Circular NBB_2021_18 / EBA Guidelines on loan origination and monitoring (EBA/GL/2020/06)

NBB_2021_18 – July 20, 2021 Circular – Page 1/5 14 Berlaimont Boulevard – BE-1000 Brussels tel. +32 2 221 38 12 company number: 0203.201.340 RPM Brussels www.bnb.be

Circular
Brussels, July 20, 2021
Reference: NBB_2021_18 your correspondent:
Claire Renoirte tel. +32 2 221 53 50 claire.renoirte@nbb.be

EBA Guidelines on loan origination and monitoring (EBA/GL/2020/06)

Scope
This circular applies to credit institutions, brokerage firms, resolution bodies and entities treated as resolution bodies under Belgian law, as well as to branches established in Belgium of credit institutions and brokerage firms subject to the law of a non-EEA country (hereinafter "the institutions"), both on a consolidated and a solo basis.

Unless a specific exemption is mentioned in this circular, it applies to all credit risks taken by the institutions, excluding debt securities, derivative instruments, securities financing transactions, and consumer credit below 200 euros, in accordance with Directive 2008/48/EC on consumer credit contracts ("the consumer credit directive", hereinafter "the CCD").

Summary/Objective
This circular aims to implement the guidelines of the European Banking Authority (EBA) of May 29, 2020 on loan origination and monitoring (EBA/GL/2020/06).

These guidelines are part of the European action plan of July 2017 aimed at addressing the problem of non-performing exposures ("non performing loans", hereinafter "NPLs") and limiting their future occurrence to ensure a more robust banking system and better European financial stability.

This circular therefore complements Circulars NBB_2019_21 and NBB_2019_11, which respectively aimed at implementing the EBA guidelines on, on the one hand, the management of non-performing exposures and restructured exposures (EBA/GL/2018/06 of October 31, 2018) and, on the other hand, the publication of non-performing and renegotiated exposures (EBA/GL/2018/10 of December 17, 2018).

The objective of these guidelines on loan origination and monitoring (EBA/GL/2020/06) is to strengthen the internal governance practices, arrangements, processes and mechanisms of institutions to ensure that their loan origination, credit risk management and monitoring meet robust and prudent standards, thereby improving the credit quality of new loans granted and limiting the future occurrence of NPLs.

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They also aim to ensure that institutions' practices are aligned with consumer protection rules and respect fair treatment of consumers.

These guidelines seek to address the main shortcomings observed in recent years in loan origination and monitoring, as well as to reflect developments in priorities and supervisory policy related to credit granting. This includes, in particular, environmental, social and governance factors (hereinafter "ESG factors"), as well as anti-money laundering and counter-terrorist financing measures.

These guidelines cover several relevant aspects of loan origination and monitoring throughout their lifecycle, including internal governance for loan origination and monitoring (cf. section 4), in line with Circular NBB_2018_28 on internal governance 1, loan origination procedures (cf. section 5), pricing (cf. section 6), valuation of immovable and movable property (cf. section 7) and the monitoring framework (cf. section 8).

They thus clarify the internal governance arrangements, processes and mechanisms, as defined in Article 74(1) of Directive 2013/36/EU (hereinafter "the CRR"), and the credit risk and counterparty requirements, as provided for in Article 79 of that Directive.

These guidelines are applicable from June 30, 2021. However, the NBB will grant a tolerance margin of 6 months, until December 31, 2021, to allow institutions to ensure practical compliance with this circular; this is to take into account the exceptional operational efforts that institutions had to make following the Covid-19 crisis.

Section 5 on loan origination procedures applies to loans and advances granted after June 30, 2021, as well as to loans and advances outstanding on June 30, 2021 if their terms have been modified after June 30, 2022, but only if the modifications follow a specific approval of the credit approval decision and if their implementation requires the conclusion of a new loan contract with the borrower or an amendment to the existing contract.

Section 6 on pricing applies to loans and advances whose granting is subsequent to June 30, 2021. However, these Sections 5 and 6 only apply to consumer loans, micro and small enterprises, and medium and large enterprises. They therefore do not apply to loans and advances granted to credit institutions, investment firms, financial institutions, insurance and reinsurance undertakings and central banks, nor to loans and advances granted to sovereign borrowers, including central governments, regional and local authorities, and public sector entities. These 2 sections also do not apply to renegotiated and non-performing loans. Section 7 on the valuation of immovable and movable property applies to any valuation, monitoring and revaluation of immovable and movable collateral, excluding financial collateral, carried out after June 30, 2021. Finally, Section 8 specifying the monitoring framework applies to all credit facilities granted after June 30, 2021. However, for this last section, if institutions do not have all the relevant information and data, as specified in these guidelines, necessary for monitoring existing borrowers or credit facilities granted before the entry into force date, institutions must collect the missing information and data no later than June 30, 2024, by conducting a regular credit review of borrowers, as indicated in said guidelines.

1 Transposing the EBA guidelines of September 26, 2017 (EBA/GL/2017/11).

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Given the very broad scope of these guidelines, they apply proportionally according to the following principles:

• For Section 4 on governance, the principles of proportionality apply as stated in Title I of the EBA guidelines on internal governance of September 26, 2017 (EBA/GL/2017/11), transposed by Circular NBB_2018_28;
• For Section 5 on loan origination procedures, the principles of proportionality apply according to the size, nature and complexity of the credit facility, without prejudice to Articles 18 and 20 of Directive 2014/17/EU concerning credit agreements for consumers relating to immovable property used as residential ("the mortgage credit directive", hereinafter "the MCD") and Article 8 of the CCD;
• For Section 7 on the valuation of immovable and movable property, the principles of proportionality apply according to the size, nature and complexity of the credit facility and the collateral;
• And finally for Section 8, the principles of proportionality apply according to the size, nature and complexity of the institution; the size, nature and complexity of the credit facility; as well as the type, size and risk profile of the borrower.

Regarding consumer loans, institutions must ensure that the application of these proportionality principles does not undermine the objective of consumer protection, as defined in the MCD and the CCD and specified in these guidelines, and in particular in Section 5.1 and Sections 5.2.1, 5.2.2, 5.2.3 and 5.2.4.

Regarding the integration of these guidelines into its supervisory practice, the NBB recalls that these guidelines represent sound and robust practices that will apply proportionally, with the main objective of limiting the future occurrence of NPLs and ensuring the solidity of the banking system and financial stability.

The NBB particularly expects that the resources allocated for the valuation of assets covered by these guidelines will improve over time, taking into account the evolution of market limitations. This can be done by using a sufficient number of internal and/or external valuers, with a minimum of 2 valuers for the smallest institutions to ensure compliance with paragraph 235 of these guidelines, and/or the use of advanced statistical valuation models. However, the use of these statistical models must strictly meet the specific expectations of these guidelines, in particular those set out in Section 7.4 and in paragraphs 210, 219 and 220 for valuations carried out at the time of credit granting, and in paragraphs 223 and 230 for monitoring and revaluations of collateral. It should be noted that the requirement to have at least two valuers within the smallest institutions for the valuation of movable and immovable property can be met by using a single external valuation company, provided that the contract with said company clarifies how the latter will ensure compliance with the requirements of the EBA guidelines. The institution remains responsible for compliance with said guidelines and must therefore at least clarify the means implemented to ensure that the value of the assets provided by said company is not subject to any significant bias due to a conflict of interest within that company.

The NBB also expects that the consideration of ESG factors and their associated risks will increasingly be integrated over time into institutions' credit risk appetite policies, as well as into their risk management and their credit risk policies and procedures, by developing a holistic approach. For paragraph 208 of these guidelines on the valuation of immovable and movable property, the NBB expects institutions to take into account, for example, EPB certificates and other relevant energy labeling systems as factors that may influence the value

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of the asset 2. The NBB notes, however, that these ESG factors include both environmental factors, as well as social and governance factors. They are today the foundation of socially responsible investment. Consequently, in general, the consideration of EPB certificates alone is not considered sufficient to ensure compliance with the requirements of the EBA guidelines. The NBB therefore expects institutions to take proportionate measures to comply with the guidelines on ESG factors and document them, for example by developing internal policies and procedures in line with their credit risk management and credit granting that specify, for example, the types and number of ESG factors they intend to take into consideration for the different uses required in these guidelines.

For leasing operations provided by institutions or by an entity part of a banking group, although these guidelines do not contain specific requirements for these operations, the NBB expects them to meet the general principles of said guidelines, particularly regarding internal governance, valuation of assets provided for leasing and assessment of customer credit risk.

The NBB finally recalls that the guidelines of section 5.2 on borrower solvency assessment are considered sound and robust standards for credit risk assessment under the CRR. This does not, however, affect the respective responsibilities of the FSMA 3 and the Federal Public Service Economy regarding consumer protection, registration of institutions for granting mortgage loans and compliance with the MCD, in particular its Chapter 6, and the CCD, in particular its Article 8.

The NBB therefore asks institutions to take adequate measures to comply with these guidelines and to document them, so as to be able to communicate, if necessary separately, information falling within the respective competence of each of these competent authorities.

The NBB finally clarifies that the annexes included in the body of these guidelines represent only a reference point left to the consideration of institutions.

2 This is linked to the requirements of Circular NBB_2020_45 on the collection and reporting of information on the energy efficiency of real estate exposures.
3 For institutions subject to its supervision, the NBB is the first-line competent authority insofar as these guidelines implement the requirements of the CRR, Articles 79 and 74(1).

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Madam,
Sir,

This circular aims to transpose the guidelines of the European Banking Authority (hereinafter "the EBA") of May 29, 2020 on loan origination and monitoring into the NBB's supervisory practice.

The EBA guidelines present various key elements relating to: internal governance for loan origination and monitoring (cf. section 4), in line with Circular NBB_2018_28 on internal governance, loan origination procedures (cf. section 5), pricing (cf. section 6), valuation of immovable and movable property (cf. section 7) and the monitoring framework (cf. section 8).

They thus clarify the internal governance arrangements, processes and mechanisms, as defined in Article 74(1) of Directive 2013/36/EU (hereinafter "the CRR"), and the credit risk and counterparty requirements, as provided for in Article 79 of that Directive.

The French and English versions of the text established by the EBA, as well as the explanatory note established by the EBA and the responses provided by the EBA as part of its consultation on these guidelines in 2020, are attached to this circular.

A copy of this circular is sent to the commissioner(s), approved auditor(s) of your institution.

Please accept, Madam, Sir, the assurance of my distinguished consideration.

Pierre Wunsch
Governor

Annexes – only available via www.nbb.be :

1. Final Report on guidelines on loan origination and monitoring_COR_FR
2. EBA GL 2020 06 Final Report on GL on loan origination and monitoring
3. EBA explanatory note on the EBA’s comprehensive approach to loan origination
4. EBA GL 202006 appendix- feedback table for GL on loan origination and monitoring