- Miranda Pambori
In response to the growing amount of non-performing loans (NPL’s) within Europe, the subsequent economic and social consequences and hardships due to Covid-19 and the everlasting desire to create a united and uniformed European Economic Area; the European Banking Authority (EBA) has proceeded to the publication of another set of Guidelines, this time focusing on Loan Origination and Monitoring (the Guidelines). As an extension to its previous published Guidelines, the EBA aims to tackle the problems faced within the European and International economic world and fill the gap that exists in relation credit-granting and consumer protection, both of which lie at the heart of the European objectives and agenda.
The Guidelines were developed in response to the Council of the European Union’s Action Plan on tackling the high level of non-performing exposures. By creating a set of detailed Guidelines on banks, the aim is to address and tackle the issues of transparency and borrower affordability. The objective of the Guidelines is to improve institutions’ practices in relation to credit granting. Furthermore, the obligation incurred on the creditor to assess the creditworthiness of a borrower aims to ensure that creditors’ practices are aligned with consumer protection rules and allow the fair treatment of consumers against the risks of over-indebtedness, bankruptcy and overall encourage responsible lending.
Building on the already existing national practices while addressing the shortcomings of institutions’ credit-granting policies and practices, allows for an easier appreciation and application of the Guidelines and simultaneously achieving the improvement and establishment of a better working framework and the desired consumer protection.
Previous initiatives and guidelines published by the EBA tackle problems around loans once they become non-performing, whereas the Guidelines, focus on enabling the creation of loan originating standards and ensure that newly originated loans are of high credit quality, remaining equally performing in the future.
The Guidelines also take into account the integration of environmental, social and governance related factors and environmentally sustainable lending, anti-money laundering and counter-terrorist financing.
It is essential to note that the Guidelines are neither binding nor directly applicable. They are non-legislative tools (Level 3 regulatory requirements) to promote the consistent application of EU law across its Member-States. The Guidelines are directed to competent authorities, financial market participants and financial institutions, which are however expected to ‘make every effort to comply’ and report so accordingly. Under the ‘comply or explain’ principle, any competent authority that does not comply or does not intent to comply, must inform the EBA of this as well as the reasons for non-compliance.
Although the Guidelines became applicable on 30/06/2021, attention should be given to the 3-part phase of application. Different application dates apply, depending on the date of origination of each loan. For newly originated loans (after 30/06/2021), full application of the Guidelines applies on that day whereas, for pre-existing but renegotiated loans (prior to 30/06/2021) the Guidelines become applicable on 30/06/2022 and their full application will be on 30/06/2024.
One of the major characteristics in understanding and implementing the Guidelines, is its focus on the proportionality principle and differentiation. Institutions should at all levels apply the principle of proportionality accordingly, both in terms of their own size, nature, scale and complexity of their activities but even more in regard to their respective borrowers and their status. As seen both in the structure and content of the Guidelines, they very much focus on the type of borrower and purpose of the loan and all the different categories that are covered within. This encapsulates the intention of creating a framework that differentiates between borrowers and thus contributes to achieving a well-rounded policy area, with greater (consumer) protection, away from a ‘one-fits-all’ approach that limits the performance of institutions, borrowers and the overall European economy. Differentiating between the different classes of borrowers and assets is essential for the correct and justifiable application of these guidelines and the achievement of the main objectives (control the risks associated, ensure overall credit quality of the loan and protect borrowers from irresponsible lending).
Institutions should ensure the close monitoring at all levels and regular review of their policies and procedures, especially in relation to the creditworthiness assessment and the information and data they have, ensuring these remain valid, accurate and representable of the current situation.
Equally important, is for financial institutions to ensure that there is a clear definition and a shared understanding of the different types of borrowers so as to be able to correctly match the candidates in the right category and apply the part that is relevant to them. The Guidelines provide general provisions and then split into sub-categories based on the type of borrower/asset/loan, thus institutions must be aware of the different details and sections applicable in each different type. The use of standardised lists/templates similar to the information contained in the Annexes will enable institutions to easily distinguish between these different types, and thus the different processes and requirements applicable each time.
To summarise, the Guidelines encourage close monitoring and a case-by-case application of the provisions to ensure they are well-suited and proportional to the profile of the borrower and the type of the lending activity, thus tailoring the lending activity to the borrower’s capacity to repay.