CeMAP Mortgage Law and Practice Questions and Answers

Question 1

A client has a mortgage on their property with Lender A (a 'first charge') and later takes out a secured loan for home improvements with Lender B (a 'second charge'). If the client defaults and the property is repossessed and sold, what is the order of repayment from the sale proceeds?

Accepted Answer

Lender A is repaid in full, then Lender B is repaid from any remaining funds.

Answer

In UK mortgage law, charges are ranked in order of creation. A first charge holder has priority and must be repaid in full from the proceeds of a sale before any funds are distributed to the second charge holder. This is why second charge lending is considered higher risk and often comes with a higher interest rate.

Question 2

Under the Law of Property Act 1925, which of the following is the most common method for creating a legal mortgage on a registered freehold property in the modern conveyancing process?

Accepted Answer

By a charge by deed expressed to be by way of legal mortgage.

Answer

The Law of Property Act 1925, specifically section 87, establishes the 'charge by deed by way of legal mortgage' as the standard and most common method for creating a legal mortgage today. This method does not involve transferring ownership or a lease but creates a legal interest for the lender which is registered against the property's title.

Question 3

A lender is initiating repossession proceedings against a borrower in arrears. According to the FCA's MCOB (Mortgage Conduct of Business) rules, what is a key principle the lender must follow before taking court action?

Accepted Answer

Repossession must be treated as a last resort after all other reasonable options have been considered.

Answer

The FCA's MCOB sourcebook is clear that lenders must treat customers fairly and that repossession proceedings should only be initiated as a last resort. Lenders are required to explore other options with the borrower, such as extending the mortgage term or changing the mortgage type, before commencing legal action.

Question 4

The Mortgage Credit Directive (MCD) was implemented into UK law in March 2016. What was one of the most significant impacts of this directive on the UK mortgage market?

Accepted Answer

It brought the regulation of first charge and second charge mortgages under the same FCA regime.

Answer

Prior to the MCD, first charge mortgages were regulated under the FCA's mortgage regime (MCOB), while second charge lending was regulated under the Consumer Credit Act. A key change brought by the MCD was to bring both first and second charge mortgages under the same regulatory framework, the FSMA regulated mortgage regime, to create a single, consistent market.

Question 5

A borrower wishes to repay their fixed-rate mortgage in full during the initial benefit period. The lender applies an Early Repayment Charge (ERC). According to MCOB rules, this charge must be:

Accepted Answer

A reasonable pre-estimate of the costs the lender incurs due to the early repayment.

Answer

The FCA's MCOB 12.3 states that an Early Repayment Charge must be a reasonable pre-estimate of the cost to the lender resulting from the customer repaying the loan early. The rules specifically prohibit the use of the 'Rule of 78' as it is not considered an appropriate or fair method for calculating the lender's cost.

CeMAP - Certificate in Mortgage Advice and Practice Practice Test

CeMAP - Certificate in Mortgage Advice and Practice Practice Test

CeMAP Mortgage Law and Practice Questions and Answers