Draft Guideline 1.1:
The assessment of the candidate borrower’s creditworthiness is carried out at the moment of the granting of the credit based on his/her circumstances at that time and not on the basis of the evolution of the borrower’s financial circumstances throughout the lifetime of the loan, which are very difficult for the creditor to predict. Unless the borrower provides information about variability of his/her income, a creditor cannot feasibly verify this over the lifetime of the loan.
If the requirement to collect income history is retained, the collection of data from borrowers should be limited to a certain period of time in order to secure proof of employment and the level of the income. The collection of life-time income data would be onerous for both parties.
Draft Guidelines 1.2 & 1.3:
As a general remark, the EBIC believes that provided the lender complies with the requirements of draft guideline 1.1, there is no reason why there should be additional, specific requirements for self-employed individuals or those with a seasonal income.
As specific comments on the contents of 1.2 and 1.3, the EBIC is concerned about the introduction of notions aimed at guaranteeing the quality of the information provided by the consumer, specifically the independence of sources (1.2) and third party verification (1.3). For example, would the receipt of a pay slip or a tax declaration from the consumer fulfil the third party verification requirement? Or is the intention that a creditor consults a candidate borrower’s employer or the tax authority? These notions would be difficult to apply and justify operationally, would give rise to undesirable discussions with the third party and the consumers, particularly where the consumer already has a bank account/relationship with the lender and could actually prove to be an obstacle to the granting of mortgages to certain categories of consumers. The EBIC therefore advocates the removal of this reference.
Draft Guideline 2.1: As indicated above, it must be clear that the assessment is carried out at the time that the credit agreement is concluded. The more precise term “conclusion of the credit agreement” should replace “mortgage approval”.
Draft Guideline 3.1:
This requirement does not reflect the information requirements in the MCD and would appear to impose additional disclosure requirements outside of the ESIS, the added value of which is not clear. It should also be noted that the assessment of whether documentation is well presented or not is very subjective. In fact, it is unclear how the way in which loan documentation is designed plays a role in the creditworthiness assessment and to what extent it can be determined that the creditworthiness assessment has not been carried out appropriately without a specific design.
Finally, the EBIC is concerned that this draft guideline appears to shift the responsibility for misrepresentation of information by the candidate borrower from the borrower to the creditor.
Draft Guideline 4.1:
The drafting of this guideline implies that in the event of payment difficulties or over-indebtedness of the borrower it would be concluded that the creditworthiness assessment had not been appropriately carried out by the creditor, that this was therefore the cause of the hardship and that the creditor is liable. In the MCD the lender should only assess the “probability” for the customer to fulfil his/her obligations. To ensure consistency with the MCD, the following wording should be deleted “without causing the consumer undue hardship and over-indebtedness”.
As a final comment, it should be borne in mind that creditors must always consider the balance between information needs and general principles of personal data protection.
Draft Guideline 4.2: The EBIC understands this draft guideline as requiring the creditor to keep its credit policy up-to-date, rather than as a requirement on the creditor to continuously review the creditworthiness of the borrower. Confirmation of this understanding would be welcomed.
Draft Guideline 4.3:
The EBIC is concerned that this draft guideline could actually limit the factors that the creditor is allowed to take into account (in light of data protection legislation). In addition, it is very difficult for creditors to assess whether “undue hardship and over indebtedness” will occur, because in the vast majority of cases the causes are beyond the creditor’s control, resulting from macro-economic factors and “accidents of life”.
Additionally, it is not possible to take into account all directly relevant taxes and insurances, since not all of this information is necessarily known to the creditor at the moment of the creditworthiness assessment, and even less so in the future (see draft guideline 4.4) as tax rules change constantly.
With these considerations in mind, the EBIC advocates the removal of the examples provided by the EBA, from “servicing obligations” until and including “directly relevant taxes and insurance”.
Draft Guideline 4.4: The EBIC believes there is no need to consider a “normal” retirement age and that the prospective borrower’s intention should be sufficient. The guideline should be limited to, “If the loan term extends past retirement age…”.
Draft Guideline 5.1:
Unlike for a candidate borrower’s existing financial obligations, creditors do not have access to information which would enable them to substantiate the “living expenses of the consumer”, making it difficult to fulfil this requirement.
As an additional consideration, creditors should not be required to predict the financial situation of their borrowers. Default is, in the majority of cases, the result of ‘accidents of life’ (illness, divorce, job loss), generating an abrupt change in the financial situation of the borrower.
If this draft Guideline were to be retained, it should allow creditors to make use of a standard amount to determine reasonable living expenses.
Draft Guideline 6.1:
This draft guideline lists the prudent allowances for negative scenarios in the future which are to be taken account of in the creditworthiness assessment. Even though the list includes only examples, it is impossible for the banks to take into account all the factors mentioned in the list. It should be left to the National Competent Authorities to define these criteria. As a general remark and as indicated above, the Industry is very cautious about requirements on creditors to make allowances for future scenarios because of the obvious limitations to doing this.
With these considerations in mind, the EBIC advocates the removal of the examples provided by the EBA from “a reduced income in retirement” until and including “deferred payments of principal or interest”.
Draft Guideline 7.1:
As a general remark, the risk profile of a loan typically depends on the individual circumstances of a borrower; a loan that might pose a higher risk for one borrower because of their circumstances may not for another because of a different set of circumstances. What is important is complete and comprehensive information and adequate explanations to the candidate borrower of the features of different loans. It should be recalled that specific loan types with particular features, such as foreign currency loans and variable interest rate loans, are extensively addressed in the MCD and it is our view that no further action is required in this respect.
Specifically on 7.1, the EBIC would like to point out that this guideline effectively relates to prudential requirements, reflecting section 7.3 of the FSB Principles for Sound Mortgage Underwriting. Previous guidelines already allow for creditors to establish policies to differentiate between different customer segments, and therefore, this draft guideline should be deleted.
Following on from points made above, the EBIC believes that it is important to include in the draft guidelines requirements relating to ‘responsible borrowing’, which would oblige borrowers to provide the lender with complete and correct information on their financial situation and personal circumstances in the context of the credit application process.