Recommendation J regarding the rules for the collection and processing by banks of data on the real estate market

Financial Supervision Authority
Recommendation J regarding the rules for the collection and processing by banks of data on the real estate market Warsaw, March 2023

Introduction
This Recommendation (hereinafter: Recommendation J) is issued pursuant to Article 137(1)(5) of the Act of 29 August 1997 – Banking Law (Journal of Laws of 2022, items 2324, 2339, 2640, and 2707, and of 2023, item 180), Article 12(1b) of the Act of 20 July 2000 on the promulgation of normative acts and certain other legal acts (Journal of Laws of 2019, item 1461), and Article 11(1) of the Act of 21 July 2006 on the supervision of the financial market (Journal of Laws of 2022, item 660, as amended1) and replaces Recommendation J of the Financial Supervision Authority regarding the rules for the collection and processing by banks of data on real estate from 2012.

Recommendation J concerns good practices regarding the collection and processing by banks of data on the real estate market contained in internal (own) and external (interbank) databases, which support the risk management process related to credit exposures secured by mortgages. By adapting its activities to Recommendation J, a bank takes into account legal provisions, in particular the Act of 29 August 1997 on Mortgage Bonds and Mortgage Banks (Journal of Laws of 2023, item 110) and the Act of 21 August 1997 on Real Estate Management (Journal of Laws of 2023, item 344).

Recommendation J applies to all mortgage-secured credit facilities granted from the date of its implementation.

Since the issuance of Recommendation J in 2012, the regulatory environment determining obligations regarding the assessment of the value of real estate collateral has changed significantly. An update of this Recommendation is necessary to align its content with currently applicable legal provisions.

From the perspective of the bank's operational safety, one of the particularly important issues is a prudent financing policy for real estate market transactions, and especially the assessment of the value of real estate collateral. Due to the large share of mortgage-secured credit exposures in banks' credit portfolios and the significant economic importance of such exposures, incorrect or overly cautious acceptance by banks of mortgage collateral values may result in an increase in systemic risk. Therefore, to limit the consequences of potential crisis situations, banks should possess as complete knowledge as possible about the real estate market.

For effective risk management related to accepting real estate collateral, banks need reliable and complete information about the real estate market, current and historical data showing changes occurring in this market in both long-term and short-term perspectives, and especially its cyclicality. These data should take into account the local nature of the real estate market and the long-term nature of changes occurring within it.

The creation and active use by banks of databases collecting information about the real estate market constitutes an important factor promoting the development of an efficient system for obtaining long-term financing by banks using debt instruments issued based on mortgage-secured loans.

Banks' engagement in collecting and processing real estate data increases market transparency and the scope and quality of information that can be obtained, which in turn facilitates the sale of receivables (trading them), e.g., for the purpose of conducting securitization transactions or using loans as a pool securing the issuance of debt securities. Conversely, in the case of rating agencies assessing securities secured by mortgages (mortgage bonds, securitization papers), the quality of the collateral portfolio plays an important role, the assessment of which can be made using data of appropriate qualitative and quantitative standards.

Systematic collection by banks of information about the real estate market and the creation of databases containing at least the set of data specified in Recommendation J will ensure banks access to the appropriate set of information necessary for assessing the risk associated with the real estate market.

Databases should serve primarily to verify the value of accepted real estate collateral and update it throughout the entire period of the credit agreement. Information contained in databases will enable the analysis of individual local real estate markets, and especially the identification of changes occurring in them and the risk associated with specific properties that serve as collateral for credit exposures.

Information contained in databases can be used to assess the risk of changes in the value of real estate collateral (estimating parameters of prognostic models for real estate collateral values, determining trends in the value changes of these collaterals). Observing phenomena occurring in the real estate market enables effective portfolio risk management, monitoring the level of collateral value in the portfolio (e.g., in connection with monitoring the Loan-to-Value ratio), and taking appropriate preventive actions. In particular, modeling the assessment of the risk of changes in real estate collateral values should serve as one of the tools for conducting risk management policy for mortgage-secured credit exposures. The use by banks of models for assessing the risk of changes in real estate collateral values may also be useful in the context of assessing the security of receivables.

Recommendation J complements the principles specified in Recommendation S of the Financial Supervision Authority regarding good practices in managing mortgage-secured credit exposures, and consequently sets forth the criteria for assessing the reliability of databases indicated in Recommendation S. Recommendation J should be applied to all types and categories of real estate that constitute or will constitute the subject of collateral for credit exposures.

The construction of databases should be based on developed, widely disseminated, and harmonized standards regarding information collection. Extremely important features of every reliable database, determining its usability for assessing real estate collateral values and monitoring property values, are the accuracy, completeness, integrity, and verifiability of the data contained therein, ensuring the comparability of these data. The Annex to Recommendation J specifies the scope and structure of data describing specific types and categories of real estate, with a breakdown of appropriate subcategories to ensure comparability at various data levels.

The best way to meet the above-mentioned assumption is to maintain, independently of own (internal) databases, a common database for the entire banking sector, systematically fed by both bank sources by all banks involved in mortgage-secured credit exposures, as well as by non-bank sources. Such a database, due to the wide scope of information, can become the best source of authoritative and, above all, standardized information about the real estate market, although the use by banks of external databases will require banks to ensure the correct selection of data to match the bank's activity profile, environment (scaling the database to the bank's business profile), and IT infrastructure.

One of the key elements determining the reliability of databases is the quality of the information sources from which they are fed. The primary source of information about real estate should be data contained in notarial deeds and valuation reports. These reports, after being cross-referenced with data recorded in databases, should be verified from the perspective of the possibility of recovering funds from the collateral (the bank should take into account the recoverable value of the collateral, in accordance with Recommendation S).

There is no single, complete set of information necessary to assess the value of real estate collateral and monitor property values. Information sources are characterized by significant spatial dispersion and diversity in scope and quality. Banks should use reliable sources, i.e., in addition to the aforementioned notarial deeds and valuation reports, e.g.: land and building registers, land and mortgage registers, spatial development plans, information on transaction prices from local markets, statistical studies (e.g., data published by the Central Statistical Office), sets of unit price indicators from construction, catalogs of material expenditures, technical and design documentation, sets of data on prices and property values held by government and local government units. If a bank's internal database is not fed from the above sources, the bank should use external (including interbank) databases, in which data from reliable sources are collected. Banks should collect in databases, in particular, information on:

• transaction prices based on a real estate sale agreement (including a preliminary or binding agreement, concluded in the form of a notarial deed);
• property values disclosed in valuation reports prepared by certified property appraisers;
• the value of mortgage collateral based on the bank's assessment of the real estate collateral value.

The second element determining the level of reliability of databases is the stock of currently updated information. Banks should prepare analyses based on a sufficiently large, representative sample built using own data and data from external databases. A bank that does not have its own reliable database should use data from reliable external (including interbank) databases.

Recommendation J applies to all banks for which the share of mortgage-secured credit exposures in their own credit portfolios exceeds 10%. This share should be determined by the bank at least once a year. Recommendation J applies mutatis mutandis to branches of foreign banks and branches of credit institutions.

A reliable assessment of the risk of changes in real estate collateral values requires the use of models utilizing data accumulated in databases. Reliable, stable, and verified statistical models supporting the process of assessing the risk of changes in real estate collateral values streamline the process of monitoring the risk of portfolios of mortgage-secured credit exposures. Models used to assess the risk of changes in real estate collateral values are a separate and independent tool compared to methods used for assessing and monitoring the value of real estate collateral, defined for the purposes of Recommendation J in the definitions of monitoring real estate value and assessing the value of real estate collateral.

Recommendation 10 – regarding statistical models – applies to banks for which the share of the portfolio of mortgage-secured credit exposures in the value of mortgage-secured credit exposures for the entire banking sector in Poland is not less than 2%, i.e., significantly engaged banks (understood in accordance with Recommendation S). The bank should determine the level of market share once a year, based on data published by the KNF for the entire market2.

Due to the differences between mortgage-secured loans for residential and commercial real estate, banks analyze their market share for each of these two portfolios separately. It is particularly important for significantly engaged banks to actively participate in the external (interbank) information exchange system regarding the real estate market.

Due to the different nature of financing for commercial and residential real estate, the amendment to Recommendation J – within Recommendation No. 10 regarding the use of statistical models in assessing the risk of changes in real estate collateral values – introduces the possibility for significantly engaged banks not to use statistical models for mortgage-secured credit exposures on commercial real estate, provided that the methods used by banks for assessing collateral value ensure its reliable and credible assessment.

Due to the significance of the models used, banks should, upon request of the Financial Supervision Authority, present model documentation3 along with a description of the principles of their implementation and use, as well as the methodology for building models. The Authority will verify the documents and materials submitted by banks in terms of form and substance. Regarding the models referred to in Recommendation J, banks should apply the provisions of Recommendation W of the Financial Supervision Authority regarding risk management of models in banks.

Regardless of the above-mentioned principles regarding the coverage of a specific group of banks by this Recommendation, depending on the level of engagement in mortgage-secured credit exposures, all banks are encouraged to use databases on the real estate market and the good practices indicated in Recommendation J in this regard.

Regarding the quality and reliability of the data used, as referred to in Recommendation J, banks should also apply the provisions of Recommendation D of the Financial Supervision Authority regarding the management of information technology areas and the security of the teleinformatics environment in banks, indicating the need to develop formalized data management rules in each bank used in the course of activities, including in particular data architecture and quality management, and ensuring proper support for the bank's activities.

2 Data is published periodically by the KNF (with year-end data published by February 15 of the following year).
3 The KNF may assess such models on the basis and in the manner specified in Article 133(2)(1) and (2) of the Act of 29 August 1997 – Banking Law (Journal of Laws of 2022, item 2324, as amended).

Areas covered by the Recommendation
Recommendation J relates to issues concerning the collection and processing by banks of data on the real estate market and covers the following areas:

1. collection of data on the real estate market,
2. creation of databases on the real estate market,
3. reliability of databases on the real estate market,
4. use of databases on the real estate market.

The Financial Supervision Authority expects banks to adapt their activities to Recommendation J no later than by December 31, 2023, and in the scope of categories identifying real estate in databases on the real estate market – no later than by March 31, 2024.

Glossary of Terms

1. Significantly engaged bank – understood in accordance with Recommendation S.
2. Real estate market database – understood in accordance with Recommendation S.
3. Mortgage-secured credit exposure – understood in accordance with Recommendation S.
4. Model monitoring – understood in accordance with Recommendation W.
5. Monitoring of real estate value – understood in accordance with Recommendation S.
6. Commercial real estate – understood in accordance with Recommendation S.
7. Residential real estate – understood in accordance with Recommendation S.
8. Assessment of the value of real estate collateral – understood in accordance with Recommendation S.
9. Recommendation S – Recommendation S of the Financial Supervision Authority regarding good practices in managing mortgage-secured credit exposures.
10. Recommendation W – Recommendation W of the Financial Supervision Authority regarding risk management of models in banks.
11. Validation – understood in accordance with Recommendation W.
12. Reliability of a database – the total set of characteristics of a database specified in recommendation 6.1.
13. External (including interbank) database – an independent of the bank database on the real estate market.

List of Recommendations
I. Collection of data on the real estate market
Recommendation 1
Risk management related to real estate accepted by banks as collateral for mortgage-secured credit exposures should be an element of risk management policy in the bank and should be implemented based on data concerning the real estate market, collected in reliable internal or external (including interbank) databases.

Recommendation 2
Data collected by banks should allow, to a sufficient extent, for conducting real estate market analyses, assessing the value of real estate collateral, monitoring real estate value, and assessing the risk of changes in the value of real estate collateral.

Recommendation 3
The rules for maintaining and using databases on the real estate market should be determined by the bank in its credit risk management policy and described in procedures approved in accordance with the bank's internal implementation rules within a unified risk management system.

II. Creation of databases on the real estate market
Recommendation 4
Databases on the real estate market should contain data allowing for the classification of real estate into groups with a high level of similarity of features influencing their value.

Recommendation 5
The bank should actively participate in the external (interbank) information exchange system regarding the real estate market, creating for this purpose a common external (interbank) database for all banks, also fed from reliable non-bank sources. This database should be systematically fed by all banks covered by Recommendation J.

III. Reliability of databases on the real estate market
Recommendation 6
The bank should use databases that it has recognized as reliable.

Recommendation 7
The bank should verify the reliability of the databases used for the real estate market no less than once a year. The method of verification, criteria, and persons/organizational units of the bank authorized to conduct it should be specified in appropriate procedures, approved in accordance with the bank's internal implementation rules.

IV. Use of databases on the real estate market
Recommendation 8
A database on the real estate market should allow the bank to assess the value of real estate collateral and monitor real estate value for the mortgage-secured credit exposures analyzed by the bank.

Recommendation 9
The bank should have procedures and methodologies for assessing the value of real estate collateral, in particular for real estate for which it is not possible to make assessments based on databases on the real estate market created in accordance with Recommendation J.

Recommendation 10
A significantly engaged bank should use statistical models based on data from reliable external (including interbank) or internal databases for the proper assessment of the risk of changes in the value of real estate collateral.

I. Collection of data on the real estate market
Recommendation 1
Risk management related to real estate accepted by banks as collateral for mortgage-secured credit exposures should be an element of risk management policy in the bank and should be implemented based on data concerning the real estate market, collected in reliable internal or external (including interbank) databases.

1.1. To streamline the credit risk management process, banks should collect data on the real estate market.
1.2. For the collection of data on the real estate market, banks should use internal or external (including interbank) databases fed by both data held by banks and data from reliable non-bank sources.
1.3. Data from databases on the real estate market, collected by banks for credit risk management purposes, should be representative of the real estate market financed by the bank and should simultaneously take into account the local nature of the market, subject to the provisions of recommendations 4.1 and 4.2.
1.4. Databases on the real estate market should meet the reliability criteria specified in recommendations 6 and 7.

Recommendation 2
Data collected by banks should allow, to a sufficient extent, for conducting real estate market analyses, assessing the value of real estate collateral, monitoring real estate value, and assessing the risk of changes in the value of real estate collateral.

2.1. Databases on the real estate market should be currently fed by banks with data on real estate on which a mortgage has been established in favor of the bank.
2.2. The bank should feed databases on the real estate market with reliable, available, and obtainable data on real estate referred to in recommendation 2.1, in accordance with the Annex to Recommendation J, in particular data concerning:

a) transaction prices based on a real estate sale agreement (including a preliminary or binding agreement), concluded in the form of a notarial deed; b) property values disclosed in valuation reports prepared by a certified property appraiser; c) the value of mortgage collateral based on the bank's assessment of the real estate collateral value; d) banking-mortgage value of the real estate.

2.3. Databases on the real estate market should be fed not only by bank data, but also by data from other reliable sources, e.g., from:
a) notarial deeds; b) valuation reports; c) assessment of the value of real estate collateral; d) banking-mortgage value of the real estate; e) land and building registers; f) land and mortgage registers; g) spatial development plans; h) information on transaction prices from local markets; i) statistical studies (e.g., data published by the Central Statistical Office); j) sets of unit price indicators from construction; k) catalogs of material expenditures, technical and design documentation; l) sets of data on prices and property values held by government and local government units.

2.4. Information derived from monitoring real estate value should not be used in assessments of the value of real estate collateral as reference values.

Recommendation 3
The rules for maintaining and using databases on the real estate market should be determined by the bank in its credit risk management policy and described in procedures approved in accordance with the bank's internal implementation rules within a unified risk management system.

3.1. Internal procedures should, among other things, specify the rules for maintaining, using, and updating databases on the real estate market, as well as the scope of duties and responsibilities of persons administering and using