Circular 7/2010 of the Bank of Spain on the development of certain aspects of the mortgage market

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Circular 7/2010, of November 30, of the Bank of Spain, to credit institutions and approved valuation companies and services, on the development of certain aspects of the mortgage market. (BOE of December 6, 2010)

The approval of Law 41/2007, of December 7 (which extensively modified Law 2/1981, of March 25, on the regulation of the mortgage market), and Royal Decree 716/2009, of April 24, which develops the latter Law, has resulted in a significant regulatory update of our mortgage market, attributing to the Bank of Spain technical competencies on certain aspects, to the exercise of which this Circular is devoted.

Thus, the essential data of the special accounting register referred to in Article 21 of the aforementioned Royal Decree are established, which must be incorporated into the annual accounts of the issuing entity, by virtue of the authorization established in paragraph 6 of said article and regulation.

Likewise, in exercise of the authorization granted in Article 1 of the Order of March 31, 1989, by which the Bank of Spain is empowered to establish and modify the accounting standards of credit institutions, the minimum content of the note in the annual activity report is specified technically, in which the explicit declaration of the Board of Directors or equivalent body of the credit institution is included regarding the existence of explicit policies and procedures pertaining to their activities in the mortgage market.

Finally, other technical criteria of lesser significance are also included on matters related to the securitization of mortgages that also have the guarantee of a credit institution, and regarding the judgment that must be carried out on the possible equivalence of guarantees granted on real estate located in other countries of the European Union.

Consequently, in exercise of the powers granted, the Governing Council of the Bank of Spain, upon proposal of the Executive Commission, has approved this Circular, which contains the following regulations:

First Regulation.

Rating agencies recognized by the Bank of Spain. [ 1 ]

For the purposes established in Article 5.2.j) of Royal Decree 716/2009, of April 24, rating agencies shall be understood as those defined in number 98), paragraph 1, of Article 4 of Regulation (EU) No. 575/2013 of the European Parliament and of the Council, of June 26, 2013, on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No. 648/2012.

[1]

Drafted according to Circular 3/2014, of July 30, first regulation.

Second Regulation.

Operations with bank guarantee or insurance.

In accordance with what is established in Article 5.2 of Royal Decree 716/2009, of April 24, those operations eligible to serve as coverage for the issuance of mortgage bonds, to be subject to mortgage participations, or to serve for the calculation of the issuance limit of mortgage certificates, which have an insurance or a bank guarantee provided by an entity other than the creditor with the minimum credit rating indicated by the Royal Decree itself, may exceed the general limit of 80%, without exceeding 95%, in the ratio between the amount of the mortgage loan or credit and the appraised value of the mortgaged housing obtained through valuation carried out in accordance with current regulations by an approved valuation entity.

The indicated maximum ratio shall be 95% in those cases where the bank guarantee or insurance covers all payments derived from the mortgage loan or credit that the debtor is obliged to make, has immediate character, and, in the case of the bank guarantee, the guarantor enjoys a credit quality rating equal to or greater than that of the Kingdom of Spain. In other cases, the determination of the maximum percentage to which the indicated ratio may reach will be carried out after verification of the specific clauses of the guarantee or insurance contract, and the nature and characteristics of the provided guarantee and the credit quality of the guarantor.

To this end, creditor credit institutions or the associations representing them may submit the appropriate documentation to the Bank of Spain, including a copy of the corresponding contract and the identification of the guarantee provider, with a proposal for the maximum percentage to be applied in the indicated ratio for the set of operations sharing identical characteristics, stating the reasons on which they base their application. After three months have passed from its complete submission without the appropriate resolution having been notified, the requested proposal shall be deemed approved.

Third Regulation.

Guarantees of real estate located in other countries of the European Union.

The determination of the equivalence of guarantees for those loans and credits by real estate situated in other countries of the European Union, necessary for them to be considered eligible for the calculation of the issuance limit of mortgage certificates and to serve as coverage for the issuance of mortgage bonds, under the provisions of Article 6 of Royal Decree 716/2009, of April 24, shall be carried out taking into account the requirements established in the aforementioned regulatory norm.

To this end, creditor credit institutions or the associations representing them may submit to the Bank of Spain the corresponding application, referring to the set of operations sharing identical characteristics, along with the appropriate documentation accrediting compliance with the aforementioned requirements. The Bank of Spain may request from the entities any additional information and documentation it deems pertinent. After three months have passed from its complete submission without the appropriate resolution having been notified, the application shall be deemed approved.

The decision adopted by the Bank of Spain shall be made public for general knowledge.

Fourth Regulation.

Mechanisms to favor the independence of the valuation activity. [ 2 ]

The valuation services of credit institutions, as well as the valuation companies referred to in Article 3.2 of Law 2/1981, of March 25, on the regulation of the mortgage market, must inform the Bank of Spain of the mechanisms that, in accordance with the aforementioned provision, they have established to favor the independence of the valuation activity and avoid conflicts of interest, and which must at least include the internal code of conduct referred to in the following regulation. This information must mention the internal body that approved these mechanisms and include a detailed description of them.

The information referred to in the previous paragraph must be communicated to the Bank of Spain within one month from the creation of the valuation services of the credit institutions and, in the case of the valuation companies referred to in the first paragraph of Article 3.2 of Law 2/1981, of March 25, on the regulation of the mortgage market, no later than March 31 of the fiscal year in which, in accordance with the criteria established in the third final provision of Royal Decree 775/1997, of May 30, on the legal regime for the approval of valuation services and companies, they meet the condition provided therein. In the cases referred to in the third paragraph of Article 3.2 of the aforementioned law, the repeated information must be sent by the affected valuation companies within one month from the moment they know or should know that they fall within the situation referred to in said paragraph.

Any modification of the mechanisms established to favor the independence of the valuation activity and avoid conflicts of interest must also be communicated to the Bank of Spain within one month, counted from its approval.

The Bank of Spain will verify the adequacy of these mechanisms, and may reasonably require valuation services and companies to adopt additional measures necessary to preserve their professional independence.

[2]

Incorporated by Circular 3/2014, of July 30, first regulation.

Fifth Regulation.

Minimum content of the internal code of conduct. [ 3 ]

The internal code of conduct that must be adopted by the own valuation services of credit institutions, as well as those valuation companies referred to in Article 3.2 of Law 2/1981, of March 25, on the regulation of the mortgage market, as a minimum mechanism to favor the independence of the valuation activity and avoid conflicts of interest, will incorporate at least the following content:

1. Specific circumstances that generate the legal obligation to have the regulation.

2. Principles and objectives that inspire the regulation.

3. Material scope of the regulation, stating whether this applies exclusively to the activity whose object is the valuation of real estate that must take effect in the cases referred to in Article 1 of Royal Decree 775/1997, of May 30, on the legal regime for the approval of valuation services and companies, or if it is also applicable to the whole or part of the rest of the activity of the company or service.

4. Subjective scope of the regulation, with the delimitation of the different groups of people to whom it applies, such as professionals (whether or not affiliated), members of the governing body, other employees or representatives.

5. Consequences and, if applicable, penalties provided for the persons indicated in the previous point for non-compliance with the provisions of the regulation.

6. Detail of the framework of the professional, financial or operational relationship of the valuation services with their credit institution and the companies of its economic group, and of the valuation companies with:

i) Credit institutions and other natural or legal persons that are part of the influence group of the valuation company.

ii) The parent company and companies of the economic group to which, if applicable, the valuation company belongs.

The information referred to in this section must refer to the units and positions of the valuation companies or services through which the receipt of commissions, information on services provided, and the delivery of the corresponding valuation reports are channeled.

For the purposes of this circular, the existence of an economic group will be presumed in the cases contemplated in Article 42 of the Commercial Code. Likewise, it will be understood that the following form part of the influence group of the valuation companies:

– The credit entity or entities of the same economic group whose total business relationship with the valuation company represents, individually or collectively, at least 10% of the total net income of that company, calculated in accordance with what is established in the third final provision of Royal Decree 775/1997, of May 30, on the legal regime for the approval of valuation services and companies, which coincides with the amount of item 1 of state II of Circular 3/1998, of January 27, of the Bank of Spain, to approved valuation companies and services.

– Natural or legal persons who have specific interests in the promotion or marketing of real estate or in analogous activities and are controlling shareholders or who exercise significant influence over the valuation company, as well as companies controlled or in which such shareholders exercise significant influence. The existence of that significant influence will be appreciated taking into account the criteria defined for this purpose in the current accounting regulations.

7. Identification of the person responsible for the valuation service.

8. Indication of the internal body (board of directors or delegated commission) of the valuation company or, in the case of valuation services, of the credit institution that approves the regulation.

9. Detail of the incompatibilities applicable collected in Articles 6 or 10 (depending on whether they are valuation companies or services) and 13 (relating to professionals) of Royal Decree 775/1997, of May 30, on the legal regime for the approval of valuation services and companies, as well as other incompatibilities that, in addition to those, apply to the valuation company or service, the person responsible for that service, the affiliated appraisers, the remaining appraisers, the directors and executives of the valuation company, and the rest of the employees.

Specifically, at least the measures adopted regarding these incompatibilities must be detailed:

a) To prevent members of the board of directors of the valuation company who have executive functions from maintaining any professional or labor relationship with natural or legal persons of their influence group or with those companies of their economic group, to which the valuation company provides services and which are directly related to credit activity or real estate promotion. Likewise, it must be indicated whether such executive directors can be, and if so in what cases and under what conditions, significant shareholders of the aforementioned companies of their economic or influence groups.

b) To ensure that the person responsible for the valuation service is completely separate from the purchasing and commercial units of the entity, adopting necessary measures to separate the valuation service from the commercial and operational services of the organization, so as to guarantee that the former takes autonomous decisions regarding the scope of its activity and conflicts of interest are avoided.

c) To avoid direct treatment of the valuation company and its professional appraisers with those employees or executives of the companies of the economic or influence groups who provide their services for the units that, without specific competencies in risk analysis or management, are related to the granting or marketing of mortgage loans or credits.

10. Specification that the action of the valuation company or service in the scope of its valuation activity must be governed exclusively by technical criteria.

11. Indication that neither the valuation service nor the valuation company, nor their respective professional appraisers, will accept guidelines, instructions, recommendations, pressures or relevant information of any type, especially those coming from natural or legal persons that are part of the economic or influence groups or from the executives or employees thereof, regarding the valuation activity and, particularly, with its result. Furthermore, in the case of valuation services of credit institutions, the specification will be included that the operational or commercial departments of the latter cannot promote the revision of the appraised value.

For the purposes of the provisions in the previous paragraph, relevant information shall be understood as those, such as those relating to the loan amount or the purchase price of the property, that could guide the result of the valuation.

12. Expression of the confidentiality obligations incumbent on the company or credit institution, its administrators or executives, professionals and employees, which must include at least those collected in Article 11 of Royal Decree 775/1997, of May 30, on the legal regime for the approval of valuation services and companies.

13. Description of the code or set of conduct rules that, with the objective of preventing conflicts of interest, have been approved to regulate the relationships of the valuation companies and services and their respective professional appraisers, whether affiliated or not, with the clients of said valuation companies or services. These rules of conduct will incorporate at least criteria on the offering to clients or the rejection of gifts or favors from them, which could compromise their independence, as well as the indication that professional appraisers cannot maintain direct communication with clients regarding the value of the property to be appraised.

14. Other contents:

a) Description of the criteria or policies established to prevent the remuneration corresponding to the directors or administrators of the valuation company, as well as that of its employees, from being significantly linked to the results of natural or legal persons of their influence group or of those companies of their economic group to which they provide services.

b) Description of the mechanisms established to prevent the remuneration of the members and managers of the valuation service from having a significant relationship with the mortgage credit granted by the entity or its economic group and, in general, with the total business captured.

c) Indication of whether the price of valuations carried out for or at the request of natural or legal persons of the economic or influence groups is established in the same way as for the rest of the valuations.

d) Detail of the procedures established to prevent the transmission of any type of prior opinions on the appraised value, such as estimates or indicative valuations that could enable arbitrage in the selection of valuation services or companies. Likewise, the procedures implemented to ensure that, in those cases where, for justified necessity, those prior valuations must be carried out, the company or valuation service abstains, for a minimum period of six months, from carrying out the subsequent valuation of the same goods, and leaves a written record of each of these cases and the reasons that justified it, in a specific file available to the Bank of Spain.

e) Description of the policies established with the purpose of rejecting commissions for whose realization the valuation company or service lacks the due qualification, either due to not having specialized professionals or the necessary technical means, or due to lack of recent experience either in the valuation of goods of the same type or in the geographic area where the goods to be valued are located.

f) Indication of the procedures generally used to assign valuations, specifying in particular if such assignment is centralized and random. Likewise, indication of whether there is any difference between the aforementioned general procedures and those specifically used for the assignment of commissions coming from natural or legal persons of the economic or influence groups, stating, if applicable, the differences existing.

g) Detail of the stipulations established to prevent shareholders of valuation companies who have specific interests in the promotion or marketing of real estate, or in analogous activities, from intervening directly or indirectly in the valuation of those goods, and to know the result of said valuation before it is invoiced and delivered.

h) Description of the procedure established for the systematic monitoring of the degree of compliance with the regulation itself, as well as for the assessment of the effectiveness of its provisions in preserving the independence of the valuation company or service.

i) Indication that the internal controls and audits of the commercial and operational areas of the economic group to which the valuation company belongs, or of the credit institution with its own valuation service, will be carried out independently of those carried out on the valuation company or service.

j) In the event that shareholders or directors of the valuation company, or other executives of this or of the valuation service, provide services as professional appraisers, affiliated or not, for the said company or service, a description of the respective functions.

k) Indication of the rules or contents of this regulation that will be made public, stating the procedure that will be used to do so.

[3]

Incorporated by Circular 3/2014, of July 30, first regulation.

Sixth Regulation.

Annual report of the technical commission that certain credit institutions must constitute. [ 4 ]

The annual report that, on the compliance with the independence requirements referred to in the previous regulation, must be prepared by the technical commission of those credit institutions mentioned in Article 3.3 of Law 2/1981, of March 25, on the regulation of the mortgage market, must incorporate at least the following content:

1. Identification of the members of the technical commission itself, indicating their function and responsibilities within the economic group to which the credit institution belongs.

2. Independence requirements assumed by the entity, with detailed expression of each of the specific norms and requirements it contains. In particular, a copy or extract of the internal code of conduct of the valuation service will be included.

3. Detail of the information regularly provided to the valuation service to comply with the stipulations included in its internal code of conduct.

4. Detail of the scope and depth of the verification carried out of the independence requirements and the criteria used for its realization.

5. Degree of compliance with the specific independence requirements referred to in paragraph 2 above.

6. Detail of the non-compliances found that are considered of certain relevance, as well as the specific measures adopted regarding their future remediation.

[4]

Incorporated by Circular 3/2014, of July 30, first regulation.

Additional Provision. Modifications of Bank of Spain Circular 4/2004.

The following modifications are introduced in Bank of Spain Circular 4/2004, of December 22, to credit institutions, on public and reserved financial information standards, and models of financial statements [ 5 ] :

1. A new section S.5) is added in the sixtieth regulation, Individual Accounts Note, with the following text:

«S.5) Special accounting register referred to in Article 21 of Royal Decree 716/2009, of April 24.

71. The annual accounts of entities issuing mortgage certificates or bonds must include the information mentioned below regarding the following data coming from the special accounting register referred to in Article 21 of Royal Decree 716/2009, of April 24:

A) Active operations:

a) Nominal value of all pending mortgage loans and credits.

b) Nominal value of all pending mortgage loans and credits that are eligible, without considering the limits to their calculation established in Article 12 of the aforementioned Royal Decree.

c) Value of the amount of all pending mortgage loans and credits that are eligible, according to the criteria fixed in Article 12 of the aforementioned Royal Decree, that are computable to provide coverage for the issuance of mortgage titles.

d) Nominal and updated value (this calculated in accordance with what is established in Article 23 of the aforementioned Royal Decree)