Practice for Consumer Loans

FINANSTILSYNET
Postboks 1187 Sentrum
0107 Oslo
Circular
Practice for Consumer Loans

CIRCULAR:
6/2022
DATE:
19.12.2022
THE CIRCULAR APPLIES TO:
Banks
Credit institutions
Financing companies
Insurance companies
Pension funds
Branches of foreign financial institutions
Credit institutions conducting cross-border business

Practice for Consumer Loans
2 | Finanstilsynet

1 Introduction
The Ministry of Finance issued regulations on amendments to Regulation 9 December 2020 No. 2648 on financial institutions' lending practices (the Lending Regulation) on 9 December 2022. The regulation enters into force on 1 January 2023.
This circular replaces Finanstilsynet's circular 1/2021.
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/id2950571/ Finanstilsynet provides further comments on the regulation below.

2 Regarding § 3 Exceptions
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 residential property that are expected to be repaid upon the future sale of the property when one or more agreed and life-related events occur, for example, upon the borrower's death. 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 to the approval of credit cards if the customer's total credit card limits will not exceed 25,000 kroner. The provisions of the Financial Contracts Act regarding the duty to assess the customer's creditworthiness apply regardless of the regulation's provisions.

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 property if property is provided as security." This means that information about all 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 3 percentage points on the customer's total debt, but such that the financial institution in any case shall base its calculations on an interest rate of at least 7 percent. The purpose is to assess whether the borrower has a sufficient liquidity buffer to service the loan in the event of increased interest rates after approval, or potentially at the end of the interest fixation period for fixed-rate loans. No income growth is assumed during the fixed-rate period. In calculating living expenses, it is expected that financial institutions take into account all relevant expense items, such as expenses for kindergarten and school leisure programs, housing expenses (e.g., municipal fees, electricity, insurance, and maintenance), and car maintenance expenses. If the living expense assessments are based on the rates of the Consumer Research Institute SIFO, these must be kept up to date, and 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., health services, holiday trips, gifts, etc.). When financial institutions process applications for mortgage loans where there is also a need for a short period of interim financing, the long-term loan related to the new property regulated by the Lending Regulation's requirements is assumed. For loans taken to finance the purchase of a new property in addition to financing the existing property until it is sold (interim financing), the assumed loan need after the sale of the existing property may be used as the basis for the assessment according to the regulation's requirements. It is expected that financial institutions base their calculations on a prudent assessment of the price that can be obtained for the existing property, so that the long-term loan need is not underestimated.

5 Regarding §§ 9 and 13 Repayments
For loans exceeding 60 percent of the property's value, the financial institution shall require annual repayment.
The provisions in §§ 9 and 13 regarding the requirement for repayments do not prevent the financial institution from granting repayment deferral due to circumstances that occur during the loan's term and that temporarily worsen the customer's repayment capacity. Questions have been raised about what lies in the concept of "temporary worsening of the customer's repayment capacity," including whether circumstances such as separation, divorce, change of residence, disability, and unemployment can be covered. The provision covers such circumstances provided that these are circumstances that occur "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. The regulation does not regulate repayments for loans with collateral other than residential property.

6 Regarding §§ 10, 14, and 16 Refinancing
The regulation allows financial institutions to offer refinancing of loans in cases mentioned in § 10, § 14, and § 16, even if the new loan does not meet the provisions of the regulation regarding repayment capacity, debt ratio, loan-to-value ratio, and repayments. The requirement that the new loan shall not exceed the existing loan, or the size of the loans at the time of refinancing, is not an obstacle to the new loan covering verifiable costs (interest, fees, etc.) accrued on the loans to be refinanced. In the refinancing of mortgage loans, it is a requirement that the loan has collateral in the same property, or at the time of refinancing does not have a higher loan-to-value ratio than the existing loan. This opens up for a loan to be replaced with a loan secured by another property, provided that other conditions in the provision are met, and that the loan-to-value ratio of the new loan is not higher than the existing loan. Refinancing of consumer loans according to § 14 and loans with collateral other than residential property according to § 16 presupposes that the institution calculates the sum of interest, fees, and other costs for the remaining term of the loan, and compares this 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 profile for each individual loan to be refinanced. In the refinancing of revolving credit facilities without agreed repayment, the institution shall base its calculations on 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 facilities in other financial institutions shall be closed. This applies generally in the case of bank changes, and not only for loans that meet the requirements of the regulation §§ 10 and 14.

7 Regarding §§ 12, 15, and 17 Flexibility
"Approved loans" in § 12, "approved consumer loans" in § 15, and "approved loans with collateral in other assets than residential property" in § 17 that 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 that have been accepted by the customer. This will mainly be disbursed loans in the period. Loan commitments and financing certificates shall not be included in the reporting. Engagements that are split into two or more loans to the same customer shall be reported with the total amount. The flexibility quota shall only be based on the loan offers that have been accepted by the customer. Revolving credit facilities shall be included with the total approved credit amount. The regulation §§ 12, 15, and 17 presuppose that the institutions' boards, or potentially the management for branches in Norway of foreign financial institutions, have set 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 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 for consumer loans that have been refinanced in accordance with § 14, and according to § 17 third paragraph for loans with collateral other than residential property that have been refinanced according to § 16. Loans that have been refinanced in accordance with § 10 shall not be included in the deviation reporting.

8 Reporting
It follows from the regulation §§ 12, 15, and 17 that financial institutions shall report to the board or management for foreign financial institutions each quarter about what share of the value of new approved loans in the quarter has been approved according to the flexibility provision. Finanstilsynet 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 shall also be included in the calculation. An increase in existing loans shall be regarded as an entered agreement (approval of) a new loan.

8.1 Loans with collateral in residential property
The reporting of mortgage loans according to the Lending Regulation § 12 must at least cover the following matters for repayment loans and revolving credit facilities respectively:
Loans with collateral in residential property outside Oslo municipality, covered by § 12 (figures in 1000 kroner) Repayment Loans | Revolving Credit Facilities Breaks only § 5 Breaks only § 6 Breaks only § 7 Breaks only § 9 Breaks § 5 and § 6 Breaks § 5 and § 7 Breaks § 5 and § 9 Breaks § 6 and § 7 Breaks § 6 and § 9 Breaks § 7 and § 9 Breaks § 5, § 6, and § 7 Breaks § 5, § 6, and § 9 Breaks § 5, § 7, and § 9 Breaks § 6, § 7, and § 9 Breaks § 5, § 6, § 7, and § 9 Total loans covered by § 12 Total loans with collateral in residential property approved in the quarter

Loans with collateral in residential property in Oslo municipality, covered by § 12 (figures in 1000 kroner) Repayment Loans | Revolving Credit Facilities Breaks only § 5 Breaks only § 6 Breaks only § 7 Breaks only § 9 Breaks § 5 and § 6 Breaks § 5 and § 7 Breaks § 5 and § 9 Breaks § 6 and § 7 Breaks § 6 and § 9 Breaks § 7 and § 9 Breaks § 5, § 6, and § 7 Breaks § 5, § 6, and § 9 Breaks § 5, § 7, and § 9 Breaks § 6, § 7, and § 9 Breaks § 5, § 6, § 7, and § 9 Total loans covered by § 12 Total loans with collateral in residential property approved in the quarter

8.2 Consumer Loans
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 facilities respectively:
Consumer loans covered by § 15 in the Lending Regulation (figures in 1000 kroner) Repayment Loans | Revolving Credit Facilities Breaks only § 5 Breaks only § 6 Breaks only § 13 Breaks § 5 and § 6 Breaks § 5 and § 13 Breaks § 6 and § 13 Breaks § 5, § 6, and § 13 Total loans covered by § 15 Total consumer loans approved in the quarter

8.3 Loans with collateral other than residential property
The reporting shall cover new loans with collateral other than residential property, for example boat and car loans, to consumers residing in Norway.
Loans with collateral other than residential property covered by § 17 in the Lending Regulation (figures in 1000 kroner) Repayment Loans | Revolving Credit Facilities Breaks only § 5 Breaks only § 6 Breaks § 5 and § 6 Total loans covered by § 17 Total loans with collateral other than residential property approved in the quarter

9 Finanstilsynet's Supervision
Finanstilsynet will follow up compliance with the Lending Regulation through local supervision, by obtaining board reports on an ad hoc basis, and through quarterly reporting from the largest providers in the Norwegian market. The companies covered by the quarterly reporting are notified separately.

FINANSTILSYNET
Postboks 1187 Sentrum
0107 Oslo
POST@FINANSTILSYNET.NO
WWW.FINANSTILSYNET.NO