Recommendations on Standardization of Loans for the Purchase of Completed Housing

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Creation date: 2023-01-20

Approved

by the resolution of the Supervisory Committee of the National Bank of the Kyrgyz Republic No. 27/3 of December 25, 2008

Recommendations on Standardization of Loans Issued for the Purchase of Completed Housing

(In the edition of the resolutions of the Supervisory Committee of the National Bank No. 29/1 of 08.07.2016, No. 47/1 of 23.11.2016, No. 22/2 of 29.06.2017, No. 43/2 of 30.12.2022)

I. General Provisions

1.1. (Lost force in accordance with the resolution of the Supervisory Committee of the National Bank No. 22/2 of 29.06.2017).

1.2. These Recommendations are developed to reduce the credit risk of commercial banks and other financial and credit organizations licensed and regulated by the National Bank of the Kyrgyz Republic (hereinafter referred to as "banks") in carrying out operations for issuing loans for the purchase of completed housing (hereinafter referred to as "loan"), including the unification of parameters of such loans,
ensuring transparency of the housing credit market for potential borrowers and investors.

1.3. These Recommendations cover only the necessary minimum of recommendations for the standardization of loans issued for the purchase of completed housing. Banks have the right, taking these Recommendations as a basis, to introduce stricter additional requirements for credit risk management when issuing a loan for the purchase of housing.

At the same time, within the framework of the implementation of state programs developed and approved by the Cabinet of Ministers of the Kyrgyz Republic and aimed at creating favorable conditions for the population to acquire completed housing, banks may establish other requirements in accordance with the conditions of the program and their own risk assessment (coefficients, etc.). These risks must be reflected in internal policies and procedures, including, in accordance with the requirements of regulatory legal acts of the National Bank. Banks are responsible for the proper identification, assessment, and management of their risks, including credit risk.

(In the edition of the resolution of the Supervisory Committee of the National Bank of the Kyrgyz Republic of December 30, 2022 No. 43/2).

1.4. For the purposes of these Recommendations, the following concepts are used:

Loan
– monetary funds provided by the bank to the borrower under a loan agreement for the acquisition of ownership of real estate - completed housing on the conditions of targeted use, term, costliness, repayability, and security. In this case, the main security for the fulfillment of obligations under the loan shall be the acquired real estate.

Loan Agreement - an agreement under which the bank undertakes to provide monetary funds (loan) to the borrower in the amount and on the conditions provided for by the agreement, and the borrower undertakes to return the received monetary sum and pay interest on it.

Borrower - an individual with full legal capacity, namely, the ability by their actions to acquire and exercise civil rights, create civil obligations and fulfill them in full volume, with whom a loan agreement for the purchase of completed housing is concluded, subject to pledge as security for the fulfillment of obligations under the loan.

Borrower's solvency

• the borrower's ability to timely and fully fulfill their financial obligations arising from the conclusion of the loan agreement.

Underwriting – the process of assessing the client's solvency, the probability of loan repayment, as well as the cost and condition of the property transferred as collateral.

Credit History
– a formed by the credit bureau set of credit information regarding the subject of credit information, in accordance with the Law of the Kyrgyz Republic "On the Exchange of Credit Information".

(In the edition of the resolution of the Supervisory Committee of the National Bank of the Kyrgyz Republic of December 30, 2022 No. 43/2).

Appraiser (independent specialist-appraiser)
– an individual who has a qualification certificate for carrying out appraisal activities, issued in the manner determined by the Cabinet of Ministers of the Kyrgyz Republic.

(In the edition of the resolution of the Supervisory Committee of the National Bank of the Kyrgyz Republic of December 30, 2022 No. 43/2).

Appraisal Organization
– a legal entity registered in the manner established by legislation, the main type of activity of which is appraisal activity, and having in its staff at least two appraisers with a qualification certificate.

(In the edition of the resolution of the Supervisory Committee of the National Bank of the Kyrgyz Republic of December 30, 2022 No. 43/2).

Pledge - a method of securing the fulfillment of a monetary or monetary-denominated obligation under a pledge of ownership rights to real estate - completed housing.

Pledgor - a person who has ownership rights to the subject of the pledge. The pledgor can be both the borrower themselves and a third party with respect to the obligation secured by the pledge. In this case, the real estate transferred as collateral for the fulfillment of obligations under the loan remains in the possession and use of the borrower.

Pledgee (creditor) - a bank whose claims on the main obligation are secured by a pledge.

Pledge Agreement - an agreement under which one party - the pledgee, who is a creditor on the obligation secured by the pledge (the main obligation), has the right to receive satisfaction of its monetary claims against the debtor on this obligation from the cost of the pledged property (subject of the pledge) of the other party - the pledgor, in priority to other creditors of the pledgor, with exceptions established by the Law "On Pledge".

1.5. Credit risk in issuing a loan for the purchase of completed housing represents a combination of two risks – (1) the risk of the borrower's failure to fulfill their obligations in accordance with the terms and conditions of the loan agreement and (2) the risk that the bank will not be able to compensate for its losses on the loan through the realization of the subject of the pledge (real estate).

In this case, (1) the risk of the borrower's failure to fulfill their obligations is determined by two parameters (a) the borrower's solvency and (b) the reliability of the borrower. (2) The risk that the bank will not be able to compensate for its losses through the realization of the subject of the pledge is determined by the ratio of the market value of the subject of the pledge and the amount of the loan.

II. Assessment of Borrower Solvency

2.1. Based on the analysis of documented information about the potential borrower, the bank assesses its solvency – the ability to timely and fully fulfill its obligations for loan servicing (repayment of the principal and accrued interest).

2.2. The borrower's ability to fulfill their financial obligations (solvency) is determined:

• based on the ratio of the borrower's expenses and income;
• by the stability of the income received by the borrower.

2.3. When assessing the ratio of expenses and income sizes, it is recommended to use two coefficients:

1) D/I (Debt/Income) Coefficient, reflecting the ratio of monthly loan payments (principal debt and interest payments) to the borrower's average monthly total income (after deducting taxes and other withholdings).

In accordance with international experience, the recommended value of the D/I coefficient is no more than 35%.

2) E/I (Expenses/Income) Coefficient, reflecting the ratio of the total amount of constant monthly expenses to the borrower's average monthly total income (after deducting taxes and other withholdings).

The recommended value of the E/I coefficient is no more than 40%.

2.3.1. When calculating the borrower's total monthly income, it is recommended to take into account income for the last 6-12 months, while only documented income of persons who are joint borrowers under the loan agreement should be considered. In exceptional cases, the possibility of issuing a loan to a borrower employed for less than 6 months is considered, provided there is a written guarantee (confirmation) from the place of work (organization) about the extension of labor relations with the borrower for a period of more than 3 years.

2.3.2. When calculating the D/I and E/I coefficients, the following documented income of the borrower is used:

1)
Salary at the main place of work, including income for overtime work and bonuses (if the regularity of receiving the bonus is confirmed); 2) Income from part-time work and concurrent employment; 3) Income in the form of dividends; 4) Income in the form of interest on deposits, securities; 5) Net income in the form of rent; 6) Alimony and child benefits; 7) Income from individual entrepreneurial activity without forming a legal entity, 8) other documented income.

2.3.3. When determining the income of a borrower who has income from individual entrepreneurial activity, it is necessary to require and consider the following documents:

• copy of the certificate of state registration and/or patent;
• certificate from tax authorities on the absence of debt to the budget at the time of submitting documents to obtain a loan;
• contracts for supply, for services rendered, and other documents confirming the financial stability of the borrower and their ability to receive sufficient income to repay the loan during the term of the loan agreement.

2.3.4. A loan is issued on the condition of the bank's confidence in the stability of receiving adequate income by the borrower during the expected term of the loan agreement.

2.3.5. It is recommended to include in the total amount of monthly expenses expenses for all payments, deductions, and withholdings made by the borrower during the month, including housing costs, utility bills, insurance payments, loan servicing (including others), alimony, other mandatory monthly expenses (car maintenance; education fees; maintenance, servicing, insurance of other movable and immovable property, etc.).

2.4. For a clear and complete picture of the borrower's real financial position, it is necessary to analyze the stability of the borrower's employment, their future income and expenses.

2.5. When assessing the stability of the borrower's income receipt, it is necessary to take into account:

• that the borrower must be legally competent and over 18 years old.
• the probability of the borrower maintaining stable earnings during the term of the loan agreement. During underwriting and consideration by the credit committee, it is recommended to analyze: the borrower's level of education, the prospects of the specialty, the demand for the profession, the correspondence of the salary to the average salary in the market for this profession, the term and work experience of the borrower in this industry, their successes and achievements, etc.

III. Borrower Reliability

3.1. When assessing the reliability of the borrower, it is necessary to take into account:

• the moral readiness of the borrower to assume legal and financial obligations in accordance with the contracts concluded related to the loan;
• the borrower's credit history (absence of negative information);
• the reputation of the borrower, both professionally and in a general human sense.

3.2. In order to minimize the risk of the borrower's failure to fulfill their obligations, it is recommended to require the borrower to insure their life and ability to work for the entire period of the loan agreement (by timely prolongation of relevant insurance contracts or concluding new ones) in such a way that the amount of insurance coverage is always not less than the amount of the outstanding loan debt.

3.2.1. The policyholder and the insured person under the personal insurance contract must be the borrower, and the beneficiary under the insurance contract must be the bank that provided the loan.

IV. Sufficiency of the Value of the Pledged Property to Compensate the Bank's Losses on the Loan

4.1. The risk that the realization of the subject of the pledge (real estate) will not compensate for the bank's losses on the loan is determined by the LTV (Loan/Value) coefficient, i.e., the ratio of the cost of the real estate transferred as collateral and the loan amount (principal debt amount).

4.1.1. The recommended value of the LTV coefficient is no more than 60%.

4.1.2. When calculating this coefficient, as the cost of the real estate transferred as collateral, the minimum of two values is used: the price of the real estate according to the sales contract or the appraised value of this real estate.

4.2. In order to reduce risks when issuing a loan,
it is recommended for the bank to establish the following requirements for the property transferred as collateral:

4.2.1. The assessment of the cost of the real estate transferred as collateral is carried out at the expense of the borrower by an appraiser/appraisal organization in accordance with the requirements established by the legislation of the Kyrgyz Republic. The appraiser/appraisal organization must provide a detailed report on the assessment results with justifications and conclusions about the value of the assessed object.

In this case, it is recommended to use the services of an appraiser/appraisal organization meeting the following requirements:

• presence of a qualification certificate;
• the appraiser/appraisal organization must not be an employee and/or an affiliated person of the bank and a related person of the borrower;
• work experience of at least 2 (two) years in the field of appraisal activity.

(In the edition of the resolution of the Supervisory Committee of the National Bank of the Kyrgyz Republic of December 30, 2022 No. 43/2).

4.2.2. The real estate transferred as collateral must be located on the territory of the Kyrgyz Republic and at least meet the following conditions and requirements:

1) is not in a dilapidated condition;
2) has electricity and water supply;
3) has a reinforced concrete, stone, or brick foundation;
4) is not adobe, nor a prefabricated-panel real estate object.

4.2.3. The real estate transferred as collateral must be free from any restrictions (encumbrances)
rights to it, and must not be pledged to secure another obligation of the borrower.

4.2.4. The real estate transferred as collateral must be insured (insurance against loss, damage to property) for the entire period of the loan agreement (by timely prolongation of relevant insurance contracts or concluding new ones) in such a way that the amount of insurance coverage is always not less than the amount of the outstanding loan debt.

The policyholder under the property insurance contract must be the borrower, and the beneficiary under the insurance contract must be the bank that provided the loan.

4.2.5. Ownership rights to the real estate transferred as collateral must be confirmed by corresponding documents, оформленными (formatted) in accordance with the requirements of the legislation of the Kyrgyz Republic.

4.2.6.
Before concluding the pledge agreement, the borrower and spouse(s), as well as other persons defined by the legislation of the Kyrgyz Republic, must give notarized consent to the transfer of the acquired real estate as collateral.

4.2.7. The pledge of real estate must be registered with the authorized body for state registration of real estate.

4.2.8. During the term of the loan agreement, without the written consent of the bank, re-planning, reconstruction, and change of the intended purpose of the property transferred as collateral must not be allowed.

4.2.9. Without prior written consent of the bank, the borrower must not conclude other pledge agreements, or otherwise create encumbrances on the real estate that is the subject of the pledge.

4.3. The bank, at its discretion, has the right to additionally insure the loan issued to the borrower by concluding a contract with an insurance organization on insurance of business risk (non-repayment of the loan).

V. Underwriting and Conclusion of Contracts

5.1. During the underwriting procedure, the bank must assess the magnitude of each of the risks specified in paragraph 1.5 of these Recommendations.

5.2. Within the framework of underwriting, it is necessary to assess all supporting documents regarding the borrower themselves, their income and expenses, conduct a legal examination of title documents for the subject of the pledge, etc.

5.3. The results of underwriting must be considered at a meeting of the bank's credit committee.

5.4. It is recommended to conclude a loan agreement only after eliminating existing remarks on the documents provided by the potential borrower and adopting a positive decision on providing the loan, as well as discussing all loan terms with the client. In this case, the loan agreement is recommended to be concluded in the form of Appendix 1 to these Recommendations, observing the norms of the legislation of the Kyrgyz Republic.

Appendix 1

to the Recommendations on Standardization of Loans, issued for the purchase of completed housing

LOAN AGREEMENT

city ___________

"____"______________ year

Bank, represented by _________________, acting on the basis of __________________, hereinafter referred to as "Creditor", on the one hand, and

Mr. (Mrs.) _____________________________________, ID No. _____________, issued _______________________, date of issue _________________, residing at address: _______________________, hereinafter referred to as "Borrower", on the other hand, hereinafter jointly referred to as "Parties", and separately as indicated above or "Party", have concluded this agreement (hereinafter referred to as "Agreement") on the following:

Section 1. SUBJECT OF THE AGREEMENT

1.1. In accordance with this Agreement, the Creditor provides the Borrower with a loan in the amount of (_______) _______ (hereinafter in the text – "Loan"), on the conditions of targeted use, security, term, costliness, repayability, and other conditions of this Agreement.

1.2. The Borrower undertakes to return the Loan, with the payment of Interest (hereinafter in the text - Reward/Remuneration), in accordance with the conditions of this Agreement.

Section 2. CONDITIONS FOR PROVIDING THE LOAN

2.1. The Loan is provided for a term of ____(___________) months.

2.2. The Loan is provided for the following purposes: ______________________________(purchase of an apartment or other real estate), having the following characteristics (number of rooms, area, floor, etc.), located at address: ___________________.

2.3. The Loan is provided in ___________ (currency type) in non-cash form by transferring the entire loan amount to account No. __________ in ____________ (Bank Name), opened in the name of the Borrower, no later than __ (____) working days, counting from the date: ______________________.

2.4. Repayment of the Loan and payment of remuneration on the Loan is carried out by the Borrower no later than the deadlines provided for in the Schedule of Step-by-Step Repayment, which is Appendix No. 1 to this Agreement (hereinafter in the text – Repayment Schedule), in accordance with the conditions of this Agreement.

2.5. The Loan is provided to the Borrower on the condition:

• payment by the Borrower of the difference between the cost of the acquired real estate specified in article 4.1 and the amount of the provided loan from the Borrower's own funds in the amount of ____ (_____________) and depositing the aforementioned amount into the account specified in p.2.3.;
• conclusion by the Borrower of insurance contracts provided for in p 5.4.5 of this agreement;
• accuracy and completeness of the information presented by the Borrower to the Creditor, in accordance with this agreement, including that specified in the application for obtaining the Loan».

2.6. The monetary funds credited in accordance with p.2.3 and p.2.5 of this agreement are transferred at the disposal of the Borrower towards payment under the Sales Agreement ______________ (apartment/other real estate) to account ____________ (seller) of real estate in ___________ (Bank Name) or (credited to the deposit account of notaries/issued to the Borrower for payment under the sales agreement in cash).

2.7. The debt under this Agreement, including the principal amount of the Loan and remuneration for it, may be repaid early by the Borrower on the conditions provided for in Section 6 of this Agreement.

2.8. Hereby, the Borrower gives their consent to the non-accountable deduction from any bank accounts of the Borrower of the amount of the Loan, accrued Remuneration, and all fines (if any are accrued), which the Creditor may use upon the occurrence of conditions specified in p. 5.1.3 of this Agreement.

Section 3. REMUNERATION FOR THE USE OF THE LOAN

3.1. For the use of the Loan, the Borrower undertakes to pay the Creditor remuneration in the amount of ________(_______) percent per annum of the Loan amount.

3.2. The size of the annual effective interest rate on the Loan, taking into account commissions and other payments, is _____(____) percent per annum of the Loan amount.

3.3. Remuneration is accrued on the amount of the outstanding principal debt on the Loan, based on the actual number of days of using the Loan.

3.4. The term for accruing remuneration starts from the day following the provision of the loan; the repayment day is not included in the term for accruing remuneration.

(In the edition of the resolution of the Supervisory Committee of the National Bank of the Kyrgyz Republic of December 30, 2022 No. 43/2).

3.5. Payment of Remuneration is made by the Borrower no later than the deadlines provided for in the Repayment Schedule.

3.6. The date of payment of Remuneration is understood as the date of crediting the amount of Remuneration to the account specified in p.8.1 of this Agreement.

Section 4. SECURITY FOR THE FULFILLMENT OF THE BORROWER'S OBLIGATIONS UNDER THE AGREEMENT

4.1. Security for the fulfillment by the Borrower of their obligations under this Agreement is:
_______________________, located at address: ___________, appraised value ______ () , according to Pledge Agreement No. ________ dated "" year, which is an integral part of this Agreement (hereinafter in the text – "Subject of Pledge").

4.2. In addition to the Subject of Pledge specified in p.4.1 of this Agreement, the Borrower is liable for their obligations under this Agreement with all their property, against which execution may be levied in accordance with the legislation of the Kyrgyz Republic.

4.3. Other security for the fulfillment of the Borrower's obligations under this Agreement ____________________________________________________________.

Section 5. RIGHTS AND OBLIGATIONS OF THE PARTIES

5.1. The Creditor has the right:

5.1.1. At any time to carry out checks on documents of the actual financial condition of the Borrower, the targeted use of the Loan, the presence, use, preservation, condition, and maintenance conditions of the Subject of Pledge.

5.1.2. To demand early collection of the debt under this Agreement, including the principal amount of the Loan, the amount of accrued Remuneration, the penalty amount, on the conditions and in cases established by this Agreement, including deducting from the Borrower's account, opened in the manner specified in p.5.2.3 of this Agreement.

5.1.3. In a non-accountable manner, without additional consent of the Borrower, to deduct from any accounts of the Borrower, opened in any banks and/or financial and credit organizations carrying out separate types of banking operations in the Kyrgyz Republic and abroad, including from the Borrower's account opened in the manner specified in p.5.2.3 of this Agreement, the amount of debt under this Agreement, including the principal amount of the Loan, Remuneration accrued for the use of the Loan, fines, penalties, expenses, and losses payable/compensated by the Borrower to the Creditor in accordance with this Agreement and the Pledge Agreement specified in p.4.1 of this Agreement, in the case of:

• non-repayment (non-return) within the deadlines established by this Agreement, of the Loan and/or accrued Remuneration;
• one of the statements and/or guarantees made by the Borrower in this Agreement was invalid or became invalid during the term of this Agreement;
• the occurrence of any of the cases specified in Section 7 of this Agreement.

5.1.4. In the event of a change in the conditions for the formation of borrowed resources, associated with amendments and additions to existing regulatory legal acts and/or the adoption of new regulatory legal acts of the Kyrgyz Republic regulating banking, civil, and/or financial relations, to unilaterally change the conditions of this Agreement, including the Remuneration rate and the amount