Response to consultation Paper on draft Guidelines on loan origination and monitoring.
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(i) We deem extremely relevant to avoid the request of a limitation in the credit decision making in terms of time and number. In fact, if interpreted in the tighter way, it can represent a relevant obstacle for operations. In particular, we deem that the number of delegated credit decision is not correlated to an increase in terms of risks undertaken by the institutions.
(ii) The Paragraph 63, that would allow individual approval authorities only for small and non-complex transactions, would significantly increase the complexity of the lending process and highly decrease the level of efficiency of institutions.
Due to the peculiar characteristics of consumer credit activity (institutions granting many loans of small amount, whose maximum threshold is defined by law), it should be clarified that any individual involved in consumer credit decision-making such as members of staff and members of management body is allowed to take credit decision within the range of amounts defined by law.
(iii) We deem that should be better clarified what does EBA intends with a “well-defined framework to control the process, establish minimum applicability and professional suitability for such delegated authority. Individual delegated authority holders should be adequately trained and hold relevant expertise and seniority in relation to the specific authority level delegated to them.”
(iv) We deem that excluding the commercial network as approval authority would significantly increase the complexity of the lending process. For this reason we warmly suggest that commercial network should be included as approval authority, bordering such activity with specific and clear limits set by institutions’ risk management.
(v) As to the remuneration schemes - as in the paragraph 63 – it is extremely important to highlight that they are associated to a large number of parameters - not only the volume, but also the level of lending quality. Variable remuneration of the staff involved in credit granting that is linked to performance objectives/targets should include credit quality metrics and be in line with credit risk appetite: it would be important to exemplify some measures of credit quality metrics. The link of variable remuneration of the staff involved in credit granting to the long-term quality of credit exposures appears more as a theoretical concept rather than a practical one, since the credit cycle in some products is long and dependent on the economic.
(19) Regarding the section 4.3.1 on the Anti-money laundering and counter-terrorist financing policies and procedures, we deem useful adding the following to the end of paragraph 41: “Conversely, also information collected for anti-money laundering purposes may be used for creditworthiness assessment. For example, institutions may take into consideration also credit risks referred to beneficial owners”. It might be worth emphasizing the principle of the usability of the information acquired for AML-CTF purposes also for granting and monitoring credit procedures and vice versa.
This approach, implying an active role performed by the risk control function during the lending phase, might be hardly applicable for reasons:
(i) the prior involvement of the risk control function appears not fully coherent with the separation of responsibilities between the ex-ante first line of defense (lending functions) vs the ex-post second line of controls (risk management) and, ultimately, with the regulatory principle of segregation of duty;
(ii) the need to have second opinion to the creditworthiness assessment might trigger process inefficiencies related to the duplication of activities and skills in charge of different functions, entailing inter alia also additional staff costs.
This dismisses the possibility of developing alternative creditworthiness procedures that minimize the information required from borrowers or do not take into consideration specific individual pieces of information, even though such procedures could prove to be more accurate than traditional ones.
Therefore, although we understand the rationale behind this section - seeking harmonization of credit granting practices across Europe and the accrued knowledge on the credit granting business – we suggest the EBA should include an additional section, setting less prescriptive requirements to institutions applying alternative procedures, which could improve customer access to credit or improve the accuracy of the creditworthiness assessment, but which do not fit this prescriptive approach.
(21) The guidelines should make clear that pieces of information listed in Annex 2 should be collected and verified if they are relevant for the type of product only, according to the proportionality principle. It means that they should be needed only in case of non-standard requests. Moreover, the guidelines should exclude those situations in which the national legislation provides for specific forms of financing (i.e. in Italy salary and pension backed loans and loans guaranteed by severance indemnity).
(22) Some of the pieces of information required are not available for institutions granting consumer credit and loans to small professionals and, moreover, they don’t add any value to the creditworthiness assessment especially when granting small ticket loans and loans granted on the point of sale or online.
(23) In order to check consumer’s financial commitments it should be mandatory to interrogate and contribute credit bureaus, which are often private companies and, moreover, are not available in all European countries. This should cause a further increase of costs, in many cases disproportionate to any potential benefits in the cost of risk.
(24) Therefore we would suggest EBA to open for the possibility, for consumer credit and small professionals granting activity, to focus institutions’ assessment on statistic tools (such as rating and scorecards) used in order to evaluate in a predictive way the ability of the borrowers to meet their obligations, limiting the obligation to collect and verify information investigating credit bureaus only to the cases when the loan required is over a defined threshold.
We underline that, with reference to the proportionality principle, the Guidelines should better state the possibility for info packages differentiated driven by loans’ sizing and borrowers’ risk profile and accept a certain degree of flexibility.
(25) For the purposes of the creditworthiness assessment of consumers, we welcome the requirements included in paragraph 91, a), which provide that lenders collect information on the loan purpose, “where relevant for the type of product”. As a matter of fact, for some consumer credit classes (e.g. revolving credit card, personal loans, overdraft, etc.) loan purpose is not required, if the granted amount is not significantly above the average.
(27) In general, while sharing EBA requirements for assessment creditworthiness, we reaffirm considerations previously summarized with reference to available information and documents and needed better definition of the proportionality principle.
(28) In general, we consider credit granting criteria set out in Annex 1 too much detailed and standardised and often not adequate to reduce the cost of risk in consumer credit activity. Our suggestion is to simplify, not asking for fixing ex ante limits on all parameters listed in Annex 1.
(29) It should be clarified that the financial metrics (ratios) listed in paragraph 99 for the purposes of the creditworthiness assessment for lending to consumers must not be always used, regardless of the characteristics and amount of financial transaction.
(30) The requirement set in paragraph 101 to carry out sensitivity analyses reflecting potential negative scenarios in the future should be eliminated or re-defined as a “best effort” requirement.
(31) In addition, it is necessary to specify how institutions have to document the use of these metrics for credit decision purposes and, to what extent, they have to be implemented in their rating system.
We propose a better coordination of this paragraph with the requirements laid down in Chapter 6 of MCD and in Article 8 of CCD.
In addition, in accordance with the aim of the CCD, the guidelines should confirm the relevance of responsible borrowing” principle in order to avoid that, if over indebtedness of the borrower occurs, courts shouldn’t assign automatically a responsibility to the lender.
(33) About the definition of “disposable income”, we deem not clear the reference to the “expenses” of the borrower. Most part of these expenses is not known by lenders and the requirement should consider that borrower’s information is under the GRDP. We propose that the guidelines take into account only the expenses which could be known by lenders at the moment of the creditworthiness assessment.
(34) Once again, loan origination procedures set in Section 5 should be applied with reference to the proportionality principle, i.e. excluding consumer credit and loans to small professionals activity because of its large scale, small ticket and short term loans characteristics."
The EBA guidelines should take into account that new potential changes would require high IT budget allocation and a greater amount of time for their implementation, not complied with the EBA proposed deadlines (June 30th, 2020).
(37) Specifically, performing full appraisals for revaluation purposes as set out in paragraph 213 instead of the current desktop (mainly) or drive-by (negligible) ones, would significantly increase the appraisals’ annual cost, as well as delivery time could be delayed. Additionally, mainly in case of NPE, the debtor/asset owner wouldn’t permit an internal visit of the Real Estate asset. Furthermore, statistical model-based revaluation (Paragraph 209 and 216) used by institutions generally update the real estate assets value every 6 months and revaluation appraisals are always performed by external valuers.
(38) Referring to the requirements for the valuation at the point of origination (par. 7.1) and for monitoring and revaluation process (par. 7.2), we observe that the guidelines should include a detailed definition of movable property collateral (e.g. It’s not clear if they include registered assets or pledges on goods too).
(39) Moreover, the last period of paragraph 199 - “Valuation should be carried out (internal valuation) or ordered (external valuation) by the institution, unless it is subject to a request from the borrower under certain circumstances” – seems to allow borrowers to choice the valuers, also if the responsibility for the real estate evaluation belongs to the lenders. This point deserves a clarification to avoid possible interest conflicts.
(40) Regarding the requirement included in the paragraph 214, we propose to clarify that the turnover of valuers is required for the valuation of the same immovable property only.
(41) In paragraph 223 “Institutions should ensure that the fee or the salary for the valuer is not linked to the result of the valuation”: the payment of valuers follow different approaches. This includes models where market price of the property is taken as indicator for the complexity and the needed effort for the valuation. This requirement should be deleted as it excludes customary pricing models that show no risk for the appraiser´s neutrality – also due to sufficient quality assurance.
(43) In any case, the monitoring activity shouldn’t lead to additional reporting requests for entities towards the Supervisory Authorities, by determining the increase of the administrative obligations and costs for institutions.
(44) As a general consideration we would suggest EBA should better specify whether and in which situation the warning on monitoring should be performed at portfolio level or at loan level. In particular, we deem important to clarify the supervisory expectations related to the watch list (paragraph 266).
5. What are the respondents’ views on the requirements for governance for credit granting and monitoring (Section 4)?
(18) As a general comment, we suggest EBA should review the part of the requirements introduced in the section regarding the credit decision making, in order not to limit the well-functioning lending activity. In particular:(i) We deem extremely relevant to avoid the request of a limitation in the credit decision making in terms of time and number. In fact, if interpreted in the tighter way, it can represent a relevant obstacle for operations. In particular, we deem that the number of delegated credit decision is not correlated to an increase in terms of risks undertaken by the institutions.
(ii) The Paragraph 63, that would allow individual approval authorities only for small and non-complex transactions, would significantly increase the complexity of the lending process and highly decrease the level of efficiency of institutions.
Due to the peculiar characteristics of consumer credit activity (institutions granting many loans of small amount, whose maximum threshold is defined by law), it should be clarified that any individual involved in consumer credit decision-making such as members of staff and members of management body is allowed to take credit decision within the range of amounts defined by law.
(iii) We deem that should be better clarified what does EBA intends with a “well-defined framework to control the process, establish minimum applicability and professional suitability for such delegated authority. Individual delegated authority holders should be adequately trained and hold relevant expertise and seniority in relation to the specific authority level delegated to them.”
(iv) We deem that excluding the commercial network as approval authority would significantly increase the complexity of the lending process. For this reason we warmly suggest that commercial network should be included as approval authority, bordering such activity with specific and clear limits set by institutions’ risk management.
(v) As to the remuneration schemes - as in the paragraph 63 – it is extremely important to highlight that they are associated to a large number of parameters - not only the volume, but also the level of lending quality. Variable remuneration of the staff involved in credit granting that is linked to performance objectives/targets should include credit quality metrics and be in line with credit risk appetite: it would be important to exemplify some measures of credit quality metrics. The link of variable remuneration of the staff involved in credit granting to the long-term quality of credit exposures appears more as a theoretical concept rather than a practical one, since the credit cycle in some products is long and dependent on the economic.
(19) Regarding the section 4.3.1 on the Anti-money laundering and counter-terrorist financing policies and procedures, we deem useful adding the following to the end of paragraph 41: “Conversely, also information collected for anti-money laundering purposes may be used for creditworthiness assessment. For example, institutions may take into consideration also credit risks referred to beneficial owners”. It might be worth emphasizing the principle of the usability of the information acquired for AML-CTF purposes also for granting and monitoring credit procedures and vice versa.
6. What are the respondent’s views on how the guidelines capture the role of the risk management function in credit granting process?
(20) The requirement set out in the Guidelines for the Credit risk management and internal controls framework to provide an “independent risk opinion to the credit decision takers” (par 76c) and an “independent/second opinion to the creditworthiness assessment” (par. 76g) seems to require an ex-ante supervision of the risk management function within the credit process.This approach, implying an active role performed by the risk control function during the lending phase, might be hardly applicable for reasons:
(i) the prior involvement of the risk control function appears not fully coherent with the separation of responsibilities between the ex-ante first line of defense (lending functions) vs the ex-post second line of controls (risk management) and, ultimately, with the regulatory principle of segregation of duty;
(ii) the need to have second opinion to the creditworthiness assessment might trigger process inefficiencies related to the duplication of activities and skills in charge of different functions, entailing inter alia also additional staff costs.
7. What are the respondents’ views on the requirements for collection of information and documentation for the purposes of creditworthiness assessment (Section 5.1)?
We believe that most of the requirements in section 5 and criteria established in annex 1 and 2 will have a hinder innovation in credit granting as they are too prescriptive and do not allow companies to develop alternative procedures in order to determine the creditworthiness of a consumer or a small professional. Thus, it seems that the creditworthiness assessment will always require financial institutions to collect specific information and documentation and have details on income, cashflow or financial commitments, for instance.This dismisses the possibility of developing alternative creditworthiness procedures that minimize the information required from borrowers or do not take into consideration specific individual pieces of information, even though such procedures could prove to be more accurate than traditional ones.
Therefore, although we understand the rationale behind this section - seeking harmonization of credit granting practices across Europe and the accrued knowledge on the credit granting business – we suggest the EBA should include an additional section, setting less prescriptive requirements to institutions applying alternative procedures, which could improve customer access to credit or improve the accuracy of the creditworthiness assessment, but which do not fit this prescriptive approach.
(21) The guidelines should make clear that pieces of information listed in Annex 2 should be collected and verified if they are relevant for the type of product only, according to the proportionality principle. It means that they should be needed only in case of non-standard requests. Moreover, the guidelines should exclude those situations in which the national legislation provides for specific forms of financing (i.e. in Italy salary and pension backed loans and loans guaranteed by severance indemnity).
(22) Some of the pieces of information required are not available for institutions granting consumer credit and loans to small professionals and, moreover, they don’t add any value to the creditworthiness assessment especially when granting small ticket loans and loans granted on the point of sale or online.
(23) In order to check consumer’s financial commitments it should be mandatory to interrogate and contribute credit bureaus, which are often private companies and, moreover, are not available in all European countries. This should cause a further increase of costs, in many cases disproportionate to any potential benefits in the cost of risk.
(24) Therefore we would suggest EBA to open for the possibility, for consumer credit and small professionals granting activity, to focus institutions’ assessment on statistic tools (such as rating and scorecards) used in order to evaluate in a predictive way the ability of the borrowers to meet their obligations, limiting the obligation to collect and verify information investigating credit bureaus only to the cases when the loan required is over a defined threshold.
We underline that, with reference to the proportionality principle, the Guidelines should better state the possibility for info packages differentiated driven by loans’ sizing and borrowers’ risk profile and accept a certain degree of flexibility.
(25) For the purposes of the creditworthiness assessment of consumers, we welcome the requirements included in paragraph 91, a), which provide that lenders collect information on the loan purpose, “where relevant for the type of product”. As a matter of fact, for some consumer credit classes (e.g. revolving credit card, personal loans, overdraft, etc.) loan purpose is not required, if the granted amount is not significantly above the average.
8. What are the respondents’ views on the requirements for assessment of borrower’s creditworthiness (Section 5.2)?
(26) We note that the borrower’s creditworthiness assessment process seems excessively complex and disproportionated compared to credit facilities size in consumer credit activity.(27) In general, while sharing EBA requirements for assessment creditworthiness, we reaffirm considerations previously summarized with reference to available information and documents and needed better definition of the proportionality principle.
(28) In general, we consider credit granting criteria set out in Annex 1 too much detailed and standardised and often not adequate to reduce the cost of risk in consumer credit activity. Our suggestion is to simplify, not asking for fixing ex ante limits on all parameters listed in Annex 1.
(29) It should be clarified that the financial metrics (ratios) listed in paragraph 99 for the purposes of the creditworthiness assessment for lending to consumers must not be always used, regardless of the characteristics and amount of financial transaction.
(30) The requirement set in paragraph 101 to carry out sensitivity analyses reflecting potential negative scenarios in the future should be eliminated or re-defined as a “best effort” requirement.
(31) In addition, it is necessary to specify how institutions have to document the use of these metrics for credit decision purposes and, to what extent, they have to be implemented in their rating system.
9. What are the respondents’ views on the scope of the asset classes and products covered in loan origination procedures (Section 5)?
(32) We draw the attention on the requirements included in the paragraph 180, which seem to impose on lenders a responsibility for the possible misrepresentation of information provided by the borrower.We propose a better coordination of this paragraph with the requirements laid down in Chapter 6 of MCD and in Article 8 of CCD.
In addition, in accordance with the aim of the CCD, the guidelines should confirm the relevance of responsible borrowing” principle in order to avoid that, if over indebtedness of the borrower occurs, courts shouldn’t assign automatically a responsibility to the lender.
(33) About the definition of “disposable income”, we deem not clear the reference to the “expenses” of the borrower. Most part of these expenses is not known by lenders and the requirement should consider that borrower’s information is under the GRDP. We propose that the guidelines take into account only the expenses which could be known by lenders at the moment of the creditworthiness assessment.
(34) Once again, loan origination procedures set in Section 5 should be applied with reference to the proportionality principle, i.e. excluding consumer credit and loans to small professionals activity because of its large scale, small ticket and short term loans characteristics."
10. What are the respondents’ views on the requirements for loan pricing (Section 6)?
(35) The implementation of the pricing framework, as referred to in paragraphs 189 and 190, requires a depth revision of the institutions’ industrial accounting methods. That said, the application of these requirements will require an adequate timeframe which is not compatible with the aim of ensuring the guidelines compliance by 30 June 2020.11. What are the respondents’ views on the requirements for valuation of immovable and movable property collateral (Section 7)?
(36) The approach proposed from Paragraph 207 to 213 would completely modify the current perimeter identification applied to collaterals subject to revaluation and the frequency of the update. Many institutions have just modified their evaluation processes on the basis of the recent NPEs guidance.The EBA guidelines should take into account that new potential changes would require high IT budget allocation and a greater amount of time for their implementation, not complied with the EBA proposed deadlines (June 30th, 2020).
(37) Specifically, performing full appraisals for revaluation purposes as set out in paragraph 213 instead of the current desktop (mainly) or drive-by (negligible) ones, would significantly increase the appraisals’ annual cost, as well as delivery time could be delayed. Additionally, mainly in case of NPE, the debtor/asset owner wouldn’t permit an internal visit of the Real Estate asset. Furthermore, statistical model-based revaluation (Paragraph 209 and 216) used by institutions generally update the real estate assets value every 6 months and revaluation appraisals are always performed by external valuers.
(38) Referring to the requirements for the valuation at the point of origination (par. 7.1) and for monitoring and revaluation process (par. 7.2), we observe that the guidelines should include a detailed definition of movable property collateral (e.g. It’s not clear if they include registered assets or pledges on goods too).
(39) Moreover, the last period of paragraph 199 - “Valuation should be carried out (internal valuation) or ordered (external valuation) by the institution, unless it is subject to a request from the borrower under certain circumstances” – seems to allow borrowers to choice the valuers, also if the responsibility for the real estate evaluation belongs to the lenders. This point deserves a clarification to avoid possible interest conflicts.
(40) Regarding the requirement included in the paragraph 214, we propose to clarify that the turnover of valuers is required for the valuation of the same immovable property only.
(41) In paragraph 223 “Institutions should ensure that the fee or the salary for the valuer is not linked to the result of the valuation”: the payment of valuers follow different approaches. This includes models where market price of the property is taken as indicator for the complexity and the needed effort for the valuation. This requirement should be deleted as it excludes customary pricing models that show no risk for the appraiser´s neutrality – also due to sufficient quality assurance.
12. What are the respondents’ views on the proposed requirements on monitoring framework (Section 8)?
(42) The ongoing monitoring introduced by EBA guidelines appears too complex and elaborate. This framework represents a burden that is not justified in relation to the average size of the consumer credit (and mortgages) granting institutions' portfolio (see the considerations provide in question 1).(43) In any case, the monitoring activity shouldn’t lead to additional reporting requests for entities towards the Supervisory Authorities, by determining the increase of the administrative obligations and costs for institutions.
(44) As a general consideration we would suggest EBA should better specify whether and in which situation the warning on monitoring should be performed at portfolio level or at loan level. In particular, we deem important to clarify the supervisory expectations related to the watch list (paragraph 266).