One requirement for originating conventional mortgage loans

29 May 2020

• The EBA’s Guidelines are vital to strengthening lending standards and asset quality in the future.
• The Guidelines bring together prudential standards and consumer protection obligations along with AML and ESG considerations.
• The EBA’s expectations for improved creditworthiness assessments apply to all banks offering loans to consumers, SMEs and corporates and to other creditors offering loans to consumers.
• The EBA strikes a balance between the needs for banks to focus on core operations today whilst strengthening future lending, by introducing transitional arrangements for renegotiated loans to June 2022.

The European Banking Authority (EBA) published today its Guidelines on loan origination and monitoring that expect institutions to develop robust and prudent standards to ensure newly originated loans are assessed properly. The Guidelines also aim to ensure that the institutions’ practices are aligned with consumer protection rules and respect fair treatment of consumers.

“For the first time in the EBA’s regulatory practice, these Guidelines bring together the prudential and consumer protection perspectives, which lies at the heart of sound and sustainable lending to consumers, SMEs and corporates. In the context of the COVID-19 pandemic institutions need to maintain good credit risk management and monitoring standards that is essential for supporting lending to the economy. To address the current circumstances the new Guidelines contain additional transition periods for recently renegotiated loans to help institutions better focusing on their immediate operational priorities”, said José Manuel Campa, the EBA Chairperson.

The Guidelines specify internal governance arrangements for the granting and monitoring of credit facilities throughout their lifecycle. In particular, the Guidelines clarify the credit decision-making processincluding the use of automated models, building on the requirements of the EBA Guidelines on internal governance.

The Guidelines set requirements for assessing the borrowers’ creditworthiness together with the handling of information and data for the purposes of such assessments. In these requirements, the Guidelines bring together the EBA’s prudential and consumer protection objectives.

The EBA has developed these Guidelines building on the existing national experiences, addressing shortcomings in institutions’ credit granting policies and practices highlighted by past experiences. At the same time, these Guidelines reflect recent supervisory priorities and policy developments related to credit granting, including environmental, social and governance factors, anti-money laundering and countering terrorist financing, and technology-based innovation.

Application date and implementation period

The Guidelines will apply from 30 June 2021. However, institutions will benefit from a series of transitional arrangements: (1) the application of the guidelines to the already existing loans and advances that require renegotiation or contractual changes with the borrowers will apply from 30 June 2022, and (2) institutions will be allowed to address possible data gaps and adjust their monitoring frameworks and infrastructure until 30 June 2024. Notwithstanding the extended transition period, the EBA notes that all loan origination requires effective risk oversight and management.

The EBA also calls on competent authorities to exercise their judgement and be pragmatic and proportionate in monitoring the implementation of the Guidelines, taking into account the operational challenges and priorities institutions may have due to the COVID-19 pandemic, whilst facilitating the economic recovery efforts.

Legal basis and background

The EBA developed the Guidelines on loan origination and monitoring in accordance with the Article 16 of Regulation (EU) No 1093/2010 in response to the European Council Action Plan on tackling the high level of non-performing loans. The European Council, in its July 2017 Action Plan, invited the EBA to “issue detailed guidelines on banks’ loan origination, monitoring and internal governance which could in particular address issues such as transparency and borrower affordability assessment”.

These Guidelines specify the internal governance arrangements, processes and mechanisms, as laid down in Article 74(1) of Directive 2013/36/EU, requirements on credit and counterparty risk, as laid down in Article 79 of that directive, and requirements in relation to the creditworthiness assessment of the consumer, as laid down in Chapter 6 of Directive 2014/17/EU and Article 8 of Directive 2008/48/EC.

The Guidelines will replace the existing EBA Guidelines on creditworthiness assessments under the MCD (EBA/GL/2015/11), which the EBA issued in June 2015, and which will be repealed with the effect from the date of application on the Guidelines on loan origination and monitoring.

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