New draft guidelines on loan origination and monitoring
EBA consultation paper
On 19 June 2019, the EBA published a consultation paper for new draft guidelines on loan origination and monitoring in response to the EU Council’s action plan published in July 2017. The purpose of this plan is to monitor the development of non-performing loans in the EU and to take appropriate measures.
In order to improve transparency, as well as boost and stabilise the banking sector in general, one of the goals of the action plan is for the EBA to develop detailed guidelines on loan origination and monitoring. The draft guidelines therefore clarify the guidelines on internal governance with regard to the loan origination process and monitoring during the term of the loan. These EBA draft guidelines include risk management practices, directives, processes and procedures for loan origination and monitoring of performing exposures, as well as their integration into the overall management and risk management framework.
In contrast to the guidelines on the management of non-performing and forborne exposures published by the EBA in October 2018 (EBA/GL/2018/06), which deals with how to manage loans that have already been forborne and non-performing loans, the new consultation paper starts at an earlier juncture. The purpose is to prevent newly granted loans from becoming non-performing ones in the future. In particular, the draft guidelines are based on the following principles:
- Art. 74 section 1 CRD IV on internal governance arrangements, processes and mechanisms
- Art. 79 CRD IV, which defines requirements of the credit and counterparty risk and
- Art. 18 and 20 2014/17/EU (Mortgage Credit Directive), which govern the obligation to assess the creditworthiness of consumers and verify information provided by consumers.
The sharp rise in the volume of non-performing loans since the financial crisis and the persistence throughout the EU have led to the supervisory authority focusing more heavily on the quality of loans. In this context, the need for an EU-wide launch of standards that apply consistently and reliably to the management and monitoring of credit risk exposures was identified.
The new draft guidelines take into account the EBA’s experience with the banks supervised and past practice in credit arrangements. Current regulatory focuses and developments regarding the granting of loans were taken into account. These primarily include ecological (for instance, the Paris Climate Convention and Agenda 2030 for sustainable development), social and market factors, combating money laundering and terrorism, and technology-based innovations. It should be emphasised that the EBA is, for the first time, proposing amendments concerning providers of consumer credit under the Consumer Credit Directive and non-bank mortgage credit under the Mortgage Credit Directive. The EBA’s overarching objective is to boost the financial stability and robustness of the EU financial system by implementing these regulations. Therefore, the aim is also to improve the quality of data and the symmetry of information between banks and investors in the secondary markets for non-performing loans in Europe.
The public hearing is scheduled at the EBA in Paris for 20 September 2019. The consultation phase will end on 30 September 2019 but the guidelines aren’t slated to be applied until 30 June 2020. It remains to be seen how the organisations concerned will respond and what challenges will arise when the guidelines are implemented and monitoring takes place in the future.