Rahn and Deepa Singh –Property Development Finance Case Study

Task 1— Identify the clients’ complex broking needs

Task 1: 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.

(800 words)

Task 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.

3. 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.

4. 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.
5. 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.
6. Describe the client responsibilities, so Rahn and Deepa understand the facilities being proposed.
7. Outline the risks (potential and real) of which Rahn and Deepa should be made awareof, including using their own home as security.
8. 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.
9. Prepare a time line for the project detailing payments and where funds will be obtained from.  
10. A request for the client to inform you of any questions about the transaction and/or provide an instruction for you to proceed.
11. Advise which relevant disclosures need to be made regarding broker remuneration.

(800 words)

Task 3 — Implement complex loan structures

Rahn and Deepa have accepted your recommendations and have given you authority to proceed with their application.

As part of implementing their loan application you are required to prepare a formal written loan submission to the lender for pre-approval.

Note: Lender templates, credit policies and submission requirements vary from lender to lender. For this task, you can use thetemplate called ‘Credit Memorandum’ (or follow the structure as a guide)and/or any of the other example tables provided in the Toolbox.

Your loan submission must include:

• details of borrower and their contact details
• borrowers’ backgroundsincluding ability to manage project or possible use of building expert
• an overview of the proposal — what the finance is for the proposed structure and loan recommended. Include:

– product types

– deposit amount (if required)

– loan amounts

– terms

– interest rates

– interest repayments

• full details of the security being offered
• a funds-to-complete table, include statutory costs and any relevant fees

– the loan for the two remaining units (loan amount will be 80% of the completion value)

– outline the debt servicing position

– the projected rental income

– interest only repayments

– the security and LVR position

• a highlight the relevant risks. Include transactional, economic and personal risks and how they can be mitigated
• any other information that is relevant to assist the lender provide an approval
• your comments and recommendations
• a list of the documents that you would attach in your written submission. (You can assume that you have all of the necessary approvals for the construction and have obtained a valuation).

(800 words)

Task 4 — Verification of applicant’s financial situation

When a consumer loan falls under the protection of the National Consumer Credit Protection Act 2009 (NCCP Act), there are disclosure obligations that the broker must abide by.

Assume the following:

• Rahn and Deepa’s loan falls under the NCCP Act.
• You are about to provide the client with credit assistance.
• You are going to charge them a fee for your service.

Task 4: Question 1

What are the two (2) disclosure documents that you must provide to the client at the initial meeting?

(4 words)

Hint/Tip:

Refer to the Toolbox for a helpful link under the heading Responsible lending obligations

Task 4: Question 2

In order for you to collect and store client information and conduct a credit check, what document would you need to get signed by the client?

(10 words)

Task 4: Question 3

Your client has advised you that they are not sure what the term ‘cross-collateralisation’ means.  Explain what cross-collateralisation means to the client.

(50 words)

Hint/Tip:

Refer to the topic notes

Task 4: Question 4

Given that Rahn and Deepa want to equally own the new property, claim taxation benefits and maintain ownership if one party passes away, how should they register their ownership interest on the Certificate of Title?

Task 4: Question 5

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.