European Banking Authority guidelines on loan origination and monitoring (EBA/GL/2020/06)
On 29 May 2020, the European Banking Authority (the "EBA") issued final guidelines on loan origination and monitoring (the "Guidelines"). The purpose of the Guidelines is to ensure that in-scope entities have adequate loan origination and monitoring procedures in place in order to prevent loans from eventually becoming non-performing loans ("NPLs"). The Guidelines also address the protection and fair treatment of consumers with respect to loan granting.
The Guidelines are a response to the European Council's invitation to the EBA to issue "detailed guidelines on banks' loan origination, monitoring and internal governance which could in particular address issues such as transparency and borrower affordability assessment". While the Guidelines are not directly enforceable, national competent authorities must inform the EBA whether they comply or intend to comply with the Guidelines and if not, explain why.
Application by the CSSF of the EBA Guidelines
On 22 December 2022, the CSSF published Circular CSSF 22/824 in order to inform that, in its capacity as national competent authority, it will apply the Guidelines. Consequently, the Guidelines will become part of the CSSF’s administrative and regulatory practice. Circular CSSF 22/824 applies from 31 March 2023.
The Guidelines will apply to non-significant Luxembourg credit institutions, that is credit institutions that are not significant supervised entities within the meaning of Article 2(16) of Regulation (EU) No. 468/2014 of the European Central Bank of 16 April 2014, Luxembourg branches of credit institutions having their registered office in a third country and, in respect of certain sections of the Guidelines, professionals performing lending operations under Article 28-4 of the Luxembourg law on the financial sector of 5 April 1993, as amended, (the "LFS"), and creditors within the meaning of Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property or Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers. In addition, the consumer-protection provisions contained in the Guidelines will also apply to significant credit institutions and Luxembourg branches of EU credit institutions. Other provisions of the Guidelines will not apply to them.
What is the scope of the Guidelines?
All credit facilities granted by in-scope entities are captured by the Guidelines, excluding derivatives, debt securities and securities financing transactions. Section 5 (Loan origination procedures) and section 6 (Pricing) of the Guidelines do however only apply to "loans and advances", that is, amongst others, credits for consumption, mortgage loans, credit card debt, revolving loans and overdrafts, syndicated loans, financial leases and trade loans.
Section 5 and Section 6 do not apply to "loans and advances" made to credit institutions, investment firms, financial institutions, insurance and reinsurance undertakings, central banks and sovereigns, including central governments, regional and local authorities and public sector entities.
In addition, Section 5 and 6 only apply to loans originated after 31 March 2023 and loans and advances that already existed on 30 June 2021 if their terms and conditions change after 31 March 2023 and provided that such changes follow a specific credit decision approval, and if their implementation requires a new loan agreement with the borrower or an addendum to the existing agreement.
As to Section 7 (Valuation of immovable and movable property), it applies to any valuation, monitoring and revaluation of immovable property and movable property collateral, excluding financial collateral, conducted after 31 March 2023.
If in-scope entities do not have all the relevant information and data to be used for the monitoring of existing borrowers or credit facilities granted before 31 March 2023, as regard to Section 8 (Monitoring framework) of the Guidelines, they should collect them until 30 June 2024 through regular credit review of borrowers.