EBA guidelines on property valuation for loan origination and monitoring purposes

The European Banking Authority (EBA) published the final version of the Guidelines on loan origination and monitoring on May 29, 2020. They are in response to the European Commission’s action plan, the main objective of which is to reduce the level of non-performing loans at banks in the European Union.

The main objectives of introducing the Guidelines are:

• to improve the processes and mechanisms for new lending in Europe,
• to ensure reliable standards of credit risk taking, management and monitoring by institutions,
• to ensure high credit quality for new lending,
• to ensure that consumer protection is adequate and properly implemented.

The provisions of the document may have a direct impact on the practice of valuers in Poland. Chapter 7 of the Guidelines is devoted to valuation of real estate and movable property. There is a provision referring to the form of carrying out a real estate valuation.

At the time the loan is being granted, the value of the property serving as a collateral should be estimated by an appraiser based on a complete visual inspection of the property. The real estate appraisal may be prepared by a licensed external valuer, which means a person who prepares the study on behalf of the institution, or by an internal valuer, in other words a professionally licensed employee of the institution. Exceptions are residential properties on well-developed and mature real estate markets, which can be valued remotely using advanced statistical models. Models should be:

• based on a sufficiently large sample that is based on observed transaction prices,
• based on updated data of high quality,
• adjusted for location at the appropriate level of detail.

EBA makes it clear that the hallmark of a good model is the quality of the data it contains. The effectiveness and performance of the models should be continuously monitored. The institution is responsible for the proper operation of the model, while the appraiser is responsible for the valuation performed on the basis of the model. The valuer will evaluate, verify and approve the valuation proposal suggested by the model. It is important that the appraiser understands all the inputs and assumptions of the model. If there are doubts about the value proposed by the model, the appraiser should opt for another valuation method.

Institutions that have recourse to external valuers should create a list of acceptable valuers, who are knowledgeable in particular segments of the real estate industry.

The valuer, who carries out the valuation, must:

meet national or international requirements and accepted professional standards for appraisers,

possess appropriate experience, technical skills and the necessary knowledge (knowledge of the market, as well as the subject and the purpose of the valuation)

be independent from the lending process.

Institutions should evaluate the work of the valuers, for example by comparing their estimated values to the results obtained by advanced statistical models. Appropriate rotation of appraisers is extremely important – institutions should determine the number of consecutive valuations that can be executed by the same appraiser.

There is little time left to comply with the new requirements – the guidelines apply on June 30, 2021. Will the introduction of the guidelines have an impact on the work of valuers?

Dominika Gocalińska
Customer Relations Specialist