitate a comprehensive assessment of affordability by providing clarity to both first and second charge lenders of: o the total amount being borrowed under the first and second charge loans; and o the total cost of repayments under both loans.

To obtain the applicant’s authority for both lenders to share personal data on the applicant to enable them to work together to reach the right decision, collectively, regarding whether to grant the loan.

The LTA therefore plays a vital role in enabling a lender to make a fully informed decision regarding the applicant’s ability to repay, and in terms of demonstrating compliance with their obligation to operate in accordance with a responsible lending policy. The LTA will be retained on file by both first and second charge lenders and will therefore provide an important part of the record keeping requirements of both the FSA and the Office of Fair Trading (OFT).

Stress testing affordability Intermediaries and lenders alike are required to stress test the ability of prospective borrowers to repay mortgage loans. Practice varies between lenders, and some lenders apply a monetary uplift to current repayment levels while others will assume a 1% increase to current mortgage rates, and, more commonly, a 2% increase. As mentioned earlier, the majority of lenders in the building societies sector will offer products using an administered interest rate. This means that they will have variable interest rates. It must, however, be borne in mind that the second charge mortgage under “belgravia95” has a rate of interest that is fixed for the full term of the loan. In applying stress testing to affordability, the risks in terms of inability to maintain payments when the Bank of England Base Rate or any other applicable indices rise, are mitigated by the fact that the repayments on the top up loan are unaffected.


The impact of an interest rate rise is therefore less significant under “belgravia95” than it would otherwise be under a straight 95% first charge mortgage for the same principal amount borrowed.

Arrears management The fair treatment of retail customers who have fallen into arrears with their mortgage repayments is a critical element of the scheme and requires the co-operation of both first and second charge lenders to deliver this essential outcome. A standard protocol has been developed and is an important part of the scheme. It is predicated on the relevant section 3 of the FSA’s Mortgage and Home Finance: Conduct of Business Sourcebook (MCOB), and whilst second charge lending is not a regulated activity under the Regulated Activities Order4 as amended, the second charge lender has undertaken to adopt this standard. This has been essential to ensure that a consistent and fair approach is taken to dealing with borrowers in arrears, and the authority included in the Lender Transparency Agreement (LTA) facilitates sharing of information between the first and second charge lenders. This is also an important factor in providing assurance to first charge lenders that they can participate in the scheme and continue to discharge their regulatory obligations in terms of their strategies for Treating Customers Fairly (TCF).

Insuring the top up loan The 2012 version of “belgravia95” carries insurance to cover the capital element of the top up loan. The policy details are covered elsewhere in the scheme bible. It must be noted that the existence of such cover further mitigates against loss for all parties to the transaction. Failure to make repayments due to loss of income, for example, will not necessarily lead to punitive action by the lenders. Both lenders will communicate and determine whether a claim on the policy is required. A successful claim may enable the borrower to remain in his property for longer, allowing him time to overcome 3 4

MCOB 13.3 The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, SI 2001/544


the circumstances which caused the loss of income. The second lender is insured so will not lose capital. The main lending risk is 80%. This offers considerable time before loss may occur. The main lender will determine the arrears and repossession action required and when this should be instigated.

Second charge lending Two factors make the role of the second charge lender/investor, on the face of it, more risky, and these are: 

the second charge lender/investor ranks second after the first charge lender when payments are made following re-possession of a mortgaged property, and They are providing lending up to a higher loan to value.

The latter is, however, mitigated by a number of factors: 

 

The second charge lender/investor is protected by a bespoke insurance policy. The second charge lender/investor cannot lose their capital. The second charge lender/investor, by lending 15% of the value of the property, is spreading its investments over a larger number of assets. The second charge loan is a 10 year repayment loan, with the interest rate and the repayments under the loan being fixed for its full term. The borrower therefore has certainty regarding the level of payments they must make, any increases to the overall mortgage expenditure will be mitigated by this fact, and after 5 years the second charge lender’s capital exposure under a loan has been eliminated as he has received back an amount equal to the size of the loan. Note: Later versions of this product permit the second lending to be offered over 15, 20 or 25 years.

General insurances Insurance plays an important role in risk management as a risk transfer mechanism. Lenders will not lend unless their security, the mortgaged property, is insured. In addition, it is prudent to provide a “backstop” so that if the borrower becomes unable to repay the mortgage due to genuinely


unforeseeable contingencies arising, insurance is in place to enable repayments under the loans to continue. Building and contents insurance It is clearly imperative that building insurance is put in place for mortgage lending to take place. Negotiations have taken place with a number of leading insurers, including AVIVA, to secure the best products and terms for purchasers under this scheme. These terms include 2 months’ payment-free cover and price-match facilities to maximise customer satisfaction, fair treatment of customers, and conversion rates. ASU insurance Statistics indicate that borrowers generally stop paying their mortgage instalments because of an inability, rather than unwillingness, to maintain payments. This inability is invariably a function of suffering an accident, sickness or a period of unemployment. Arrangements have been made to offer ASU insurance to all borrowers under this scheme, both to minimise the risk of repossession to borrowers and to mitigate the risks to first and second charge lenders. The product again offers 2 months’ free cover and price-match facilities.

Other scheme participants Belgravia has a role in acting as gatekeeper to the scheme, applying rigorous admission standards to new entrants to the scheme, and in terms of ongoing oversight of all scheme participants. This provides an important framework of controls to mitigate the various risks that can affect members of the scheme, including, most notably, reputational risk. These roles apply to the following participants of the scheme and are covered more fully in section 4 of the Scheme Bible:         

Builders First charge lenders Second charge lenders Third party administrators Solicitors Mortgage brokers General insurance brokers Insurance companies Estate agents


Outsourcing risks The operation of “belgravia95” involves a number of facets of the scheme being outsourced. As a result, Belgravia is treating the operation of the scheme as a material outsourcing arrangement under which a range of critical and important functions are being outsourced. Consequently, the principles of Chapter 8.15 of the FSA’s Senior Management Arrangements Systems and Controls Sourcebook are being applied to the management of these outsourcing arrangements. Belgravia has, and will, apply due diligence to new entrants to the scheme. The subsequent oversight it will operate is covered in greater detail in the Scheme Bible on Scheme Oversight.

External risk factors We recognise that there are a range of external factors that can affect the operation of “belgravia95” and that, in order to maximise the effectiveness of the scheme, these issues have to be managed. These include the following factors: Competition It will be impossible to safeguard against competitors entering the market with a similar offering to “belgravia95”. Certain measures will be imposed such as a requirement for prospective participants in the scheme to sign a Confidentiality Agreement prior to being provided with commercially sensitive information on the scheme, such as this Scheme Bible. In addition, Belgravia’s intellectual property rights are being protected under contracts with key participants in the scheme so that reciprocal obligations exist between the parties. In addition, Belgravia operates a robust competitor analysis process and receives market information via a network of industry professionals. The potential threats posed by competing products and providers to Belgravia’s market share are evaluated and assessed by the Belgravia Board and appropriate action is taken. 5

General Outsourcing Requirements


Other key controls in this area take the form of product innovation and product development. The Board of Belgravia recognise the necessity to continually innovate in the area of product design, and this is and will remain one of the most important functions within the company. Belgravia will continue to apply robust legal protection to its intellectual property rights and will take action should any breaches of undertakings signed with Belgravia by third parties take place.

Political factors Belgravia is cognisant of the fact that changes in the political landscape can affect the marketability of certain products. Consequently, we have considered whether the design of “belgravia95” has a natural alignment with any particular political ethos. Our conclusion is that it does not. However, we will continue to maintain a dialogue with the government of the day regarding the design and development of the scheme to ensure that any potential political barriers to the further development of the scheme in a commercial context are not hampered in this way.

Legal/regulatory factors The secured lending market is, and will continue to be, a heavily regulated sector of the financial services industry. This is logical and, in the context of a retail consumer’s financial transactions, funding a house purchase is a very large transaction and the potential for consumer detriment is therefore considerable. Belgravia has developed an ethos of treating all of its customers fairly, and has defined “customers” as being all retail and, in time, commercial borrowers utilising “belgravia95” in its current and future forms, and all counterparties that participate in some way in the scheme. This is complemented by the presence on the Board of Belgravia of an individual who has very extensive financial services regulatory compliance expertise who is able to advise the Board on regulatory matters and who can liaise with the heads of risk and compliance within all scheme participants. He is also charged with ensuring that all regulatory developments that could have an impact on “belgravia95” are identified at the consultation stage and are evaluated by the Board. He will liaise with counterparts at other scheme participants and ensure that an integrated approach is taken to


addressing all regulatory developments and that Belgravia capitalises on opportunities presented by regulatory change. This aspect is of particular importance currently as the coalition Government is changing the structure of financial services regulation in the United Kingdom, and this Government and its predecessor resolved to change the basis on which secured second charge lending is regulated.

Fiscal change “belgravia95” does not provide any specific tax benefits to borrowers and it is not therefore considered to have a high degree of sensitivity or demand elasticity to changes in taxation. However, we will remain vigilant. For any changes in the UK tax regime that could affect the scheme and, should the need arise, we will make representations to HMRC and make any necessary changes to the design of the product

Property valuation Valuation of properties is a critical factor in the house purchase process, and it is therefore imperative that the surveying profession adopts a consistent approach to properties where the purchase is being part-funded by “belgravia95”. In order to maximise the probability that valuers understand the product and don’t treat it as an incentive that would occasion down-valuation, a number of meetings have taken place with senior personnel from the Royal Institution of Chartered Surveyors (RICS), and they have in turn issued guidance to the profession that the scheme does not constitute an incentive, as it is entirely commercially based, and it should NOT be recorded on the Council of Mortgage Lenders’ Disclosure of Incentives Form. We will continue to liaise with RICS as we develop the scheme further, both in terms of our entry into other markets and as we develop new products targeted at specific market sectors. This is seen as being of fundamental importance in safeguarding the effective expansion of the scheme.


Macroeconomic factors Various macroeconomic factors will affect the scheme, and while we will be unable to influence these directly, we will monitor trends and developments and evaluate their potential impact on the scheme. Our analysis will be quite granular so if we identify regional factors, such as increased levels of unemployment in a particular area, we will be able to assess the likely impacts on our operations and take appropriate action in a timely manner.

Customer demand Customer demand is clearly a critical driver for the success of “belgravia95” and we will monitor demand for the product very closely. Feedback will be drawn from a variety of sources and this will be considered by the Board of Belgravia on a regular basis. We will use a range of generally available data sources, coupled with market research and customer contact programmes commissioned by Belgravia, to ensure that we develop products that meet the needs of defined sectors of the market. It is important to recognise that “belgravia95” is aimed at the mass market and is not therefore reliant for its sustainability on the continued existence of a niche market sector. Nevertheless, we will continue to monitor consumers’ preferences and buying patterns in the area of property purchase to ensure that our product offerings are aligned to consumer demand.


belgravia95

95% Top Up Lending Scheme IFA - Training & Information Pack


Top Up Lending Scheme I.

Problem Statement

II. Background to the problem III. The solution IV. Applying for “belgravia95�

V. Added value VI. Comparison summary of Government MIG v belgravia95


Problem Statement : Mortgage Finance • Personal deposit - size • “FTBs aged between 22 and 29 have to save 45% of their takehome pay every month for 5 years to afford a deposit” • Average FTB now 37yrs


Background to the problem 1. Capital Adequacy

2. Ability to Repay

Lenders flex the rate by 1% to ensure ability to repay

3. Responsible lending 95% / Shared Equity


Solution Top up lending product which splits the lending: • 5% personal deposit to support responsible lending • 80% mortgage facilitates capital adequacy requirements

• 15% top up loan is fully insured • Reduces risk to main lender • Helps to keep defaulting borrower in his home • Lender Transparency Agreement • Ability to repay assessment for the sum of both loans : 95%

• Data Protection Statement to facilitate communication


Applying for “belgravia95” Assuming this product is best advice… • Complete LTA – to ensure ability to repay 95% • Complete first lender application & second lender application • Collect support documentation – copies to both lenders

• Note: Only one valuation required • Note: Product fee for second loan to be collected on application


Added Value 1. Underwriting (flex of 95% compared to flex of 80%) 2. Lender risk appetite (liquidity and capital adequacy) 3. Top up loan insured (ASU, CIC, death, contingency)

4. Availability across UK, new and second hand property 5. Specialist panels – lenders, IFAs, lawyers 6. Selection of second charge period - 10, 15, 20, 25 years 7. Fixed rate APR 8.8% 8. Regulated by Consumer Credit Act – no penalties for early

redemption 9. Note: no “cooling off” period applies


Next Steps 1. Any questions? 2. Points of contact

3. Resources: www.belgravia-group.co.uk


Scheme Comparison – Government MIG & belgravia95 LENDER

LENDER

1) 95% loan

1) 80% loan

2) Lending 15% greater than Belgravia

2) Greater liquidity

3) Additional capital reserves required MIG

INSURANCE

1) Adds no value to underwriting

1) Protects borrower (ergo lender)

2) Protects lender AFTER repossession

2) May avoid repossession action 3) Flex 80% loan only, 15% is fixed

AVAILABILTIY 1) FTBs of new homes in England

AVAILABILTIY 1) All purchasers, new & second 2) Available across Britain

COSTS - GOVERNMENT

COSTS - GOVERNMENT

1) Time, resources, audit

1) No Costs - No Time - No Resources

2) 5.5% contingency

2) No Warranties or Commitment


Conveyancers

1. Barnetts Contacts: Richard Barnett Southport Business Park Wight Moss Way Southport PR8 4HQ Tel: 0844 561 5600 Fax: 0844 561 5601 Email: legal@barnetts.co.uk

2. O’Neill Patient Contacts: Robin Higham Chester House 2 Chester Road Hazel Grove Stockport Cheshire SK7 5NT Tel: 0844 576 2121 Fax: 0844 576 2140 Email: info@oneillpatient.co.uk


BELGRAVIA PERSONNEL Belgravia – the company John Lloyd established the Halifax New Build department and gained many contacts across the industry. In 2009, Directors of Persimmon, Taylor Wimpey and Barratt asked if he was able to create a new product to replace HomeBuy Direct. The concern was that a change of Government, and thus political dogma, may leave the home building industry without financial support. Furthermore, these home builders had taken around £100m of shared equity finance onto their balance sheets; this could not continue. Fiscal constraint for the builders coupled with fiscal constraint from a new government would have enormous impact on an industry which had already shrunk by a third. Belgravia was created to offer home builders a robust and long-term mortgage finance solution, independent of government subsidy.

Belgravia Personnel (see attached CVs) John Lloyd Has contacts with lenders and builders, 30 years’ lending experience and entrepreneurial flair.

Rob Rogers Has contacts in government, estate agency, FSA, insurance and 24 years as a leader in compliance.

Colin Rogers Has 26 years’ experience in communications/journalism/publishing.

Sandra Medlicott Undertakes all financial management.


Affiliate Consultant Adviser: Richard Barnett, Scheme solicitor Richard’s expertise lies in Company, Commercial and Property Law. He qualified in 1974, and established Barnetts Solicitors in 1980. A few of the positions Richard currently holds include:  Law Society Council Member representing Merseyside and district; 

Chair of the Law Society's Conveyancing and Land Law Committee;

Member of the Law Society's e-conveyancing task force;

Law Society's representative on the Land Registration Rule Committee;

Chair of the Law Society's Council of Mortgage Lenders Handbook subgroup.

Affiliate Consultant Adviser: Tony Samuels, political lobbyist Tony was a sports, property and entertainment solicitor at Nabarro's before setting up his own practices in Cockfosters and Esher, which he sold in 2006. Since then he has been Business Development Partner for the Howard Kennedy and Colemans ctts Solicitors. He was also appointed Non-Executive Chairman of Clydesdale Bank plc, South London Region, from 2006-2008. Tony is County Councillor for Esher, is an honorary member of the 1922 Committee and is Chairman of Sport & Olympic Policy for the Tory think-tank, The Bow Group, and Joint Chairman of Media Policy at the same organisation.

Belgravia95 One Doc  

Belgravia bible and attachments as one document

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