Should interest only mortgage exposures where the customer has not repaid the capital at term but continues to pay interest and is not considered to be in financial difficulty, ever be considered as forborne?
One of the products offered to customers is interest only mortgages. These are mortgages where the customer pays interest during the life of the mortgage and makes full capital repayment at the end (bullet mortgages). In some instances, the mortgage contract requires the customer to continue to pay interest if full repayment is not made at the term date. Often the capital repayment vehicle is long term investment which may not mature at exactly the same time as the mortgage and / or an asset which requires time to convert to cash. The delay in repayment does not necessarily indicate that the customer is in financial difficulty.
According to paragraphs 240, 241, 242, 244 of Annex V to Regulation n°680/2014 (ITS on Supervisory Reporting) an exposure is considered forborne when concessions are granted to a debtor that is experiencing difficulties in meeting its financial commitments (“financial difficulties) either by mean of modified terms of the contract in favor of the debtor or more favorable terms than other debtors with similar risk profile.
Paragraph 243 further develops that the exercise of clauses enabling the debtor to change the terms of the contract (‘embedded forbearance clauses’) shall be treated as a concession where the institution approves executing those clauses and concludes that the debtor is experiencing financial difficulties.
In addition paragraph 252 states that exposures shall not be treated as forborne where the debtor is not in financial difficulties.
Consequently, conditions to classify an exposure as forborne are twofold :
1. favorable terms and conditions of the contract (whether through changes of the original contract or through embedded clauses),
2. AND, assessment by the lender of the financial difficulties of the debtor.
Where the terms and conditions of a contact allow a debtor to continue paying interest-only after the term at which refund of principal was expected, while this debtor is not assessed as being in financial difficulties by the lender, the exposure shall not be considered as forborne.