C4-2020: Application of Requirements Relating to Residential Mortgages

P O Box 427 Pretoria 0001 South Africa
370 Helen Joseph Street Pretoria 0002
+27 12 313 3911 / 0861 12 7272 www.resbank.co.za 1 C4/2020 To: All banks, branches of foreign institutions, controlling companies, eligible institutions and auditors of banks or controlling companies Circular 4/2020 issued in terms of section 6(4) of Banks Act, 1990:
Interpretation and application of criteria relating to exposures secured by residential mortgage bonds Executive summary The purpose of this circular is to provide clarity on the interpretation and application of the criteria relating to exposures secured by residential mortgage bonds, as outlined in regulation 23(8)(c), read with regulations 23(6)(b) and 23(6)(c) of the Regulations relating to Banks. This circular replaces Banks Act Circular 4/2014, dated 14 February 2014.

1. Introduction
   1.1 Due to possible differences in the interpretation of the provisions of
   regulation 23(8)(c), read with regulations 23(6)(b) and 23(6)(c) of the Regulations relating to Banks (the Regulations) in respect of exposures secured by residential mortgage bonds, there may be inconsistencies in the capital calculations and reporting with regard to regulation 23(8)(c), read with regulations 23(6)(b) and 23(6)(c) of the Regulations.
   1.2 The purpose of this circular is to provide clarity regarding the application and
   interpretation of regulation 23(8)(c), read with regulations 23(6)(b) and 23(6)(c) of the Regulations.
   1.3 This circular replaces Banks Act Circular 4/2014, dated 14 February 2014.
2. Regulation references
   2.1 Regulation 23(6)(b)(ii) of the Regulations specifically excludes residential
   mortgage loans, as specified in regulation 23(6)(c) of the Regulations from the category of retail exposures to which a risk weight of 75 per cent is applied.
   2.2 Furthermore, Regulation 23(6)(c) respectively refers to ‘lending fully secured by a
   mortgage bond’ and to ‘the capital amount outstanding’.
3. Interpretation and application of criteria relating to exposures secured by
   residential mortgage bonds
   3.1 For the purpose of regulation 23(8)(c), read with regulations 23(6)(b) and 23(6)(c)

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2 of the Regulations, exposure shall be the sum of the on-balance sheet exposure and the off-balance sheet exposure after the application of relevant credit conversion factors.
3.2 Regulation 23(6)(c) refers to a ‘lending fully secured by a mortgage bond’. This
reference should be interpreted to include an individual and a legal person such as a trust or close corporation, where such exposure is for example supported by the personal surety of the beneficial owner of the residential property mortgaged.
3.3 The impact of the above interpretations on the classification of retail-exposures
can be summarised as follows:
No
Yes
No
Yes
Portion of exposure
LTV ≤80%
Residential mortgages
On balance sheet portion +
Off balance sheet portion AFTER CCFs
Exposure meets granularity test?
Yes No
Exposure to an individual or SME, which exposure is not overdue:
Exposure ≤R12,5 million?
Exposure meets Product criteria?
Portion of exposure
80%< LTV <100%
Portion of exposure LTV
≥100%
Excluded from
Retail portfolio
Other exposures to an individual or SME
RW = 75% RW = 100%
Included in
Retail portfolio
RW = 75%
Included in
Retail portfolio
RW = 100%
RW = 35%
4. Acknowledgement of Receipt
4.1 Kindly ensure that a copy of this circular is made available to your institution’s
independent auditors. The attached acknowledgement of receipt duly completed and signed by both the chief executive officer of the institution and the said auditors should be returned to the PA at the earliest convenience of the aforementioned signatories. Kuben Naidoo Deputy Governor and CEO: Prudential Authority Date: 2020-12-07 The previous circular issued was Banks Act Circular 3/2020, dated 27 August 2020.