Loan Security

Question 1

what is the guidance on secured lending

Answer 1

Red book VPGA 2
UK national supplement 2023 VPGA 10 - material uncertainty

Question 2

what are some of the risks for lenders to consider before lending

Answer 2

location
micro and macro economic conditions
supply and demand
quality and condition of the property
functional and financial obsolescence - alternative use value
future expenditure requirements
any tenants covenant strength and effect on income
key lease terms including break options

Question 3

why would a property not be suitable for secured lending

Answer 3

uninhabitable
short lease
structural problems

Question 4

what is a liability cap

Answer 4

a limit on the amount recoverable for damages due to negligence

Question 5

what is contained in a secured lending instruction

Answer 5

• property
• lender
• borrower
• Loan details
• basis of value
• timescales
• fee
• Liability limit

Question 6

what does VPGA 2 say about dealing with conflicts

Answer 6

• declare any potential conflicts
• comply with PS2
• ‘previous involvement’ would usually be anything between the period of 2 years preceding the date of instruction
• any previous or current involvement with the borrower or the property is to be disclosed to the lender prior to acceptance
• examples of involvement:
• has a longstanding professional relationship with the borrower or the owner of the property
• introducing the transaction to the lender or the borrower for which a fee is payable to the valuer or the firm
• has a financial interest in the asset or the borrower
• acting for the owner of the property or asset in a related transaction
• acting or has acted for the borrower on the purchase of the property
• retained on disposal
• has recently acted in a market transaction
• provided fee earning professional advice on the property or asset to current or previous owners of their lenders

Question 7

what does VPGA 2 say about reporting procedure

Answer 7

valuer must provide in addition to the standard valuation procedure:
- comment on owner occupier/investment nature of the property
- comment on the suitability of the property for mortgage purposes
- any circumstances in which the value could be affected
- acknowledge any sustainability features
- must have a comment on any material difference between the reported value with and without that special assumption

Question 8

what is within the UK National Supplement with regards to Loan security

Answer 8

VPGA 10 commercial secured lending
- DRC ALONE is unsuitable for secured lending
- ‘panel agreements’ which are a third party between lenders and surveyors to manage the instruction process
- TOE should limit reliance only to the addressee ie the lender
- should always have regard to sustainability and ESG

Question 9

How have the change in interest rates affected the property market

Answer 9

increase the cost of borrowing
slows investment in property as it is a less attractive proposition
return on investment affected
yields move out to reflect the increased risk

Question 10

What risks would rising interest rates pose to a lender?

Answer 10

lender =
have to charge higher fees on borrowing
less investment in property and less lending happening
borrowers more likely to default payments with higher costs

Question 11

What would you do if you were asked to value a property that you had valued for another lender one year previously?

Answer 11

• undertake conflicts check
• Disclose to the bank that this had been undertaken
• get informed consent
• If instructed, undertake full inspections and due diligence again to make sure nothing has changed

Question 12

What helps you determine if a property is suitable for Loan Security?

Answer 12

Marketability
Condition and in-habitability
Economic Life

Question 13

What should a valuer consider when instructed under a panel agreement, and what action may therefore need to be taken?

Answer 13

• that they remain appropriate in relation to individual valuation assignments

Question 14

how do you decide on liability cap

Answer 14

• must be reasonable and proportionate to the nature of the instruction and their respective exposures to their risk

Question 15

who is responsible for the loan decision, and therefore how should the valuers comments be limited?

Answer 15

wholly responsibility of the lender to assess and take the final decision on suitability for loan.
comments limited by valuer to those property or market factors that could or may have impact in the cash flow, value or liquidity