On 29 May 2020, the European Banking Authority (EBA) published guidelines on loan origination and monitoring that expect institutions to develop robust and prudent standards to ensure newly originated loans are assessed properly. The guidelines also aim to ensure that institutions’ practices are aligned with consumer protection rules and respect fair treatment of consumers.
To support the dual focus of the guidelines, bringing together the prudential framework and consumer protection aspects of credit granting, the guidelines, in particular:
- clarify the internal governance and control framework for the credit-granting and credit decision-making process, building on the requirements of the EBA guidelines on internal governance;
- specify requirements for the creditworthiness assessment of borrowers, differentiating between lending to (1) consumers, (2) micro and small enterprises and (3) medium-sized and large enterprises, and set out the requirements for handling information and data for such assessments;
- set out supervisory expectations for the risk-based pricing of loans;
- provide guidance on the approaches to the valuation of immovable and movable property collateral at the point of credit granting, and the monitoring and review of the value of such collateral at the point of credit granting, and the monitoring and review of the value of such collateral, based on the outcomes of the monitoring; and
- specify the ongoing monitoring of credit risk and credit exposures, including regular credit reviews of borrowers.
The publication of the guidelines comes at the unprecedented time of the COVID-19 pandemic and the EBA notes that their implementation should reflect the balance between the needs for banks to focus on core operations and to strengthen future lending. To address this, the EBA is setting out a three-phase implementation of the guidelines so that institutions have additional time to deal with any COVID-19 related immediate operational priorities.
The guidelines will apply from 30 June 2021. Institutions will benefit from a series of transitional arrangements:
- the application of the guidelines to existing loans and advances that require renegotiation or contractual changes with borrowers will apply from 30 June 2022; and
- institutions will be allowed to address possible data gaps and adjust their monitoring frameworks and infrastructure until 30 June 2024.
The EBA expects Member State competent authorities to exercise their judgement and be pragmatic and proportionate in monitoring the implementation of the guidelines by institutions. The EBA states that this pragmatic approach should result in the authorities prioritising their response on the most material issues identified by the institutions in their gap analyses, taking into account the operational challenges and priorities institutions may have as a result of the COVID-19 pandemic, while facilitating the economic recovery efforts.