Question ID:
2016_2726
Legal Act:
Regulation (EU) No 575/2013 (CRR)
Topic:
Credit risk
Article:
125, 208, 229
Paragraph:
(1)(2), 1
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
Not applicable
Article/Paragraph:
na
Disclose name of institution / entity:
No
Type of submitter:
Competent authority
Subject Matter:
Monitoring and evaluation of mortgages in cases of portfolio-wholesale transactions
Question:

Is it possible to assign the preferential risk weight of 35% according to Article 125 (1) (a) of Regulation (EU) No 575/2013 (CRR) to exposures that have been purchased at a wholesale price based on a) samples as to whether the conditions laid down in Art 208 and 229 CRR are fulfilled and b) a warranty guaranteeing full compensation in case any of these exposures default?

Background on the question:

A credit institution acquired an entire retail portfolio consisting of a large number of mortgage loans. Due to the large number of loans it is assumed to be impossible to review each and every single loan before the purchase in order to be able to assess whether the conditions in the abovementioned provisions have been met. Thus, the credit institution reviewed a sample of those loans, subsequently leading it to the conclusion that the relevant preconditions for assigning a 35% RW as set forth in Article 208 and 229 CRR are met. Furthermore, the seller of the portfolio contractually guaranteed that all of those loans were indeed fulfilling the criteria for assigning a preferential risk weight and, in the event that individual loans were to default, pledged to provide full compensation.

In effect, the institution considers assigning a preferential risk weight of 35% to be applicable based on the combination of the sample review and the guarantee. However, it is our legal opinion that the criteria set forth in Articles 208 and 229 CRR – which are to be adhered to when assigning a RW of 35% according to Article 125 (1) (c) CRR – basically require an individual assessment of each and every loan (or, respectively, its terms and conditions). This is, according to our understanding, also implied by Article 79 CRD IV, which requires institutions “to assess the credit risk of exposures to individual obligors.”

Furthermore we do not see legal grounds, upon which it seems possible to “combine” different credit risk mitigation techniques (namely those of a mortgage and a guarantee) in order to assign a preferential risk weight. It is thus presumed that the circumstances described above are in breach of the provisions in question. This notwithstanding, it seems difficult, both in practical and economic terms, and almost impossible to fulfil the requirements of those provisions when acquiring entire credit portfolios (at least in cases where such portfolios are not part of a securitisation transaction, but are instead individually reflected in the financial statements).

The purchasing of portfolios is not an uncommon transaction, with the risks of such transactions are usually partially reflected in the price of the portfolio (leading not only to risks, but also economic opportunities for the purchaser) and the acquisition of such portfolios is an important part of restructuring and resolution processes. We are therefore uncertain as to whether the provisions above are factually appropriate for such business activities as well as if there is room to apply them in a proportionate manner. A proportionate approach might be feasible within the EU in particular, in the event that the seller is a credit institution that has performed the abovementioned valuation and monitoring obligations beforehand and the competent supervisory authority of the jurisdiction of the selling credit institution did not contest the RW assigned by the selling institution.

Date of submission:
04/05/2016
Published as Final Q&A:
17/03/2017
Final Answer:
In order to assign the preferential treatment described in Article 125 (1)(a) CRR to exposures fully and completely secured by mortgages on residential property, the conditions described in Article 125 (2)(c) shall be met.
 
With regard to the requirements in Articles 208 and 229 (1) CRR, in case of portfolio-wholesale transactions, the purchasing institution needs to ensure for each purchased loan that the treatment as fully and completely secured by immovable properties is applied only where such requirements are met.
 
To ensure that these requirements are met with regard to a portfolio consisting of a large number of purchased mortgage loans, in case the seller is an institution that is subject to the requirements of the CRR (or equivalent), an immediate individual assessment of each purchased loan would not be necessary, provided that the seller itself had previously complied with the requirements for treating the sold exposures as fully and completely secured by the immovable properties.
 
In this particular case, the purchaser would nevertheless have to undertake both an in-depth analysis of the processes the seller had in place and a review of a representative sample of the exposures - even if supplemented by a confirmation from the seller’s supervisor about the loans complying with the requirements. To the extent that these measures would provide a satisfactory level of assurance of compliance with the requirements in Articles 208 and 229 (1) CRR the purchasing institution could continue to treat the exposures as secured by immovable properties, even before it has fully assessed itself and confirmed compliance with the relevant requirements on an ongoing basis, and for each individual loan. Compliance with these requirements should be confirmed by the purchasing institution without undue delay, following the monitoring frequency and schedule foreseen in its procedures, or a more ambitious schedule if this were to achieve earlier compliance with the relevant requirements.
 
For this purpose, the purchasing institution shall in turn set up a documented process in order to assess whether or not the requirements are met for each exposure.
 
As part of this process, the purchasing institution could also analyse any form of guarantee provided by the seller. The existence of such guarantee has however no direct incidence on exposure classification as exposure secured by mortgage on immovable property as referred to in Article 124 CRR.
Status:
Final Q&A
Answer prepared by:
Answer prepared by the EBA.
Note to Q&A:

Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.

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