25 August 2009 EU RESPONSIBLE LENDING STANDARDS FOR HOME LOANS I. PRELIMINARY REMARKS 1. The objective of the Responsible Lending Standards for Home Loans is to promote and strengthen the provision of sustainable long-term access to housing for European borrowers. Responsible lending as conceived in the Responsible Lending Standards for Home Loans aims not only at providing the initial access to housing through mortgage credit for borrowers, but at the long-term objective of keeping borrowers in their homes. 2. Existing incentives structures in the EU regime (e.g. covered bond regulation, principle of first loss remaining with the lender, losses appearing on-balance etc.) result in a cautious approach towards lending, and thereby in responsible mortgage lending practices among mortgage lenders across the EU. It is important to note in this context that the present financial crisis was triggered by US subprime lending, and driven by the US Federal Reserve policy of providing markets with abundant liquidity at lowest rates, coupled with an inadequate remuneration of risk and an extensive equity release practice in order to boost consumption. In the US, the lending boom was fuelled by the diffusion of riskier contracts among lower-income borrowers, offered in an environment of inadequate supervision and regulation, as opposed to the situation in Europe. Recent developments have also shown that the stability of mortgage credit markets not only depends on mortgage credit lenders, but also on borrowers and predominantly the existing systems developed by the State. The common disregard of responsible lending and borrowing principles in the US led to detrimental consequences for the entire economy, as much in the US itself as worldwide. The EMF acknowledges the existence of systemic failures in banking, going well beyond the subprime issue, and is open to suggestions on supervision issues. However, these issues have to be seen separately from retail mortgage lending where, as stated above, lenders across Europe adopt a very cautious approach. To reinforce the commitment to existing practices, the document at hand codifies standards for responsible lending as practiced across the EU. It should be conceived as a set of mutual obligations on the part of lenders, borrowers and official authorities, under the adequate supervision of supervision authorities in the Member States. 3. Acknowledging the causes and effects of the current crisis, the EMF has therefore decided to firmly promote the adoption and implementation of Responsible Lending (RL) Standards for Home Loans. These standards are designed to constitute guidance for responsible mortgage lending, by establishing clear high-level principles, reflecting both the complexity of the underwriting process, and the variety of individual borrower experiences, which have to be accommodated within the mortgage industry. 1/6
4. The RL Standards at hand develop out of longstanding rules and practices on responsible lending, as existing in the Member States, and are in compliance with and builds on relevant EU and national legislative/regulatory requirements. 5. The RL Standards for Home Loans consist of a number of Indicators, which are intended to serve as guidance for individual credit institutions when developing their housing finance policies. 6. The EMF's RL Standards and its Indicators are targeted at cases involving lenders' interaction with the prospective borrower within the average product range. 7. In line with the above considerations, responsible lending implies fairness on both sides. Therefore, responsible borrowing is perceived to be the necessary counterpart to responsible lending, in the sense that lenders will depend on correct and complete information provided to them by the prospective borrower in their efforts to implement the RL Standards for Home Loans, and that prospective borrowers take the final decision as to whether or not to accept the loan offer and which product best suits their needs. Furthermore, borrowers' behaviour once the loan has been taken out is key, e.g. to maintain regular communication with the lender throughout the lifetime of the mortgage loan. 8. Reflecting the social role lenders fulfil in the context of access to housing, the RL Standards promote access to housing finance for borrowers within their financial capabilities. 9. The personal scope of application of the Responsible Lending Indicators (RLI) extends to all lenders, including financial and non-credit institutions providing Home Loans, to prospective borrowers and third party collateral debtors (see Indicators, point II.9), and to private and public bodies, where applicable (see Indicators, point II.7). 10. It is the EMF's belief that the RL Standards should apply both to lenders and credit intermediaries. 11. The scope of application of the RL Standards as regards subject matter encompasses Home Loans (as defined by the EMF's 2008 Note on Data Definitions 1 ) to consumers, including mortgages loans for purchase/ re-finance, and it extends to the following: The loan granting process; The lending decision itself, as well as advertising and marketing of mortgage credit products/home Loans; Individual loans as well as loans for debt consolidation. 1 See EMF Note on Data Definitions of February 2008, p.6. 2/6
II. INDICATORS OF RESPONSIBLE LENDING FOR HOME LOANS PRE-REQUISITES 1. Fairness, transparency and professionalism Throughout the lending process, the lender ensures fairness, transparency and professionalism in his dealings with the (prospective) borrower. 2. Fair advertising and marketing The lender will use transparent and fair advertisement techniques, complying with the Misleading Advertising and Unfair Commercial Practices Directives and relevant national legislation. The lender will provide the prospective borrower with a view of the range of products the lender offers, in an understandable, non-misleading and user-friendly way. 3. Professional distribution channels In cases where the creditworthiness assessment (see point II.11) is positive, the lender provides sustainable access to housing finance by proposing the lender's range of products through transparent and professional distribution channels, based on internal commercial policy. 4. Competent staff The lender employs competent sales, underwriting and default handling staff (see also point 14 below) for cases of default and sensitive arrears handling), and where appropriate, provides for adequate staff training. 5. Informed prospective borrower The prospective borrower is appropriately informed about the contract he is entering into by the relevant professional participating in the process (including, as appropriate, the lender/intermediary/legal advisor), i.e. the lender provides adequate, transparent and understandable information to the prospective borrower, which avoids information overload and enables him/her to make a well-informed decision. In face to face situations, information will also include explanation to the prospective borrower. 6. Information on the offer's period of validity The lender informs the prospective borrower of the duration of the validity of the binding offer. 3/6
INFORMATION RETRIEVAL PROCESS The information to lenders, which will form the basis of their lending decision, will be derived both (a) from sources other than the prospective borrower and (b) from the prospective borrower himself, who should be obliged to provide the lender with all the relevant information required for the lending decision. Information possibly retrieved from sources other than the prospective borrower Certain information elements particularly lend themselves for being obtained outside the B2C relationship, for example the collection of relevant data and information on the individual financial position from reliable databases and information sources, such as credit registers, credit scoring, land registers (EULIS), as well as property valuation. 7. Lender access to information on credit records Based on the principles of reciprocity and proportionality, the lender should have reasonable and non-discriminatory cross-border access to relevant records containing, in all cases, negative information on applicants, i.e. where the extent of cross-border business justifies the additional cost. Furthermore, and in compliance with obligations in the area of data protection, lenders contribute to credit records on a voluntary basis. 8. Real estate valuation Where applicable/relevant to its own risk or credit assessment, the lender has regard to or commissions to undertake professional valuations, according to European or internationally recognised standards. The lender will ensure that internal or external valuers independence 2, which is paramount to the quality and integrity of the valuation, is safeguarded by adequate mechanisms to protect them from undue influence from commercial units and transaction participants. Information provided by the prospective borrower 9. Accurate and adequate borrower information The lender requires the prospective borrower to provide, either face to face or by responding to a detailed questionnaire, accurate and adequate information in the context of his loan application. 10. Validation of information by the lender The lender takes reasonable steps to validate [critical] information provided to him by the borrower, respectful of the privacy and data protection rules. 2 See EMF Guidelines on the Independence of Valuers of June 2008 for reference. 4/6
ASSESSMENT OF CREDITWORTHINESS 11. Evaluation Process In accordance with supervision rules, the decision to grant a mortgage loan will be preceded by a thorough assessment, based on the borrower's circumstances as known by the lender at the point in time when the lender is considering the granting of the mortgage loan, of the prospective borrower's creditworthiness, i.e. the prospective borrower's sustainable ability to repay the loan, including the interest, on his/her income and outgoing commitments in the foreseeable future. The final decision to grant or to refuse the loan requested remains with the lender. Although it is the existence of the security which enables the lender to grant long maturity loans at a privileged rate, a lending decision will always take into consideration the borrower's sustainable ability to repay on his/her income and outgoing commitments in the foreseeable future. Specific conditions can nevertheless justify lending on the basis of equity alone, for instance in the case of specifically targeted products such as equity release schemes and private banking. On the basis of the information available to the lender, both supplied by the prospective borrower and retrieved from other readily available sources (see above under 7.-10.), the lender assesses whether: the individual prospective borrower has the ability to repay the loan under consideration on his/her income and outgoing commitments, respectful of privacy and data protection rules, and avoiding any unjustified discrimination regarding the decision as to whether or not to ultimately grant the credit; based on the circumstances known by the lender at the point in time when the lender is considering the granting of the mortgage loan, this ability appears to be sustainable over the foreseeable future; the lender will exercise particular caution where products with an initial fixed rate and/or later rate increases are concerned, and, based on the information available at that moment, will inform borrowers about possible interest rate risks in variable rate loans; the prospective borrower's ability to repay exists notwithstanding his/her level of indebtedness at the outset. 5/6
FOLLOW-UP STANDARDS 12. Lender assistance throughout the duration of the loan contract Outside the execution procedure, the lender will provide any reasonable assistance to the borrower, facilitating the servicing of the loan. When based on accidents of life/major changes of the borrower's circumstances, the lender will examine requests for adapting/changing repayment arrangements, for example in cases where the borrower wishes to change reimbursement modalities such as the date and/or amount of the monthly repayment, etc. provided any such changes do not place the security at risk. Where borrower and lender engage into discussions in order to work out appropriate solutions, the borrower must be informed about the financial consequences and legal implications of possible changes to the loan conditions, and where applicable, the costs of this operation (e.g. for deferment of amortisation). In the case of assignment of the mortgage loan, the lender will also transfer the Responsible Lending Standards to the assignee. The Members States should adapt their regulations on that matter in order to ensure these changes are not detrimental to the quality of the security. 13. Complaints procedure The borrower has access to an appropriate (internal) complaints procedure and/or access to another alternative dispute resolution scheme (including external ADR schemes, where relevant). 14. Sensitive arrears/default handling Default and/or arrears situations are handled sympathetically and positively by the lender, with a view to finding solutions in the interest of both the lender and the borrower, having regard to the individual circumstances. Any practical solutions found in this context depend on the workability and effectiveness from a lender point of view and the maintenance of the security. Arrears situations are handled by competent staff (see also indicator II.4 above), who will undertake to find personalised solutions for the borrower, without having to automatically and finally provide for them. 15. Realisation of the security It is the lender s aim to prevent as far as possible the realisation of the security. Where this is consistent with regulatory guidance and realistic, attempts to reach alternative arrangements with the borrower will be given preference to enforcement measures. 6/6