Requirements for Valuation of Real Estate in Loan Origination and Monitoring

FINANS TILSYNET Postboks 1187 Sentrum 0107 Oslo Circular Requirements for valuation of real estate in granting and monitoring of loans CIRCULAR: 5/2021 DATE: 21.10.2021 THE CIRCULAR APPLIES TO: Banks Credit institutions Financing companies

Requirements for valuation of real estate in granting and monitoring of loans 2 | Finanstilsynet 1 Introduction The Capital Requirements Regulation1 specifies requirements for the valuation of real estate. The European Banking Authority (EBA) established guidelines on loan origination and monitoring on 29 May 2020. 2 The guidelines entered into force on 30 June 2021. This circular concerns Chapter 7 of the guidelines, specifically those parts of the chapter that cover the valuation of real estate in connection with the granting and monitoring of loans, including the use of statistical models in the valuation of real estate. The Norwegian implementation of the European guidelines on the valuation of real estate in granting and monitoring of loans is described in more detail below. Finanstilsynet expects that the guidelines related to the use of statistical models for the valuation of real estate are complied with by the companies from 1 January 2022. 2 Requirements for internal guidelines for valuation of real estate as collateral for loans The company must have internal guidelines and procedures for the valuation of real estate as collateral for loans, including guidelines for the use of statistical models in granting loans. The internal guidelines for the use of statistical models must be in accordance with the company's credit policy. It is expected that the company establishes criteria for the use of statistical models for the valuation of real estate in granting loans, and these criteria should be linked to characteristics of the loan and the property provided as security. Finanstilsynet expects that the criteria among other things relate to the property's value and the loan's size, loan-to-value ratio, and the robustness of the value estimate from the statistical model. For loans that do not meet the criteria, the valuation must be carried out by an internal or external valuer. The company must ensure that the valuation is carried out in accordance with relevant and recognized standards, and that procedures are established for documenting the valuation. The company must have guidelines for follow-up in cases where the purchase price deviates significantly from the model's value estimate. The company must have internal guidelines and procedures for monitoring, follow-up, and updating the value of the collateral. 1 Cf. Article 208 and 229 2 EBA: EBA/GL/2020/06. 29 May 2020: Final Report: Guidelines on loan origination and monitoring (pdf) EBA's website: Additional information to "Guidelines on loan origination and monitoring"

Requirements for valuation of real estate in granting and monitoring of loans Finanstilsynet | 3 3 Requirements for the company's use of statistical models The company must ensure that statistical models for the valuation of real estate are adapted to the specific collateral object and geographical location at a sufficiently detailed level (for example, municipality/district). The model must contain an estimate of the uncertainty in the value estimate, and the uncertainty must be shown together with the value estimate. The company must ensure that the statistical model is robust, accurate, and reliable, and based on a sufficiently large and representative sample of observed transactions, which also includes periods of price decline. The company must regularly backtest the estimates against realized sales prices for collateral objects. The company must ensure that the validation of the statistical model meets relevant requirements set for the validation of statistical models in general. When using models developed by third parties, the company must assess the model's suitability for its own portfolio. The company must ensure that it has sufficient internal competence to understand the assumptions and limitations of the model, and its relevance for affected market areas and collateral objects. The company must have guidelines for alternative methods of valuation if the model is no longer available. 4 Requirements for valuers For the granting of loans where the use of statistical models does not meet the criteria for valuation, the valuation must be carried out by an internal or external valuer. Valuers must have competence in determining residential property values in accordance with national and international standards. The company must ensure that internal or external valuers have sufficient competence and education to carry out the valuation of the specific collateral object and have the necessary technical skills, experience, and knowledge of the market for this object. The company must ensure that there are no conflicts of interest for the valuer, including that the valuer is not involved in the credit process and does not have interests in the current collateral object, and that the valuer's remuneration is independent of the outcome of the valuation.

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