Response to consultation Paper on draft Guidelines on loan origination and monitoring.

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5. What are the respondents’ views on the requirements for governance for credit granting and monitoring (Section 4)?


6. What are the respondent’s views on how the guidelines capture the role of the risk management function in credit granting process?


7. What are the respondents’ views on the requirements for collection of information and documentation for the purposes of creditworthiness assessment (Section 5.1)?


8. What are the respondents’ views on the requirements for assessment of borrower’s creditworthiness (Section 5.2)?

As mentioned in our response to question 3, there are still a number of gaps in the available data relating to ESG risks, which may create difficulties for institutions looking to carry out a complete assessment of the borrower's exposure to climate-related and environmental risks, as well as other ESG risks. As such, the EBA Guidelines should make it clear that this guidance applies only apply where appropriate" or, otherwise, clearly state that the EBA Guidelines at paragraph 130 should be applied in a manner which takes into consideration the evolving understanding of what best practice looks like in relation to the assessment of ESG risks."

9. What are the respondents’ views on the scope of the asset classes and products covered in loan origination procedures (Section 5)?


10. What are the respondents’ views on the requirements for loan pricing (Section 6)?


11. What are the respondents’ views on the requirements for valuation of immovable and movable property collateral (Section 7)?

Syndicated loan products are used to finance a range of immovable property collateral. Real estate assets are diverse, and each particular asset will have its own unique characteristics and associated risks. The LMA understands that the EBA Guidelines at Section 7, relating to the valuation of immovable property pledged, do largely reflect existing market practice. However, the LMA is concerned that the EBA Guidelines in this section do not account for the nuanced approaches to valuation that may be required in relation to particular real estate assets or development projects.

Paragraph 195 suggests that institutions may consider using desktop or drive-by valuation approaches only in the cases of valuing or revaluing immovable property collateral (e.g. RRE and CRE) that is of similar design, specifications and characteristics to the ones already valued or re-valued by a valuer, e.g. similar apartments in the same apartment block". The LMA understands that, particularly in relation to larger portfolio transactions, a sample of properties may be valued, as opposed to a valuation being carried out for each and every property in the portfolio. The EBA Guidelines should, therefore, be updated to reflect this relatively common approach to valuation.

Paragraph 196 of the EBA Guidelines provides that two sequential individual valuations of immoveable property by the same valuer should result in the appointment of either a different internal appraiser or a different external appraisal provider. It should be noted that the RICS Valuation – Global Standards 2017 (the "Red Book") suggest that it is considered good practice, albeit not mandatory, to rotate valuers at intervals not exceeding seven years. Accordingly, the requirements under the EBA Guidelines in relation to the rotation of valuers are more onerous than the Red Book requirements, and this may lead to additional costs for borrowers. Certain large development projects may, for example, require valuations to be carried out at frequent intervals. In this type of scenario, the requirement to change valuer part way through the process may be onerous, may add significant cost for borrowers and, furthermore, may risk the loss of significant knowledge held by the original valuer.

According to paragraph 158 of the EBA Guidelines, "Institutions should assess and verify the borrower’s experience in relation to the type, size and geographical location of the CRE". It should be noted, however, that in a typical lending structure a borrower will be a special purpose vehicle which has been incorporated for the purpose of holding the immoveable property collateral. Typically, the borrower is not an operating company and does not have direct employees. As such, the borrower may have no direct experience of similar property dealings. The LMA suggests that it would be more appropriate to refer here to the experience of the borrower and/or its sponsors.

The EBA Guidelines provide at paragraph 194 that, "At the point of origination institutions should ensure that the value of all immovable property collateral irrespective whether it is pledged against the loans to consumers or professionals is assessed by an independent qualified internal or external valuer." The use of the words, "whether it is pledged against the loans", is confusing in the context of English law since it is not possible to pledge real estate under English law. In addition, the LMA would not expect that a valuation will always be carried out if the property is not pledged as collateral for the relevant loan. As such, the LMA recommends the deletion of the words, "irrespective whether it is pledged against the loans to consumers or professionals" since this may lead to confusion amongst market participants and result in unnecessary costs for borrowers."

12. What are the respondents’ views on the proposed requirements on monitoring framework (Section 8)?


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Loan Market Association