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

Go back

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

We support the general requirements set in the guidelines, such as clarity and documentation. For the sake of just clarity, procedures related to anti-money laundering and counter-terrorist financing should mainly be addressed in guidelines dedicated to these purposes, chiefly, the ESA Risk Factor Guidelines. In addition, some of the more detailed suggestions could result in overtly rigid and complicated procedures replacing well-functioning current practices. These include at least the following:
Paragraph 59: There is no need to limit the time period for delegated decision-making bodies or the number of delegated approvals. If the bodies follow the bank’s internal risk policies as is expected from them, risks are not likely to increase despite the absence of the suggested limitations. Eventual problems connected to cases of malpractice can be addressed according to existing regulation and internal procedures. In smaller institutions, any such limitations will be rendered useless by the small amount of staff.
Paragraphs 62 and 63: When delegating credit decision making powers, institutions do consider the expertise and experience of the individual employee or management body member as required in point 62. When these requirements are appropriately followed, the principle of proportionality should allow institutions to independently determine “small” and “non-complex” facilities, as these are relative concepts depending on e.g. the size and clientele of the institution.
Point 82: For some credit facilities, the variable remuneration is very difficult to disperse evenly for the duration of the credit, which, in case of mortgages, can be decades.

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

Creditworthiness assessment should be mainly carried out the first line of defence. The chance to consult risk office for second opinion is useful but should not be a mandatory part of the assessment.

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

The principle of proportionality, while mentioned in paragraph 86, could be highlighted in connection to other requirements as well. The list of required types of information in Annex 2 is partly over-comprehensive for smaller consumer loans. In some countries it is not customary to collect verified data e.g. on the exact purpose of the loan or financial commitments for non-complex small credits, such as cards and revolving credits. In addition, some data, such as third-party information on financial liabilities, is currently not available in all countries.
As far as professional borrowers are concerned, simple business plans and financial projections for small and medium-sized enterprises should suffice (paragraph 93 e-f). In general, few SMEs can produce these in any detail, which we suggest could be considered e.g. in the paragraphs concerned with SME specificities in Section 5.2.
The rules set out for sensivity analysis in paragraphs 101, 114 and 121 should be amended to include references to the proportionality principle, as they are disproportionately heavy for smaller exposures.
If interpreted rigidly, paragraph 125 could prove too restrictive in cases where a sum equivalent to the loan is deposited in and pledged to the institution. It could also cause trouble for vehicle finance in some countries, where loans granted for such purposes are comparatively small and the vehicle is used as a collateral for the loan.

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

Of the ratios mentioned in paragraph 99, loan to income and debt to income are the most useful ones.
The mention of “reasonability” in connection to the verification of the customer’s repayment ability in paragraph 103 is very recommendable, especially regarding future events. The borrower’s prospects cannot be predicted with certainty. However, the requirement not to rely on expected increase in the borrower’s income (paragraph 108) might be too stern for student borrowers about to graduate.
The heavy use of the term “at least” seems to conflict with the demands for proportionality at certain points. For example, the requirements set out in paragraph 126 are necessary for larger customers and exposures, but too burdensome for SMEs and limited exposures. The same is true for paragraph 132. We recommend that the text is modified to allow greater flexibility.
Creditworthiness assessment procedures for professional borrowers should reflect the great differences in size, field of business and resources between these customers. For instance, the assessment of ESG risks as set out in Paragraph 130 should not be obligatory for smallest professional customers. The principle of proportionality is especially important as far as sensitivity analysis is concerned, as stated above in connection with question 7. If applied categorically, the requirements in Paragraphs 144-146 would compel institutions to turn down an overwhelming majority of otherwise sound applications.
For real estate development, the nature of such projects makes it practically impossible for the bank to collect much background information on all parties taking part in the project, as e.g. sub-contractual details referred to in Paragraph 166 might not be entirely agreed on when the decision to finance the project is preliminarily made. Moreover, institutions should be able to entrust on-site visits chiefly to experts in the field of building (Paragraph 169).

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

The scope is very wide, possibly leading to problems mentioned in our answers to questions 1 and 2 of the consultation. These worries can nonetheless be in part alleviated by emphasizing the principle of proportionality in selected paragraphs, as suggested in our answers to questions 6-8.

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

While the requirements themselves are mostly reasonable, they might be unattainable within the suggested transition period.

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

In general, we value the EBA’s recognition of statistical models as an important toll of collateral valuation, as they often produce a better, more predictable and cost-effective outcome than valuation by staff or by an external expert.
We hope, however, that this approach would extend to the valuation of immovable property as well, as valuers nonetheless employ these models even currently, especially in desktop evaluation. The currently proposed requirements for on site evaluation of immovable property are too rigid, as in many cases there is good data available on the collateral even without a visit.
Paragraph 198: Neither law nor market practice demand an indemnity insurance from external valuers in all countries. While it can be good for a valuer to have one, this could substantially increase the cost of valuation.
If there is a recognized external framework or body authorizing the expertise of external valuers for certain types of collateral, the institution should not have an obligation to establish a separate panel (Paragraph 203).
The requirements for monitoring and revaluation set out in paragraphs 207-213 would necessitate comprehensive changes to evaluation processes, which only recently have been updated to comply with the recent EBA NPL Guidelines. A new round of updates is very difficult to complete within the suggested timeframe. Additionally, the limitations for the use of desktop revaluation proposed in paragraph 213 would lead to increased cost without much added value. The same applies to the rotation suggested in paragraph 214.

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

The framework is excessive and will in many cases lead to additional reporting without added value. It also could curtail disproportionately institutions’ freedom to determine their risk appetite.

Name of organisation

Finance Finland