Retail Mortgage Credit Risk Analysis

Definition

Retail Mortgage Credit Risk Analysis concerns the application of Credit Risk Analysis to retail (individual person) Mortgage loans and similal financial products

EBA Requirements

This section further specifies factors relevant to assessing the prospect of the borrower to meet obligations under a loan agreement as referred to in Article 18(1) and 20(1) of Directive 2014/17/EU. In relation to loan agreements subject to national laws transposing that Directive, institutions and creditors should apply, in addition to provisions set out in Section 5.2.1, provisions set out in this section.

When necessary, in particular in cases of borrowers who are self-employed or have seasonal or other irregular income, institutions and creditors should make reasonable enquiries and take reasonable steps to verify the information regarding the source of repayment capacity.

If the loan term extends past the borrower’s expected retirement age, institutions and creditors should take appropriate account of the adequacy of the borrower’s likely source of repayment capacity and ability to continue to meet obligations under the loan agreement in retirement.

Institutions and creditors should ensure that the borrower’s ability to meet obligations under the loan agreement is not based on an expected significant increase in the borrower’s income, unless the documentation provides sufficient evidence.

When assessing the borrower’s ability to meet obligations under the loan agreement, institutions and creditors should account for committed and other non-discretionary expenditures, such as the borrower’s current obligations, including appropriate substantiation and consideration of living expenses.

As part of the creditworthiness assessment, institutions and creditors should carry out sensitivity analyses reflecting potential negative events in the future, including a reduction in income; an increase in interest rates in cases of variable rate loan agreements; negative amortisation of the loan; and balloon payments or deferred payments of the principal or interest.

In cases of foreign currency loans as defined in Article 4(28) of Directive 2014/17/EU, institutions and creditors should also factor into the assessment of the borrower’s capacity to meet the obligations potential negative scenarios of the exchange rate between the currency of the borrower’s income and the currency of the loan. Institutions and creditors should also take into account and assess any hedging strategies and actual hedges in place, including natural hedges, to mitigate foreign currency exchange risk.

For loan agreements that relate to an immovable property that explicitly state that the immovable property is not to be occupied as a place of residence by the borrower or a family member (i.e. buy-to-let agreements) as referred to in point (b) of Article 3(3) of Directive 2014/17/EU, institutions and creditors should apply the criteria set out in Section 5.2.3.

See Also

• EBA Guidelines on Loan Origination and Monitoring