Mortgage Loan Minimum Standards Manual Updated July 2007 EBRD Contract No: C13407/C13408/UKF-2003-07-01 Mortgage Loan Minimum Standards Manual ACKNOWLEDGEMENTS This Mortgage Loan Minimum Standards Manual was written on behalf of the European Bank for Reconstruction and Development (EBRD) by advisors working for Bank of Ireland International Advisory Services. The writing of this manual and its application to Romania has been funded by the Financial Institutions Business Group within the EBRD. The UK Government under the UK/EBRD Technical Corporation (South Eastern Europe) has funded the application of this manual to Bulgaria and Croatia. The authors, under the direction of the EBRD, were Mr Rory Spain and Mr Gregory Allen. Rory Spain is a career banker with more than 30 years experience in commercial banking with Bank of Ireland. For the past 15 years, Rory has almost exclusively been involved on the central development of the Bank of Ireland Group Mortgage business. He has been responsible for the design, development and implementation of a mortgage system within Bank of Ireland; the review of existing legislation and procedures in Northern Ireland prior to setting up the Mortgage business there; managed the research and development of a securitisation programme and delivered business and technical mortgage training to a wide variety of staff. He has also bee responsible for the design and delivery of a specialist Mortgage Practice Training programme on behalf of Bank of Ireland and the Institute of Bankers in Ireland. This programme has been delivered to over 4000 bank staff in Ireland. He continues to be the External Examiner for this qualification. In addition, Rory has undertaken numerous assignments relating to the Mortgage Business in emerging and developing markets.. Gregory Allen is a banking adviser and trainer specialising in the areas of Mortgages and Securitisation. As Head of Operations within the Bank of Ireland’s ICS Building Society, Mr Allen was responsible for the development of new mortgage based products within the Group, reflecting the changing needs of the Irish Market. In addition, Mr Allen was responsible for a team which managed the first asset backed Securitisation of the Bank of Ireland residential mortgages. This included substantial interaction with the Rating Agencies. More recently, Mr Allen has been involved in the provision of training in Ireland and Spain in the area of Mortgage Practice and Financial Management for Banks. The authors would like to thank the following for their insights and contributions: Brian Kane (Standard and Poors, London) Ray Lawless (Mortgage Business, Bank of Ireland) Ray Weyer (Bank of Ireland International Finance) The application of this manual to the aforementioned countries in South East Europe was greatly assisted by Bank of Ireland partner organisations within each of the countries where extensive research was compiled on the housing market and great assistance provided in the organisation of the research visit. The authors benefited significantly from their contributions:- Mr Radu Radut, International Banking Institute, Romania Ms Gergana Slancheva, International Banking Institute of Bulgaria Mr Mario Malezan, Croatian Banking Association. During the research visits the Authors were given the opportunity to visit a number of financial insitutions within each of the countries. They would like to thank them very much for their time and cooperation. Romania Banc Post Banca Commerciale Romania Banca Transilvania Domenia Credit. July 2007 ii Mortgage Loan Minimum Standards Manual Bulgaria Bulgarian Post Bank United Bulgarian Bank Biochim Bulgarian American Credit Bank Croatia Splitska Bank Privredna Bank. They were also able to visit the National Banks and many others working within the industry such as Government Ministries, estate agents and insurance companies. We would also like to extend our appreciation to each and everyone who participated in the research meetings. The manual was helped enormously by staff of the EBRD both within the local offices in Romania, Bulgaria and Croatia and also in the EBRD London office where the Financial Institution’s Staff made many helpful comments and suggestions. July 2007 iii Mortgage Loan Minimum Standards Manual CONTENTS INTRODUCTION Part 1 The Minimum Standards and Best Practices 1. THE MORTGAGE PROCESS 1 2. MORTGAGE DOCUMENTATION 3 3. STRUCTURE OF MORTGAGE BUSINESS OPERATION 8 4. PROPERTY VALUATION 11 5. PROPERTY OWNERSHIP 14 6. INSURANCE 17 7. CREDIT AND RISK MANAGEMENT 22 8. IMPACT OF BASEL II 29 9. LENDING CRITERIA 36 10. SECURITY REQUIREMENTS 38 11 MANAGEMENT INFORMATION, IT AND ACCOUNT MANAGEMENT 40 Part 2 Overview of Primary and Secondary Markets 1. GENERAL OVERVIEW 1 2. UNDERSTANDING SECURITISATION 3 3. MORTGAGE SALES CHANNELS 11 4. MORTGAGE MARKET SEGMENTS 12 5. MORTGAGE PRODUCTS 14 6. SELF-BUILD PROJECTS 22 7. ARREARS MANAGEMENT AND REPOSSESSION 24 8. INTEREST RATES 25 9. INFORMATION TECHNOLOGY 26 APPENDICES Appendix 1: The Mortgage Process Appendix 2: Sample Application Form: Appendix 3: European Agreement on a Voluntary Code of Conduct on Pre-contractual Information for Home Loans Appendix 4: EBRD Environmental Guidelines for Residential Mortgages Appendix 5: Mortgage Bank and Mortgage Bond Laws in Europe Appendix 6: Investor / Rating Agency Sample Report Appendix 7: Cross Section of Mortgage Market Across Europe Appendix 8: Comparison between Secured Mortgage Bonds in Europe GLOSSARY OF TERMS BIBLIOGRAPHY July 2007 iv Mortgage Loan Minimum Standards Manual INTRODUCTION This manual has been written with the express intention that all banks and other financial institutions that received mortgage lines of credit from EBRD will comply with the minimum standards and best practices in the manual to ensure that the mortgages written can be included in either Mortgage Bond or Mortgage Backed Securities’ issues. Financial Insititutions are recommended to apply the minimum standards and best practices for these reasons. The information contained within this manual is based on the research undertaken by the writers and the standards that they have experienced in western European Banks. It is not intended to be definitive and there is no doubt that further improvements to mortgage lending practices will be identified as banks further develop this business. The manual is divided into two parts, both of which are of importance. Part 1 contains the core Minimum Standards and Best Practices, which have been divided into the following categories: • The Mortgage Process • Mortgage Documentation • Business Operations • Property Valuations • Property Ownership • Insurance • Credit and Risk Management Standards • Impact of BASEL II • Lending Criteria • Security Requirements • Management Information/IT and Account Management Within each of these categories, the document outlines Minimum Standards, Best Practices, reasons for Minimum Standards/Best Practices, possible investor/rating agencies requirements and further points to note. Part 2 provides the reader with further operational information and detail and it is strongly recommended that all heads of departments, front line managers and mortgage staff become fully conversant with it. In addition to this document, a ‘List of Minimum Standards and Best Practices’ has been produced to allow easy reference and guidance for senior managers of the lending institutions. The minimum standards and best practices introduced in relation to the origination and management of mortgage loans will assist lenders to meet requirements for the possible future issue of Mortgage Bonds or Mortgage Backed Securities. In order that a mortgage book can be considered suitable for the issue of Mortgage Bonds or Mortgage Backed Securities a lending institution must be aware of the likely requirements of both Credit Rating Agencies and Investors. Throughout the manual the personal experience of the writers and the outcome of their research are incorporated to provide such likely requirements. Moreover, the application of such minimum standards and best practices is prudent for the ongoing management of the primary mortgage business. July 2007 v Part 1 The Minimum Standards and Best Practices Mortgage Loan Minimum Standards Manual 1 THE MORTGAGE PROCESS OVERVIEW OF EBRD MINIMUM STANDARDS AND SUGGESTED BEST PRACTICES MS /01 i. The lender must have a written description of all the steps involved in Minimum making a mortgage loan, from the initial contact with the client up to Standards the signing of legal agreements, varying the terms of those agreements and up to redeeming the mortgage. This description should comprise a flow chart showing the steps involved and a written description of each of the steps. ii. The lender should have procedures in place to make sure that all staff that play a material part in the process receive training to ensure that they understand and are familiar with it. iii. A clearly defined organisational structure should be in place and include responsibilities, accountabilities and roles in all aspects of the mortgage process. REASONS FOR MINIMUM STANDARDS & BEST PRACTICES The process from beginning to end is long and detailed. It can be summarised into a ‘big picture’. Each member of staff, whether they be in a ‘front end’ Reasons for sales role or a back office administration role, needs to understand the ‘big Minimum picture’ and be competent to discuss it and explain it to customers. This is to Standards avoid later legal or other challenges by the client. The lenders