DFMB2 - Oral Audio Complex Lending and Broking Assignment - Kaplan Professional

Assignment Task

Study plan

We recommend that you use the study plan for this subject to help you manage your time to complete the written assignment within your enrolment period. Your study plan is in the KapLearn Complex Lending and Broking (DFMB2v2) subject room.

The Written assignment

The information and data you require to complete this written assignment is presented in the case studies which are located in the subject room.

Section 1: Case study Ray Murdoch and Steve Brown Commercial Equipment Finance

Task

1. Identify the clients’ complex broking needs

Business risk can be defined as anything that may impact the financial health of a business, or that could lead to insolvency.

The risk to a business can eventuate for a variety of reasons and can come from internal or external sources. It is your responsibility (as the broker) to understand the client’s business, potential risks, their history, experience, and business performance. You will also need to understand specific aspects of the transaction such as your client’s intended goals, objectives and requirements in purchasing the equipment.

Question

1. Prepare a list of questions that you would ask Ray and Steve in order to gather information in preparation for the loan application.

Your questions for Ray and Steve should uncover:

• Their understanding of the risks and complex nature of purchasing this equipment (e.g. the risk that the investment may not meet the returns they are expecting)
• Their understanding of the potential risks and benefits/returns associated with financing the equipment purchase
• Identification of their tolerance of risk in relation to the purchase, and damage to equipment during delivery, installation or operations. How would they mitigate these risks?
• If they have any specific product and/or product features they require
• If they want flexibility in the product to be able to pay it out early or be able to refinance
• if they would consider using their own properties as security to provide different lending options
• You need to uncover their understanding of their obligation for insurance and maintenance of the equipment etc.
• To understand the financial aspects of the transaction (i.e. total costs, installation, other potential premises modifications required to accommodate the machine etc.)
• The current financial position of the business.
• To ascertain if they have a taxation strategy in regards to the purchase of the equipment
• Which other professionals will they will consult with and for what purpose?
• To understand and/or mitigate any other potential risks you have identified with their situation. For example, their experience, background, succession planning, and business ownership issues.

2. Develop complex broking options

You are required to prepare a full loan proposal addressed to Ray and Steve outlining available loan options and the application process. The proposal must also describe the potential advantages and disadvantages of the financing option that is being recommended.

In a suitable report format, you should prepare the proposal to Ray and Steve, covering the following:

• The parties to the loan – what names will be on the loan contract?
• Provide two (2) different product options that would meet their needs and objectives – outline the product name/type, loan term, interest rate, balloon payment (if applicable), fees and charges and monthly repayments.
• Provide your recommendation of the best product option to meet their needs. State why the other product was not in their best interest or the best option for them.
• Name three (3) lenders that offer the product you recommended for their transaction. Advise them about the product type, loan terms that are available, interest rate, balloon payment (if applicable), fees and charges and monthly repayments.
• Provide a summary of the lender’s applicable fees and charges — including set up costs and ongoing fees and charges.
• Advise which relevant disclosures need to be made covering broker remuneration.
• Outline all security that will be required, including directors guarantees.
• List the documentation they need to provide to obtain the funding for the machine and to obtain a loan approval.
• Outline their responsibilities, so they fully understand their obligations regarding the security offered and the equipment during the loan term.
• Provide details of the financial and transaction risks associated with the new loan of which they should be made aware. For example, what would happen if they could no longer service the debt?
• They enquired about claiming back the GST that is included in the purchase price of the machine.
  You also feel that they may be able to utilise ‘Small Business Asset – Instant asset write-off’ benefits.
  In accordance with your qualification as a mortgage broker, what should you advise them to do regarding their question on claiming back GST?
• Invite them to ask you any questions they may have about the transaction.
• Provide an instruction for them to advise you to proceed with the application on their behalf.

3. Implement complex loan structures

Ray and Steve have accepted your recommendations and have given you authority to proceed with their application.

4. Verification of applicant’s financial situation

This task requires you to describe the actions that you would take to verify the applicant’s details and financial situation.

You will need to identify the key verification tasks associated with the financial situation of both individual applicants and related business activities, based on the information set out in the case study.

Question

1. (a) Identify and list each of the individuals and/or business entities for which you would require a credit report.

(b) Name the company that you would use to access this information and explain what you require from the client, in order to gain consent to obtain this information.

(c) Part (b) requires you to obtain appropriate consent to conduct the credit check. What legislation are you complying with by obtaining consent prior to proceeding?

(d) List the information that is provided in the credit report?

(e) What sources or supporting documentation would you need to obtain in order to verify the financial information disclosed by the client?

(f) Based on the background information provided in the case study and assuming an interest rate of 4.5% p.a., a brokerage fee of 2%, a residual value of 30% and a term of 5 years, calculate:

• the borrowed amount
• the brokerage fee
• monthly repayments
• total of annual repayments
• residual amount
• total of repayments over term of the loan including residual payment.

Section

2. Case Study Bill Smith and John Jones Commercial Premises Finance

Task

1. Identify the clients’ complex broking needs

It is the broker’s responsibility to understand the client’s business, potential risks, their history, experience and business performance. You will also need to understand specific aspects of the transaction such as the client’s intended goals, objectives and requirements in purchasing the property.

Question

1. Prepare a list of questions that you would ask Bill and John in order to gather information in preparation of the loan application for their commercial property purchase.

Your questions to Bill and John should uncover the following areas:

• the reasons behind the complex trust structure they have chosen — particularly with the shareholder involvement and their willingness to be involved in the transaction with the lender
• the benefits and risks with this property purchase
• their risk tolerance with different product types (i.e. fixed rates/interest only, term of loan etc.)
• the impact this purchase will have on the business and its financial position
• anticipated costs to fit out the new premises to suit their business needs
• the business structure/key personnel risks
• the business and industry risks (e.g. required licencing and professional indemnity).

2. Prepare complex broking options

You are required to prepare a full report for Bill and John by outlining the application process and the risks (potential and real) of which they should be aware. This must be presented in a suitable format that would be sent to the client.

You will be required to outline to the directors the product options available to them and the process that will need to take place for them to complete the new property purchase and establish the loan.

In preparation of researching the product options, you will need to understand the client’s situation and what funds will be available between the purchase and the sale settlement as outlined in the case study.

The two (2) product options for the property purchase are as follows:

Option 1: A bridging loan with a term loan following bridging period (post sale settlement)

Option 2: A variable rate term loan (to effect the purchase in 90 days time).

In developing your report, you should cover the following:

1. Who are the parties to the loan, given the Trust involvement

2. Provide Bill and John with two (2) complex loan product options

• Option 1: Bridging loan with a term loan to follow the bridging period
• Option 2: Variable rate term loan.

3. What are your recommendations of the best loan structure option, including:

• the loan amount
• security/collateral including personal and company guarantees
• the loan term

An explanation as to why the other option is not as suitable for the clients (include pros and cons and differences in fees and interest etc.)

1. Name three (3) lenders that offer the recommended product option required to facilitate this transaction. Advise the client of the product type, loan term, interest rate, ongoing fees and monthly repayment for each of the lenders.

2. What is the procedure to implement the loan, including the documentation Bill and John are required to provide and the security they need to provide?

3. Outline the risks of which Bill and John should be made aware. Information should cover risks associated with the selected loan products and required security, including guarantees and forms of security required in addition to property.

4. Provide the name of the borrower that will be on the loan contract. Also, what name will go on the Certificate of Title (given the Trust involvement) when it is registered with the Land Titles Office? (This varies from state to state so please advise which state you are from — refer to the Toolbox for assistance to conduct your research.)

5. Prepare a full funding description including a summary of fees and charges for the purchase of the property and also the setup costs (e.g. solicitors fees) and the lender’s fees and charges. If there is a shortfall of funds, how will this shortfall be covered?

6. The clients enquired about claiming back the GST that is included in the purchase price after settlement. In accordance with your qualification as a mortgage broker, what do you advise the clients to do regarding this question?

7. You request that the client informs you of any questions about the transaction and/or provide instructions for you to proceed.

8. Advise which relevant disclosures need to be made to the client regarding the broker remuneration.

3. Implement complex loan structures

Bill and John have accepted your recommendations and have given you authority to proceed with their application.

4. Verification of applicant’s financial situation

Commercial/business lending is less prescriptive than consumer lending, therefore the information provided to the lender may seem quite thorough to the broker, yet once the lender receives the loan application, it is likely they will seek further information and clarification.

Question

(a) Identify a minimum of four (4) areas where the lender may require additional information.

(b) What financial services professionals could you engage if you were not able to answer all of the lender’s enquiries?

(c) If you needed to escalate any risks or concerns, who would you engage within your own organisation to assist?

(d) When identifying commercial borrowers and directors, legislative requirements concerning AML/CTF verifications must be met. What checks would you complete to meet these requirements and what would be two (2) possible impacts if you did not complete these checks

Following your review of the borrower’s financial position, compare their current and future outgoing commitments once the new loan is initially in place.

(a) What are the two (2) key impacts/changes to their cashflow?

(b) What is the change in the amount of their outgoing commitments? Demonstrate how you arrived at this figure.

Section 3: Case Study 3 Rahn and Deepa Singh Property Development Finance

The case study can be located in the subject room.

Task

1. Identify the clients’ complex broking needs

Question

1. It is the broker’s responsibility to understand the client’s business, potential risks, their history, experience and business performance. You will also need to understand specific aspects of the transaction such as their intended goals, objectives and requirements in purchasing the property.

Prepare a list of questions that you would ask Rahn and Deepa in order to gather information in preparation of the loan application for their investment property development.

Your questions should uncover the following areas:

• their future goals, employment history, experience in project management, financial position, attitude to risks and the property purchase
• the complex features of the proposed construction financing transaction and options for 100% funding
• the identification of potential risks involved with construction loans and Rahn and Deepa ’s tolerance for risk
• the financial aspects of the transaction including, progressive payments and cost over-runs
• the financial position of the borrowers and their capacity to meet project costs
• experience in managing a construction project and whether they intend to use other building specialists or project managers
• the customers intention to undertake another project after completion
• the customer’s plans for management of the rental and sale of one unit
• if the project exceeds the projected amounts, how would they manage the extra costs.

2. Prepare complex broking options

You are required to prepare a proposal for Rahn and Deepa outlining the loan approval process and the transaction risks they should be aware of.

Prepare the proposal document, in a suitable format, and explain the consumer loan options available to Rahn and Deepa. Outline the process that will need to take place for them to complete the purchase of the property and construction of the three units.

In developing your report, you should cover the following:

1. Who the parties to the loans are.

2. Provide Rahn and Deepa with two initial loan products that would meet their requirements.

Option 1: Residential home loan secured by the family home to provide the required equity.

Option 2: Property development loan to assist with purchase of land and construction.

1. Your recommendation for the best loan structure option for each loan, including:

• amounts
• security/collateral for each loan
• terms
• repayment types
• LVRs for each loan
• explanation why each of the loans are suitable for the clients.

2. Provide Rahn and Deepa with a preliminary assessment, as required under your regulatory responsible lending obligations, outlining the three (3) lenders that provide the product required to facilitate this transaction, and advise the client of the product type, loan term, interest rate, ongoing fees and monthly repayment for each of the products.

3. Describe the procedure, from initial interview to unconditional loan approval, including documentation required from Rahn and Deepa . Ensure you mention the compliance documents you need to complete.

4. Describe the client responsibilities, so Rahn and Deepa understand the facilities being proposed.

5. Outline the risks (potential and real) of which Rahn and Deepa should be made aware of, including using their own home as security.

6. Prepare a full funding description including a summary of fees and charges for the initial purchase of the land through to completion of project. Ensure you include the costs for setup and those of the lender.

7. Prepare a time line for the project detailing payments and where funds will be obtained from.

8. A request for the client to inform you of any questions about the transaction and/or provide an instruction for you to proceed.

9. Advise which relevant disclosures need to be made regarding broker remuneration

In Task 1 you identified risks that concern Rahn and Deepa’s property development proposal. From the list of risks you identified, choose two (2) risks and discuss the following, namely:

(a) why you feel it is a risk to the client and/or the lender

(b) if the risk was to eventuate, what could be the potential consequences for the clients and/or the lender

(c) your suggestions for how these risks can be mitigated.

Section 4: Complex Lending and Broking Identifying, developing, presenting and implementing complex broking options

Task

1. Complex collateral (specialised security)

Question

(a) Explain what the risks are for a lender with taking rural land as security. 

(b) Explain what the risks are for the client with purchasing rural land.

Some properties are heritage listed for example hotels and banks of a pioneering nature. Explain what this means.

(a) Explain one (1) risk for the purchaser with buying a heritage listed property.

(b) Explain one (1) risk for the lender with taking a heritage listed property as security

(c) Why would a lender request and ESA, what might this reveal if it was requested?

2. Complex loan structures

Question

(a) List three (3) types of loan transactions that may be considered to be complex loans.

(b) Provide two (2) examples of how a client’s application with special financial circumstances (such as offering a specialised property as security or requiring a complex loan structure) might be impacted. As a broker you can assist the client and the lender with the loan implementation process.

(c) This task requires you to establish the steps required to effectively monitor loan submission procedures. List a minimum of seven (7) steps that you (as the broker) can take to assist with the loan submission, from collection of supporting documentation through to the collection of fees and settlement or loan draw down.

(d) What steps can you take to ensure the privacy of your client’s information when sending and storing their supporting documents and loan application details?

Section 5: Ethical decision-making frameworks and principles

Before you begin this Topic, you will be required to read the case study 4 which is located in the subject room.

Case Study

Task

1. Frame he ethical question applicable to the situation

Question 

1. Investigate whether the assumptions and client advice provided by the broker in ‘Scenario A’, align with industry practice.

2. Identify the two (2) ethical principles that arise in each of the three (3) scenarios from the case study and list them in the table below

3. The lender in Scenario A became aware of the broker’s instructions to the clients and advised the broker that his actions were not acceptable. In their defence, the broker stated that they had, ‘heard that this was the right thing to do at a professional development day that I attended in the past’ and that ‘I confirmed this by asking other brokers who agreed with my actions’.

4. Identify at least two biases that are revealed in the statements made by the broker and explain how they might impact the broker’s understanding of the situation?

2. Determine ethical response to the situation

Scenario A’ resulted in the client’s defaulting on their home loan 12 months after settlement as it took them several months to find new employment. Each party to the transaction claimed that they received poor advice from the broker.

Question

1. You have been asked to determine an ethical response to ‘Scenario B’. You are required to analyse the situation using the ‘RADAR’ ethical decision-making framework. Your response must include commentary on each aspect of this framework as follows:

• Recognising the event
• Assessing the situation
• Deciding what to do
• Agreeing the way forward
• Reporting

3. The broker in ‘Scenario A’ was interviewed about his actions and made the following comments:

4 . Most of my business is settled with this particular lender and the loans manager is a personal friend of mine. There is nothing unusual about the way I handled this situation. I’m not that comfortable dealing with clients this way, but it’s the way brokers operate. I know this is true because my mentor didn’t see anything wrong by not notifying the lender’.

5. Identify the situational and/or psychological barriers that may have impeded the broker’s response to this ethical situation by listing a minimum of two (2) examples of conflict of interest and at least two (2) examples of where the broker’s views were biased.

6. You have been asked to determine an ethical response to ‘Scenario A’ having now heard what the broker has had to say about his actions at question 2.3 above. Name at least two (2) people or organisations you might seek guidance from as you would consider them to be ethical advisers.

Evaluate the outcomes of the ethical response

Case Study  

One of Peta’s most important customers called yesterday seeking an explanation for the delay in receiving a valuation report for a loan application he had lodged last week. Peta had asked a colleague Alex to order a valuation (normally completed within five days), but it had not arrived.

When Peta asked Alex whether the valuation instructions had been issued, Alex said, ‘I sent them by email to the valuer a week ago’. Later, as Peta passed Alex’s desk and “woke” the laptop from the screensaver, Peta could clearly see that the email was sent just two days ago. This was typical of the poor customer service provided by the organisation due to ongoing problems with staff levels and it is not the first time Alex had been dishonest in order to cover up mistakes.

However, Peta knew that Alex’s job was at risk and decided the right thing to do was to protect her colleague by calling the client back with the news that the valuer had received the instructions but had not yet completed the valuation report. As Peta talked with the client, she learned that the delay of the valuation had resulted in the loss of the client’s opportunity to purchase the property.

Peta later heard from the manager that the client had complained and decided to not use the mortgage broking services provided by the organisation in future. Peta listened carefully when her manager later expressed his confusion on how this client’s attitude towards him had been hostile. Peta, knowing that both Alex and her own jobs were now at risk, said nothing in response.

Question

(a) Identify a minimum of three (3) ethical situations/actions described in the case study.

(b) Evaluate whether the issues were resolved and if other courses of action should have been taken.

Task

5. Dealing with workplace ethics

Case Study

Rhonda is working as a loans processing officer but has become concerned with another colleague Yen who appears to be favouring the processing of one of the referrers' applications to the detriment of other submissions.

Talking with one of the other colleagues, Rhonda was informed that Yen has been lunching regularly with the referrer and may be concerned that Yen might be getting a ‘kick back’ to provide preferential treatment and processing their loans before others.

Although Rhonda didn’t want to directly accuse the colleague of unethical behaviour, she felt it was important to report the issue as it was starting to affect the workflow of the other loan processing team.

After listening to Rhonda’s concerns, the ethics manager decided to investigate the situation in line with the company’s policy and procedures.

Question

1. After listening to Rhonda and interviewing Yen, the Compliance Manager had to determine if any company policies had been breached. After reviewing the company ethics policy, answer the following.

(a) Was it appropriate for Rhonda to raise concerns with the ethics manager about the conduct of Yen?

(b) What breaches of the company’s ethics policy have you identified?

(c) It was concluded that Yen was providing preferential treatment to the referrer and received a couple of generous gifts for providing this service. It was not determined that Yen had committed any breaches of the legislation but may have breached conflict of interests obligations.

(d) Conduct research and determine if Yen breached any Codes of Practice, including the Banking Code of Practice or Industry association codes, ASIC regulations, or legislation, state or federal.

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