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)?

Our view corresponds with the response from the Swedish Bankers's Association

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

Our view corresponds with the response from the Swedish Bankers's Association

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

Our view corresponds with the response from the Swedish Bankers's Association

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

Our view corresponds with the response from the Swedish Bankers's Association

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

Our view corresponds with the response from the Swedish Bankers's Association

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

Our view corresponds with the response from the Swedish Bankers's Association

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

The Bank suggest that this section of the guidelines is revised in order to better respect the principle of proportionality and existing well-functioning market practices. It is also important to ensure that this section of the guidelines is consistent with other union acts of law regarding valuation, e.g. the provisions in the Capital requirements Regulation (CRR) and the Mortgage Credit Directive, and do not impose stricter or different requirements.

The proposed definitions of Commercial Real Estate (CRE) and Residential Real Estate (RRE) are not in line with the definitions used in the CRR, which will lead to difficulties when applying the guidelines. The Bank suggests that the same definitions as in the CRR are used and that dynamic references to those definitions in the regulation are used, in order to ensure consistency over time.

The proposed guidelines do not seem to allow for the use of advanced statistical models for valuation purposes at origination, even though these models produce reliable results. Disallowing its use would in our view not contribute to making banks’ standards more robust. Instead, it would result in additional costs, without direct benefits to the client and the bank. For asset classes where advanced statistical models have proven to be reliable, the Bank advises EBA to allow a continuation of its use, i.e. the Bank is in favor of Option 3c, as presented in the draft cost-benefit analysis/impact assessment. If the EBA does not consider this to be appropriate throughout the union, the use of advanced statistical models could be allowed on a member state level, at the discretion of the relevant national competent authority. Similar solutions, for when there are well-developed and long-established market practices on a member state level, are found for example in CRR articles 199(3), 199(4) and 199(6).

The proposed guidelines allow for the use of a statistical model for revaluation purposes given that the model fulfills a set of criteria (e.g. the model should account for individual characteristics of the property, it should be property-specific, valid and accurate) and given that CRR article 208(3) does not apply. There are however mechanical valuation methods, including mechanical valuation methods with some human interaction, that may not be considered to be statistical models from a strict mathematical perspective, but which fulfill the set of criteria in the proposed guideline and thus would perfectly serve as a revaluation method. The Bank believes that the idea behind the guidelines is to allow these mechanical methods for revaluation purposes. This should however be clarified. The Bank proposes that the wordings “advanced statistical models” and “statistical models” in section 7 of the proposed guidelines are replaced with the phrasing used in CRR article 174; “advanced statistical models”, “other advanced mechanical methods” and “statistical models and other mechanical methods”, and thus aligned with the provisions in the CRR.

It is important that regulators move in a direction that supports smarter and more automated valuation methods (AVM) in situations where the real estate markets are well established, especially for residential real estate. The regulatory burden and costs would increase considerably if banks were required to employ certified valuers in a well-established residential real estate market, where this is in fact not needed. The use of eligible AVM methods (not indexation) and registered data is increasing, creating more reliable data. It is important that AVM methods are put on the same footing as manual valuations (RRE) and considered as independent. The data is supposed back-tested by the AVM vendors and/or the bank in the same operation.

The most important aspects of property valuation are to do the valuation independently and with a high knowledge of the local real estate market. It is also important that the valuer has a suitable education and skill to perform a reliable and prudent valuation. In our opinion, the EBA guidelines should state and support that long-term competence and experience within the institution in valuing properties is of value. The Bank suggests that the institution’s personnel working with valuation should have appropriate training (which could be done internally within the institution). Internal valuers should be appointed officers with a long experience of the real estate market, and there could be a requirement for internal approval and supervision. An appointed bank officer, using professional valuation methods in line with good market practice, should be considered acceptable to perform valuation of RRE.

The Bank finds the wording “… at the point of origination” in paragraph 191 unfortunate. A recent valuation made some time, e.g. six months, before the point of origination would be sufficient, provided that the institution makes sure the valuation is still reasonable and relevant or reviewed and supplemented. The Bank hence proposes that paragraph 191 is amended as follows:

“Where credit facility is secured by immovable or movable property collateral, institutions should ensure that the valuation to be used is relevant. Institutions should set out internal policies and procedures for valuation that are in line with the institutions’ credit risk policies and procedures.”

In order to allow for the use of advanced statistical models on a member state level, when this is appropriate, the Bank proposes that a new paragraph 194 a) with the following wording is added:

“Institutions may derogate from paragraph 194 and use statistical models for valuation of immovable property being used as security for loans to consumers, for origination purposes, if

- the property is situated within the territory of a Member State, and
- the competent authority in that Member State has approved the use of such models.”

The Bank moreover proposes that paragraph 199 is amended as follows:

“Institutions should ensure that the valuers provide an impartial, clear, transparent and objective valuation, and each valuation should have a final report providing the necessary information on the valuation process and property. The valuation report should clearly state who ordered the valuation and that the valuation has been requested for purposes of loan application only. Valuation should be carried out (internal valuation) or ordered (external valuation) by the institution or approved by the institution unless it is subject to a request from the borrower under certain circumstances.”

The requirements proposed in section 200 are too prescriptive and there is a risk that they would lead to a check list approach, instead of ensuring a prudent valuation and documentation process, thus defying the objective of the guidelines.

The requirements in paragraphs 207 to 213 would overhaul the current monitoring applied to collaterals subject to revaluation and the frequency of the update. Many banks have just modified their evaluation processes on the basis of the recent NPEs guidance. Any new changes would require high IT disburses and longer time for their implementation than what proposed in the guidelines. For example, performing full appraisals for revaluation purposes as set out in paragraph 213 instead of the current desktop ones, would significantly increase the appraisals’ annual cost, and delivery time could be delayed. Additionally, mainly in case of NPE, the debtor/asset owner wouldn’t permit an internal visit of the Real Estate asset. Also, the proposed parameters in paragraph 208 to be used to structure the frequencies of monitoring are not necessarily the best. Market volatility and risk of deterioration regarding industry, technical infrastructure and location as well as respective market price developments are deemed more suitable. The institutions do have enough experience and market knowledge to judge on the best parameter reflecting the risk structure of their portfolio. Hence, parameter for determining different monitoring frequencies should not be predetermined by the EBA.

It is not always appropriate or even possible to require rotation of valuers, as proposed in paragraph 214. There is already a requirement for appraiser rotation for non-performing loans via EBA NPL Guideline. The processes of banks have just been updated to accommodate for this new rule. The expansion to all exposures would cause yet more changes just as processes have been updated. The existing requirement for only NPLs is assessed as appropriate, while the Bank proposes to remove clause 214 which is an expansion of existing rules.

The Bank furthermore proposes that point a. in paragraph 225 is amended as follows:

“they are not involved in the loan application, assessment, decision or administration;”

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

Our view corresponds with the response from the Swedish Bankers's Association

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