EBA publishes good practices for responsible mortgage lending and treatment of borrowers in payment difficulties

The European Banking Authority (EBA) publishes today two Opinions on good practices for (i) responsible mortgage lending and (ii) for the treatment of borrowers in mortgage payment difficulties. Both Opinions are addressed to competent authorities and aim at promoting common practices, with the ultimate view of enhancing consumer protection and contributing to the stability, integrity and effectiveness of the financial system.

Key features and scope of the two Opinions

While a mortgage is likely to be the greatest individual financial commitment of a borrower in his or her lifetime, it can also give rise to risks that can affect borrowers, creditors as well as more generally, the stability of the financial system. Against this backdrop, the EBA adopted the two Opinions on good practices to ensure that potential risks associated with mortgage lending and with borrowers in mortgage payment difficulties are managed adequately by credit institutions, and to contribute to the development of consistent practices in this area.

In particular, the Opinion on responsible mortgage lending sets out good practices on the following aspects:

• Verification of information provided by the mortgage applicant;
• Reasonable debt service coverage;
• Appropriate loan-to-value ratios; and
• Lending and supervisory processes.

The Opinion on the treatment of borrowers in mortgage payment difficulties, in turn, sets out good practices on the following aspects:

• General principles;
• Policies and procedures;
• Provision of information and assistance to the borrower; and
• Resolution process.

The two Opinions complement, and provide suggestions on how to give effect to, the related provisions expected to be set out in the pending EU Directive on Credit Agreements Relating to Residential Property (also known as Mortgage Credit Directive).

The evidence underlying the two Opinions is based on a survey conducted by the EBA on national supervisory as well as more general market practices across the EU related to both, responsible lending and the treatment of borrowers in payment difficulty. Also, the good practices set out in the Opinion on responsible lending are based on the Principles for Sound Residential Mortgage Underwriting Practices identified by the Financial Stability Board (FSB).

Both Opinions relate to mortgage credit. However, to minimise the risk of regulatory arbitrage, the authorities will want to consider the widest application of these good practices to other forms of non-mortgage credit, consistent with their respective scope of supervisory responsibility.

Notes to editors

The EBA is an independent EU Authority established on 1 January 2011. It works closely with the other European Supervisory Authorities responsible for securities and markets (ESMA), and insurance and occupational pensions (EIOPA), and the European Systemic Risk Board (ESRB).

The EBA's mission is to ensure an effective and consistent level of prudential regulation and supervision across the European banking sector.  One of the EBA's key tasks is to contribute to the creation of the European Single Rulebook in banking, i.e. a single set of harmonised prudential rules for financial institutions throughout the EU which help create a level playing field and provide high protection to depositors, investors and consumers.