EBA published guidelines on loan origination and monitoring, which bring together prudential standards and consumer protection obligations, along with the anti-money laundering and the Environmental, Social, and Governance (ESG) considerations. The guidelines contain expectations of EBA for improved creditworthiness assessments and the expectations apply to all banks offering loans to consumers, small and medium-size enterprises (SMEs), and corporates and to other creditors offering loans to consumers. The guidelines will apply from June 30, 2021, with certain transitional arrangements.
The objective of the guidelines is to improve banks’ credit-granting practices and governance arrangements to ensure that they have robust and prudent lending standards. This in turn should ensure that newly originated loans are of high credit quality and contribute in the future to lower levels of nonperforming loans. The guidelines specify internal governance arrangements for the granting and monitoring of credit facilities throughout the lifecycle. In the guidelines, EBA also provides guidance on the valuation of collateral at the point of loan origination as well as for the monitoring and revaluation. Th guidelines clarify the credit decision-making process, including the use of automated models, building on the requirements of the EBA guidelines on internal governance. The guidelines set requirements for assessing the borrowers’ creditworthiness and for handling of information and data for the purposes of such assessments.
In these requirements, the guidelines bring together the prudential and consumer protection objectives of EBA. EBA has developed these guidelines building on the existing national experiences, addressing shortcomings in institutions’ credit granting policies and practices highlighted by past experiences. The guidelines reflect recent supervisory priorities and policy developments related to credit granting, including environmental, social and governance factors, anti-money laundering and countering terrorist financing, and technology-based innovation. The guidelines will apply from June 30, 2021. However, institutions will benefit from a series of transitional arrangements. The application of the guidelines to the already existing loans and advances that require renegotiation or contractual changes with the borrowers will be from June 30, 2022. Institutions will be allowed to address possible data gaps and adjust their monitoring frameworks and infrastructure until June 30, 2024.
Notwithstanding the extended transition period, EBA notes that all loan origination requires effective risk oversight and management. EBA also calls on competent authorities to exercise their judgment and be pragmatic and proportionate in monitoring the implementation of the guidelines, taking into account the operational challenges and priorities institutions may have due to the COVID-19 pandemic, while facilitating the economic recovery efforts. These guidelines are vital to strengthening lending standards and asset quality in the future. These guidelines will replace the existing EBA guidelines on creditworthiness assessments under the Mortgage Credit Directive (EBA/GL/2015/11), which the EBA issued in June 2015 and which will be repealed with the effect from the date of application of the guidelines on loan origination and monitoring.
Effective Date: June 30, 2021 (with transitional arrangements)
Keywords: Europe, EU, Banking, Credit Risk, NPLs, Loan Origination, Guidelines, Mortgage Credit Directive, ESG, Governance, AML, Fintech, Artificial Intelligence, Big Data, COVID-19, EBA
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