Credit Risk Analysis of Other Secured Consumer Lending
Credit Risk Analysis of Other Secured Consumer Lending concerns special categories of Credit Risk Analysis that apply to certain types of secured consumer lending such as borrowing for construction or buy-to-let mortgages.
In relation to loan agreements secured by immovable property, other than those covered in Section 5.2.2, institutions and creditors should apply, in addition to the provisions set out in Section 5.2.1, provisions set out in this section.
If the property is still being constructed and intended to provide, upon completion, an income to its owner in the form of rents or profits from its sale, institutions should assess the development phase and the phase after the completion of the development, when the project converts into an income-producing property. For the purposes of such loan agreements, institutions and creditors should establish that:
- the borrower has a plausible plan related to the project, including estimates of all costs associated with the development;
- the borrower has access to builders, architects, engineers and contractors, who will take part in the development;
- the borrower has obtained or is able to obtain in the future all necessary permits and certificates for the development, as the project progresses.
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), institutions should assess the relationship between the future rental income from the immovable property and the borrower’s ability to meet obligations.
As part of the creditworthiness assessment, institutions should carry out sensitivity analyses to reflect potential negative market and idiosyncratic events in the future that are relevant to the type and purpose of the loan. These events may include
- a reduction in income;
- an increase in interest rates in cases of variable rate loan agreements;
- negative amortisation of the loan;
- balloon payments or deferred payments of the principal or interest; and,
- when relevant, deterioration in the marketability of the immovable property,
- an increase in vacancy rates and
- a reduction in the rental prices for similar properties.
When relevant, institutions and creditors should also consider the implication of foreign currency exchange rate risk, as provided in paragraph 108.
- EBA, Guidelines on loan origination and monitoring EBA/GL/2020/06