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)?

These appear sensible.

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

These appear sensible.

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

These are sensible, and aligned with what is already required in the UK.

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

These are sensible, and aligned with what is already required in the UK.

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

We agree that collateral by itself should not be the primary reason for approving a loan where the property is to be the borrower's own residence. The situation is different however, where the property is to be let for rent on a commercial basis. Of course the borrower's ability to service the loan repayments must be properly assessed, but the whole point of s secured" loan is that the lender can rely on the colateral offered if needed."

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

Institutions will already be doing this as a matter of course.

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

Section 7 (page 52), referring to valuations, proposes that all valuations should be “assessed by an independent qualified internal or external valuer”. It is not clear whether this requirement would extend to automated valuation models (AVMs) which are commonly used in connection with re-mortgaging activity where the borrower is not purchasing a new property. Lenders’ internal practices vary but the AVM process, whilst it will not necessarily be carried out on each occasion by a qualified valuer, will be subject to oversight and approval by a qualified valuer: it would be helpful if the EBA guidance could clarify its expectations in cases where no physical inspection of the property is carried out.

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

Para 208 (page 54) provides that “Institutions should set out appropriate frequencies for monitoring the value of the collateral” and then sets out some detail which is potentially quite onerous: it provides that monitoring should be more frequent where (a) a building is unfinished; (b) the LTV is “higher than that of similar properties” and (c) where the credit quality is low.
Lenders will currently routinely monitor the value of their books in order to assess their potential liabilities in the event that a loan goes into default. Whilst the circumstances outlined in the draft guidelines may be helpful to firms in deciding what may be appropriate for their mortgage books and styles of lending, it would be unnecessarily prescriptive to expect all firms to carry out detailed monitoring to this extent. We shall look to the UK’s regulators to adopt a proportionate response to this element of the guidelines.

Similarly, the provisions in para 239 (page 60) are potentially disproportionate and onerous: the draft provides that “Institutions should continuously monitor and assess the quality of credit exposures and financial situation of borrowers to ensure that subsequent changes in credit risk, in respect of the initial recognition of the lending exposures, can be identified and quantified.” Lenders do of course continuously monitor the performance of their loan books – and any shortfall in regular payments will be immediately responded to. Continuous monitoring and assessment of borrowers’ financial situation is less realistic, however. If the loan is performing, the lender will have no reason to enquire into the borrower’s financial situation and many borrowers might well resent any such intrusion. It is a difference matter if the borrower’s circumstances change such that they experience financial difficulties – lenders encourage borrowers in such circumstance to contact them as soon as possible to discuss what options may be available to help them through what may be a relatively short period of difficulty. There are high expectations on UK lenders to exercise forbearance in cases of financial difficulty – as evidenced by the very low arrears and possession rates.

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