Guidelines on Lending Practices for Mortgage and Consumer Loans

Circular

This circular is no longer valid.

The new valid circular is:

Practice for loans to consumers

The circular applies to

Banks

Credit institutions

Financing companies

Insurance companies

Pension funds

Branches of foreign financial institutions

Credit institutions conducting cross-border business

1 Introduction

The Ministry of Finance established a new regulation on requirements for financial institutions' lending practices (the Lending Regulation) on 9 December 2020. The regulation entered into force on 1 January 2021, replacing the Mortgage Loan Regulation of 15 November 2019 and the Consumer Loan Regulation of 12 February 2019. This circular replaces the Financial Supervisory Authority's Circular 5/2019 and Circular 13/2019. Financial institutions must adapt their internal credit procedures to the requirements set out in the Lending Regulation. The Ministry of Finance has commented on some of the provisions on its website: https://www.regjeringen.no/no/tema/okonomi-og-budsjett/finansmarkedene/utlansforskriften/id2791101/

The Financial Supervisory Authority provides the following additional comments on the regulation.

2 Regarding § 3 Exemptions

The regulation does not apply to capital release credits with a loan-to-value ratio below 85 percent. Capital release credits are loans secured by a mortgage on a home, expected to be repaid upon the future sale of the home. The loan-to-value ratio for such loans shall be understood as the expected loan-to-value ratio at the time of realization of the collateral, given a prudent assessment of expected lifespan, future housing price development, and expected interest rate level. The regulation does not apply when granting credit cards if the customer's total credit card limits will not exceed 25,000 Norwegian kroner. The provisions of the Financial Contracts Act regarding the duty to assess the customer's creditworthiness apply regardless of the regulation's provisions. The regulation does not apply when financial institutions provide unsecured credit where the credit is granted interest-free and cost-free. Interest- and cost-free credit includes, among other things, free payment cards where the customer is to pay the total amount upon invoicing, and the customer, in case of non-payment, must pay default interest according to the Act on Interest on Late Payment.

3 Regarding § 4 Documentation

The assessment of the customer's repayment capacity shall be based on "comprehensive information about the loan customer's income, total debt, and value of the home if the home is provided as security." This implies that information about all of the customer's debt items and interest and repayment terms in the individual loan agreements must be obtained, unless the debt item is insignificant for an overall assessment of repayment capacity. If the information cannot be obtained from registers, the information must be obtained from the customer.

4 Regarding § 5 Repayment Capacity

The financial institution shall calculate the customer's ability to service the loan based on the customer's income and all relevant expenses, including interest, loan repayments, and normal living expenses. In the assessment of the customer's repayment capacity, the financial institution shall include an interest rate increase of 5 percentage points on the customer's total debt. The purpose of the stress test is to assess whether the borrower has a sufficient liquidity buffer. In calculating repayment capacity, it shall be assumed that the interest rate increase takes effect immediately (or at the end of the fixed-rate period for fixed-rate loans). In other words, only the effect of repayments falling due during the fixed-rate period affects the repayment capacity assessment. Anticipated income growth during the fixed-rate period shall not be taken into account. In calculating living expenses, it is expected that financial institutions take into account all relevant expense items, such as expenses for kindergarten and after-school programs, housing expenses (e.g., municipal charges, electricity, insurance, and maintenance), and car maintenance expenses. If living expense assessments are based on SIFO rates, financial institutions must include an addition beyond the SIFO budget that is sufficient to take into account relevant expense types not included in the reference budget (e.g., healthcare services, holiday trips, gifts, etc.).

5 Regarding §§ 9 and 13 Repayments

Repayment obligations may cease when the loan-to-value ratio falls below 60 percent of the market value of the home. The provisions in §§ 9 and 13 regarding requirements for repayments do not prevent the financial institution from granting a repayment deferral due to circumstances that arise during the loan's term and which temporarily worsen the customer's payment capacity. Questions have been raised about what is meant by the concept "temporary worsening of the customer's repayment capacity," including whether circumstances such as separation, divorce, death, disability, and unemployment can be included. The provision covers such situations provided that these are circumstances that arise "during the loan's term," and the circumstances were neither known nor should have been known to the financial institution in connection with the assessment of the customer's repayment capacity. The right to grant repayment deferral applies only in cases of temporary worsening of the customer's repayment capacity. In cases of permanently reduced repayment capacity, the financial institution must reassess the loan relationship.

6 Regarding §§ 10 and 14 Refinancing

The regulation allows financial institutions to offer refinancing of loans in the cases mentioned in § 10 and § 14, even if the new loan does not meet the regulation's provisions on repayment capacity, debt ratio, loan-to-value ratio, and repayments. The requirement that the new loan must not exceed the existing loan or the size of the loans at the time of refinancing does not prevent the new loan from covering verifiable costs (interest, fees, etc.) incurred on the loans to be refinanced. Refinancing of consumer loans according to § 14 presupposes that the institution calculates the sum of interest, fees, and other costs for the remaining term of the loan and compares it with the corresponding sum of costs for the total term of the new loan. This provision presupposes that the financial institution obtains information about actual costs and repayment profiles for each individual loan to be refinanced. In refinancing revolving credit lines without agreed repayment, the institution shall assume repayment as an ordinary serial loan over a maximum of 10 years. Financial institutions granting loans for refinancing shall disburse the loan to the creditor(s) and not to the borrower. The financial institution also has a duty to obtain confirmation from the customer that paid-off accounts and revolving credit lines in other financial institutions are to be closed. This applies generally in cases of bank switching, and not only for loans that meet the requirements of the regulation's §§ 10 and 14.

7 Regarding § 11 Restructuring

Provided that the customer's total debt does not increase, the requirement for maximum debt ratio does not apply to loans secured by a mortgage on a home granted to restructure debt for customers who would not be able to service their total debt without such restructuring. In assessing the customer's repayment capacity according to § 5 for such loans, there is also no requirement to include the effect of an interest rate increase of 5 percentage points on the customer's total debt. The provision on restructuring is intended for situations where banks review the overall economic situation of customers who are unable to service their existing debt obligations without restructuring. This often involves consolidating the customer's existing debt into a new mortgage loan with a longer repayment period. The institution must critically assess the customer's repayment capacity in accordance with the requirements of the Financial Contracts Act. If the customer's economic problems are due to overspending, the institution must assess the customer's ability to change their consumption pattern. It is an important prerequisite that the restructuring does not result in increased total debt. Loans granted as part of restructuring under § 11, including any establishment fees, must not lead to an increase in the customer's total debt.

Customers who need to restructure their debt, and who are often in a difficult economic situation, may enter into a dependent relationship with the bank. The Financial Supervisory Authority emphasizes that such situations impose a special responsibility on the bank, as a professional party, not to exploit the customers' vulnerable situation. It is also expected that the institution provides comprehensive information to the customer about alternative solutions, including debt adjustment schemes, that could improve the customer's situation. The institution must comply with the requirement for good business practice.

8 Regarding §§ 12 and 15 Flexibility

"Approved loans" in § 12 and "approved consumer loans" in § 15, which are to be included in the quarterly deviation reporting, shall be understood as loans where there is a binding agreement between the financial institution and the customer. That is, loan offers accepted by the customer. This will primarily be disbursed loans during the period. Loan commitments and financing certificates shall not be included in the reporting. Commitments that are split into two or more loans to the same customer shall be reported with the total amount. For consumer loans, the number of loan commitments will usually be much higher than the number of loans where an agreement is concluded with the customer. Therefore, it is important that the calculation of the flexibility ratio is based only on the loan offers accepted by the customer. Revolving credit lines shall be included with the total approved credit amount. For loans to sole proprietorships and legal entities where a mortgage on a home is included as one of several securities, the amount to be included in the calculation of the flexibility ratio shall be the nominal value of the home mortgage. For loans to companies secured by a personal guarantee with a mortgage on a home, for example, in the owner's private home, the amount to be included in the calculation of the flexibility ratio shall be the nominal amount of the personal guarantee. The regulation's §§ 12 and 15 presuppose that the institutions' boards, or potentially the management for branches in Norway of foreign financial institutions, have established frameworks and guidelines for the use of the flexibility provisions. It is expected that the guidelines are clear enough to be used as a basis for credit assessments and that they make it possible to control that the guidelines are followed. It is stated in § 12, third paragraph, that mortgage loans that have been refinanced in accordance with § 10 or restructured in accordance with § 11 shall not be counted in the calculation of the value of approved loans according to the first and second paragraphs. The same applies according to § 15, third paragraph, that consumer loans that have been refinanced in accordance with § 14 shall not be counted in the calculation of the value of approved loans according to the first paragraph. Loans that have been refinanced in accordance with § 10 shall not be included in the deviation reporting. Loans that have been restructured in accordance with § 11 shall not be counted in the calculation of the value of approved loans according to § 12, first and second paragraphs. This means that there is no flexibility ratio for such loans. Restructuring loans that do not utilize any of the exemption provisions in § 11 are included in the calculation of the flexibility ratio, and any deviations from the repayment capacity requirement except for the interest rate increase and the requirements for loan-to-value ratio and repayments must therefore be covered by the ratio.

9 Reporting

It follows from the regulation's §§ 12 and 15 that financial institutions must report to the board or the management for foreign financial institutions every quarter about what share of the value of new approved loans in the quarter has been granted under the flexibility provision. The Financial Supervisory Authority assumes that the board report is available no later than at the end of the following month after each quarter ends.

If the conditions for established loans are changed such that deviations arise from one or more of the conditions covered by the flexibility provision, these loans must also be included in the calculation. An increase in existing loans shall be considered as a concluded agreement on (approval of) a new loan.

9.1 Loans secured by a mortgage on a home

The reporting of mortgage loans according to the Lending Regulation § 12 must at least cover the following matters for repayment loans and revolving credit lines respectively:

Loans secured by a mortgage on a home outside Oslo municipality, covered by § 12 (figures in 1,000 kroner):

Repayment loans

Revolving credit lines

Violates only § 5

Violates only § 6

Violates only § 7

Violates only § 9

Violates § 5 and § 6

Violates § 5 and § 7

Violates § 5 and § 9

Violates § 6 and § 7

Violates § 6 and § 9

Violates § 7 and § 9

Violates § 5, § 6 and § 7

Violates § 5, § 6 and § 9

Violates § 5, § 7 and § 9

Violates § 6, § 7 and § 9

Violates § 5, § 6, § 7 and § 9

Total loans covered by § 12

Total loans secured by a mortgage on a home approved in the quarter

Loans secured by a mortgage on a home in Oslo municipality, covered by § 12 (figures in 1,000 kroner):

Repayment loans

Revolving credit lines

Violates only § 5

Violates only § 6

Violates only § 7

Violates only § 9

Violates § 5 and § 6

Violates § 5 and § 7

Violates § 5 and § 9

Violates § 6 and § 7

Violates § 6 and § 9

Violates § 7 and § 9

Violates § 5, § 6 and § 7

Violates § 5, § 6 and § 9

Violates § 5, § 7 and § 9

Violates § 6, § 7 and § 9

Violates § 5, § 6, § 7 and § 9

Total loans covered by § 12

Total loans secured by a mortgage on a home approved in the quarter

9.2 Consumer loans

Only new unsecured consumer loans shall be included in the calculation of the flexibility ratio. Furthermore, only consumer loans approved to persons residing in Norway shall be included. The reporting of consumer loans according to the Lending Regulation § 15 must at least cover the following matters for repayment loans and revolving credit lines respectively:

Consumer loans covered by § 15 in the Consumer Loan Regulation (figures in 1,000 kroner)

Repayment loans

Revolving credit lines

Violates only § 5

Violates only § 6

Violates only § 13

Violates § 5 and § 6

Violates § 5 and § 13

Violates § 6 and § 13

Violates § 5, § 6 and § 13

Total loans covered by § 15

Total consumer loans approved in the quarter

10 Financial Supervisory Authority's Monitoring

The Financial Supervisory Authority will follow up compliance with the Lending Regulation through on-site supervision, by obtaining board reports on an ad hoc basis, and through quarterly reporting from the largest providers of mortgage and consumer loans in the Norwegian market. The companies covered by the quarterly reporting have been notified separately.