Response to consultation Paper on draft Guidelines on loan origination and monitoring.
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As a consequence, we suggest inserting at the end of paragraph 63.b:
“The requirements of this paragraph do not apply to loans granted to institutions’ employees.”
Similarly, considering the information listed in the Annex 2, we suggest a diversification based on the size / structural complexity of the borrower. We also outline that the following information and the corresponding documentation could be not available in some cases, e.g.:
• For Consumers: the purpose of the loan is known but not the exact usage: overdraft, credit card, child maintenance, education fees, alimonies
• For Professionals: for some loans, the purpose is known but not the exact usage, i.e. an overdraft can be used for working capital purpose as well as for stock management, printer purchases, etc.
Finally, we suggest the following amendments:
Amendment to paragraph 92
“92. For the purposes of the collection and verification of information, institutions and creditors should at least consider collecting the information and data as set out in Annex 2.”
Application of the principle of proportionality, the detailed information listed in Annex 2 must be used for illustrative purposes only
Amendments to paragraph 94
“94. For the purposes of the collection and verification of information, institutions should at least consider collecting the information and data as set out in Annex 2.”
Application of the principle of proportionality, the detailed information listed in Annex 2 must be used for illustrative purposes only
Amendments to paragraph 88:
• “Institutions and creditors should assess the plausibility of any information and data provided by the borrower and should make any necessary checks take reasonable steps to collect and to verify the authenticity of relevant information.”
Application of the principle of proportionality
• Insert at the end of paragraph 88:
“This paragraph shall not apply where it is demonstrated that the borrower knowingly withheld or falsified the information.”
To align the Guidelines with the provisions of the Mortgage Credit Directive (article 18.4), which exempts the institution’s responsibility in case the borrower does not provide the right information
The sensitivity analyses requested in several paragraphs might lead in any case to a decision not to do the transaction as the combination of all the listed elements would undoubtedly lead to drastic worsening of the financial position of the borrower. We suggest reviewing the related paragraphs (121/ 143/ 144/ 145/ 146/…).
As regards the paragraphs related to the analysis of the borrowers’ financial position, we suggest applying the approach stated in paragraph 132 “considering which metrics would be applicable” to all the section (131-137), as some of the listed financial metrics may be hard to obtain/ calculate (ex: business plans are not always provided which makes difficult the calculation of the cash flows available for debt service). Forward looking projections are only done where it is deemed relevant considering the amount, the nature and the purpose of the loan.
We also suggest highlighting, in addition to the requirements / criteria already specified in the Guidelines to assess the creditworthiness of the borrower, the relevance of the counterparty's credit rating in the actual evaluation process. Otherwise, it could be understood that the creditworthiness assessment could leave aside the credit rating and not challenge it.
Comments on paragraph 114
“When assessing the borrower’s ability to meet obligations under the loan agreement, the institutions and creditors should carry out sensitivity analyses reflecting potential negative market and idiosyncratic scenarios in the future,….”
Banks are used to deal with information at the time of the origination. By setting a sensitivity analyses for granting a loan, we change the full credit assessment methodology. This implies reviewing e.g. the methodology, training risk analysts, IT processing and storage, etc. The cost is quite heavy and not reachable without a phase-in transition period. Until now, sensitivity analyses take part of the Stress test/Back test analysis which may lead to increase provisions.
Comments on paragraphs 116 & 121
We suggest deleting both paragraphs 116 & 121, which make little sense in the context of consumer loans, in particular with regards to the sensitivity analyses required by paragraph 121.
Comments on paragraph 134
The proportionality principle must here be applied, as the working capital needs are difficult to determine when no balance sheet is available, like for self-employed people. Furthermore, the cash conversion cycle analysis goes beyond the net revenue analysis and the financial capacity to repay the loan, which are the current practices for assessing the risk of loans to SMEs.
Consequently, we propose the following amendments:
“134. Institutions should perform, where relevant, an assessment of the cash conversion cycle of the borrower to measure the time duration for the business to convert the investment in inventory and other resource inputs into cash through the sale of its specific goods and services. Where relevant, Institutions should be able to establish the cash conversion cycle of a borrower to establish working capital needs and to establish recurring costs and assess the on-going capacity to repay credit facilities over time.
We propose to further strengthen the proportionality principle consistently with the level of exposure of the institution in each asset class or product.
Comments on paragraph 199
With regard to valuation requirement we propose to consider the well-established German model having a minimum amount (“small loan limit”) before requiring a formal full valuation (§ 24 of the “BelWertV”, the German Regulation on the Determination of the Mortgage Lending Value) : dispensation for domestic residential mortgage loans below 400 000 €, simplified valuation by a person sufficiently trained and qualified, and physical inspection of the property can be discarded under certain strict requirements.
Comments on paragraph 213
Revaluation by using desktop or drive-by should be allowed as long as there are no indications that the value of the property may have declined materially relative to general market prices.
“231. The internal credit risk monitoring framework established by banks should at least for example cover the following:”
Considering the diversity of banks’ practices due to their size, complexity and to the specificities of national markets, we propose the following amendment to paragraph 231:
“231. The internal credit risk monitoring framework established by banks should at least for example cover the following:”
5. What are the respondents’ views on the requirements for governance for credit granting and monitoring (Section 4)?
Paragraph 63.b enumerates the situations where members of staff and members of the management body should not take part in credit decisions. We observe that the requirements of this paragraph are not adequate for loans that institutions grant to their employees, where individuals involved in the credit decision-making (i.e. the institution’s employees) may are by nature not independent from the lender (the institution). Such loans are covered by specific internal rules, which are tailored to the nature of the institution’s policy on fringe benefits.As a consequence, we suggest inserting at the end of paragraph 63.b:
“The requirements of this paragraph do not apply to loans granted to institutions’ employees.”
6. What are the respondent’s views on how the guidelines capture the role of the risk management function in credit granting process?
The link between the variable remuneration of the staff involved in credit granting and the long-term quality of credit exposures is in most cases little practicable, since the credit cycle in some products can be very long and dependent on the economic cycle. However, this could be addressed by limiting this to a set number of years (e.g. 3 years could be viable from a practitioner point of view).7. What are the respondents’ views on the requirements for collection of information and documentation for the purposes of creditworthiness assessment (Section 5.1)?
Paragraph 93 requires the collection and verification of information that might not be appropriate / available for the smaller firms (e.g. financial projection, product type specific legal documentation). Therefore, we propose to limit the requirement according to the size and to the complexity of the client.Similarly, considering the information listed in the Annex 2, we suggest a diversification based on the size / structural complexity of the borrower. We also outline that the following information and the corresponding documentation could be not available in some cases, e.g.:
• For Consumers: the purpose of the loan is known but not the exact usage: overdraft, credit card, child maintenance, education fees, alimonies
• For Professionals: for some loans, the purpose is known but not the exact usage, i.e. an overdraft can be used for working capital purpose as well as for stock management, printer purchases, etc.
Finally, we suggest the following amendments:
Amendment to paragraph 92
“92. For the purposes of the collection and verification of information, institutions and creditors should at least consider collecting the information and data as set out in Annex 2.”
Application of the principle of proportionality, the detailed information listed in Annex 2 must be used for illustrative purposes only
Amendments to paragraph 94
“94. For the purposes of the collection and verification of information, institutions should at least consider collecting the information and data as set out in Annex 2.”
Application of the principle of proportionality, the detailed information listed in Annex 2 must be used for illustrative purposes only
Amendments to paragraph 88:
• “Institutions and creditors should assess the plausibility of any information and data provided by the borrower and should make any necessary checks take reasonable steps to collect and to verify the authenticity of relevant information.”
Application of the principle of proportionality
• Insert at the end of paragraph 88:
“This paragraph shall not apply where it is demonstrated that the borrower knowingly withheld or falsified the information.”
To align the Guidelines with the provisions of the Mortgage Credit Directive (article 18.4), which exempts the institution’s responsibility in case the borrower does not provide the right information
8. What are the respondents’ views on the requirements for assessment of borrower’s creditworthiness (Section 5.2)?
In paragraph 112, item c. is problematic since the certification of the costs associated with the development is not easy to obtain and it could be very expensive for the borrower.The sensitivity analyses requested in several paragraphs might lead in any case to a decision not to do the transaction as the combination of all the listed elements would undoubtedly lead to drastic worsening of the financial position of the borrower. We suggest reviewing the related paragraphs (121/ 143/ 144/ 145/ 146/…).
As regards the paragraphs related to the analysis of the borrowers’ financial position, we suggest applying the approach stated in paragraph 132 “considering which metrics would be applicable” to all the section (131-137), as some of the listed financial metrics may be hard to obtain/ calculate (ex: business plans are not always provided which makes difficult the calculation of the cash flows available for debt service). Forward looking projections are only done where it is deemed relevant considering the amount, the nature and the purpose of the loan.
We also suggest highlighting, in addition to the requirements / criteria already specified in the Guidelines to assess the creditworthiness of the borrower, the relevance of the counterparty's credit rating in the actual evaluation process. Otherwise, it could be understood that the creditworthiness assessment could leave aside the credit rating and not challenge it.
Comments on paragraph 114
“When assessing the borrower’s ability to meet obligations under the loan agreement, the institutions and creditors should carry out sensitivity analyses reflecting potential negative market and idiosyncratic scenarios in the future,….”
Banks are used to deal with information at the time of the origination. By setting a sensitivity analyses for granting a loan, we change the full credit assessment methodology. This implies reviewing e.g. the methodology, training risk analysts, IT processing and storage, etc. The cost is quite heavy and not reachable without a phase-in transition period. Until now, sensitivity analyses take part of the Stress test/Back test analysis which may lead to increase provisions.
Comments on paragraphs 116 & 121
We suggest deleting both paragraphs 116 & 121, which make little sense in the context of consumer loans, in particular with regards to the sensitivity analyses required by paragraph 121.
Comments on paragraph 134
The proportionality principle must here be applied, as the working capital needs are difficult to determine when no balance sheet is available, like for self-employed people. Furthermore, the cash conversion cycle analysis goes beyond the net revenue analysis and the financial capacity to repay the loan, which are the current practices for assessing the risk of loans to SMEs.
Consequently, we propose the following amendments:
“134. Institutions should perform, where relevant, an assessment of the cash conversion cycle of the borrower to measure the time duration for the business to convert the investment in inventory and other resource inputs into cash through the sale of its specific goods and services. Where relevant, Institutions should be able to establish the cash conversion cycle of a borrower to establish working capital needs and to establish recurring costs and assess the on-going capacity to repay credit facilities over time.
9. What are the respondents’ views on the scope of the asset classes and products covered in loan origination procedures (Section 5)?
The scope of the asset classes and products covered in loan origination procedures depicted in the Guidelines is very wide. Compared with existing policies, processes, tools and the IT infrastructure, the availability of such a granular data at origination for audit trail and monitoring requires further significant implementation actions with related investments and costs.We propose to further strengthen the proportionality principle consistently with the level of exposure of the institution in each asset class or product.
10. What are the respondents’ views on the requirements for loan pricing (Section 6)?
NA11. What are the respondents’ views on the requirements for valuation of immovable and movable property collateral (Section 7)?
We urge the EBA to align the section with the different regulatory texts on Non-Performing Loans issued recently. Indeed, Institutions have implemented the recommendations issued in that context and applying the new/ additional requirements proposed in the Guidelines will be very costly to implement.Comments on paragraph 199
With regard to valuation requirement we propose to consider the well-established German model having a minimum amount (“small loan limit”) before requiring a formal full valuation (§ 24 of the “BelWertV”, the German Regulation on the Determination of the Mortgage Lending Value) : dispensation for domestic residential mortgage loans below 400 000 €, simplified valuation by a person sufficiently trained and qualified, and physical inspection of the property can be discarded under certain strict requirements.
Comments on paragraph 213
Revaluation by using desktop or drive-by should be allowed as long as there are no indications that the value of the property may have declined materially relative to general market prices.
12. What are the respondents’ views on the proposed requirements on monitoring framework (Section 8)?
Considering the diversity of banks’ practices due to their size, complexity and to the specificities of national markets, we propose the following amendment to paragraph 231:“231. The internal credit risk monitoring framework established by banks should at least for example cover the following:”
Considering the diversity of banks’ practices due to their size, complexity and to the specificities of national markets, we propose the following amendment to paragraph 231:
“231. The internal credit risk monitoring framework established by banks should at least for example cover the following:”