All mortgage loan providers must have a separate mortgage lending policy in place which has been approved by the board of directors of the concerned institution.
Mortgage loan providers should set a limit for this type of lending in relation to (a) exposure to property lending and (b) the overall loan book.
The lending policy for mortgage loans must make a clear distinction between financing for owner occupiers and financing for investors and take account of the different risks involved.
Lending policy must include, inter alia, detailed requirements in relation to verification of income and assessment of the borrower’s ability to repay, the maximum loan-to-value and tenor allowable for each type of loan, effective collateral management procedures for taking security against the loan and the application of the risk management framework in relation to this area of business.
Mortgage loan providers are required to have robust procedures and processes in place to monitor completion schedules for the financing of properties being constructed. Where stage payments are to be made as part of the financing agreement, the mortgage loan provider must first use owner’s equity portion of the construction price to pay the developer/contractor before the mortgage loan provider provides any of the loan monies.
Payments to the developer/contractor should be based upon prescribed completion milestones that must be physically confirmed either by the mortgage loan provider or by a suitably qualified professional agent who is independent from both the borrower and the developer/contractor.
Lending policies must be reviewed and signed off by the board of directors of the mortgage loan provider, at least annually, and updated or amended as and when appropriate.
2. Effective Verification of Income and Other Financial Information
A key input to effective management of mortgage loans granting process is properly verifying the borrower’s ability to service the loan. Accordingly mortgage loan providers must have in place proper processes and procedures to ensure effective and accurate verification of income and other financial information which the lender will rely on to determine the borrower’s capacity to repay.
Loan documentation should be designed to collect a full income and liabilities history for each applicant. A detailed record of the steps taken to verify income capacity along with full documentary evidence to support the decision (including a formal sign off by the appropriate approval authority) should be maintained on file and be available for inspection by the Central Bank’s examiners if required.
3. Reasonable Debt Service Coverage
Prudent granting of mortgage loans requires an accurate assessment of the borrower’s ability to repay the loan. This is an important factor in the context of:
a. minimizing defaults and losses to the mortgage loan provider.
b. limiting the possibility of consumer over-indebtedness; and
c. maintaining stability in the financial system.
Mortgage loan providers must establish appropriate processes to assess the borrower’s ability to repay the loan, review the processes regularly and maintain up-to date records of such processes.
In making this assessment the mortgage loan providers must take into account all relevant factors that could impact on the ability of the borrower to repay the loan, including, for example, other debt servicing obligations (including credit card debt), security of employment and the individual’s particular ‘lifestyle’ expenditure. Only reliable and sustainable income should be included when making the assessment. Bonuses and other non-standard or temporary income should be suitably discounted or if not guaranteed excluded from the assessment of repayment.
Mortgage loan providers should develop standard Debt Burden Ratio (DBR) calculation templates that enable lenders to gain a full understanding of the borrower’s financial capacity in order to make an informed decision on the borrower’s ability to service the new loan. The DBR assessment should include an appropriate amount calculated to cover normal recurring household expenditure commitments in addition to other liabilities.
Where the loan extends beyond normal retirement age, lenders must take account of the adequacy of the borrower’s retirement income to repay the loan in making the assessment.
Also, the prevailing interest rate environment shall be taken into account, as such a stress test should be carried out to determine whether the borrower could continue to repay the loan should interest rates rise.
In the case of mortgage loans with deferred repayment of the principal in the first stage and interest only is paid, lenders must be satisfied that the borrower will be able to meet principal and interest payments arising at the end of that period, when assessing the borrower’s ability to repay the loan.
The assessment of the borrower’s ability to repay should not be based on future property price appreciation or an expected increase in the borrower’s earning capacity.
4. Appropriate Loan to Value Ratio (LTV)
The taking of collateral is an important element in the lending decision. Accordingly, the Central Bank expects mortgage loan providers to adopt prudent LTV ratios when granting loans.
Lenders must ensure that all loans granted are subject to an appropriate LTV that takes into account current, latent, or emerging risk factors that may impact on the value of the collateral and the lenders’ ability to realize it. The value of collateral should be suitably discounted to take account of these risk factors.
The level of down payment required from the borrower should be drawn from the borrower’s own resources and not from other sources of borrowing (including personal loans or credit cards). The Central Bank expects mortgage loan providers lending policy to be explicit in this regard to ensure the borrower has an appropriate level of financial interest in the collateral.
It is also important to note that the LTV ratios set out in these Regulations are the maximum allowable. Ultimately mortgage loan providers are responsible for ensuring their institutions remain financially sound. Accordingly, mortgage loan providers should adopt more conservative LTV ratios where the underlying risks in lending markets or segments of the lending markets are higher.
Lending decisions should not be based solely on the security available and it is important that lenders do not rely on the LTV as an alternative to assessing repayment capacity. Mortgage loan providers must ensure that appropriate processes and procedures are in place to capture this risk.
5. Effective Collateral Management
Mortgage loan providers are required to have adequate internal risk management and collateral management processes in places that ensure property appraisals are realistic and substantiated. Property appraisal reports should not reflect expected future house price appreciation.
Prior to any irrevocable commitment to lend an independent on-site valuation of the property must be undertaken by a professional third party who is suitably qualified and independent of the borrower, seller, developer/contractor and the loan decision process.
Based on clear evaluation criteria, each bank and finance company should have in place a board approved list of independent Valuers.
All legal titles must be free from encumbrances and contain no impediments for the registration of security interests. In the case of land gifted to UAE Nationals confirmation of the gift from either The relevant Diwan, or Housing Program, as well as confirmation from the land department is required.
6. Due Diligence
In order to limit and mitigate the risk arising from mortgage loans business, mortgage loan providers must have in place a clear written program of due diligence (legal and other) to be followed during all stages of the application process to ensure lending policies are being implemented correctly. Procedures must also be in place to ensure that, prior to drawdown, all conditions attaching to the loan have been (or are being) complied with.