On 31 August 2018 the Financial Supervisory Authority of Norway (FSAN) submitted a proposal to the Ministry of Finance for a new regulation covering prudent consumer lending practices.
The draft proposal follows on from the guidelines on prudent consumer lending practices published by the FSAN in June 2017. In the first half of 2018, the FSAN reviewed the compliance of financial institutions with the 2017 guidelines and concluded that the majority of them had not implemented the guidelines satisfactorily. In order to strengthen the FSAN's ability to ensure that the 2017 guidelines are actually implemented, it has proposed that they be converted into a regulation. This would make it easier for the FSAN to impose penalties on institutions that fail to comply with the rules.
The draft regulation contains several requirements relating to the issuance of consumer loans, including credit offered via credit and payment cards. Most of the requirements are a continuation of those included in the 2017 guidelines; however, there are some significant amendments.
Scope The Norwegian consumer loan market is dominated by web-based institutions. In order to protect Norwegian consumers and avoid jurisdictional arbitrage, the scope of the regulation has been widened compared with that of the 2017 guidelines and now includes financial institutions providing cross-border services into Norway under an EU passport. The scope of the 2017 guidelines was limited to Norwegian financial institutions and branches of foreign financial institutions in Norway. The FSAN has concluded that such a scope of application for the regulation would not violate any directives or general freedoms under the EEA Agreement.
Debt servicing capacity When assessing a borrower's servicing ability, the financial institution must factor in an interest rate increase of at least five percentage points from the prevailing level of interest on the borrower's overall debt. If the borrower lacks sufficient resources to meet normal living expenses after an increase of five percentage points, a loan cannot be granted.
The 2017 guidelines provide more flexibility to financial institutions since they are in a guideline format and obligations are phrased using the word "should". Under the regulation, most rules have been amended so that they allow no discretion by banks. If a borrower cannot meet the debt servicing capacity or other requirements in the proposed regulation, a loan will not be granted.
The FSAN considered whether it should allow for a specific quota of the loans granted by an institution each quarter to deviate from the requirements in the regulation. Such a system is in place under the regulation on new residential mortgage loans (FOR-2018-06-19-906). However, the FSAN concluded that in the interest of consumer protection, banks should not be given authority to deviate from the regulation.
Debt ratio Financial institutions cannot grant consumer loans that would increase a borrower's overall debt to more than five times its gross annual income
Instalment payments Consumer loans which must be repaid with instalment payments cannot have terms longer than five years. The proposed regulation specifically states that the instalment requirement means that loans must be repaid in monthly instalments on a linear schedule. Accordingly, no balloon payments are permitted.
Exceptions for loan refinancing and credit cards with low credit limits The proposed regulation contains two exceptions that may apply to loan refinancing and credit cards with low credit limits:
- The requirements on debt servicing capacity and debt ratio do not apply to loan refinancing where the refinanced loan does not exceed the size of the existing loan and has the same or more stringent terms.
- The requirements on debt servicing capacity, debt ratio and instalment payments do not apply where applications for a credit card with a maximum credit limit of Nkr25,000 are concerned, provided that the applicant does not already have a credit card.
The FSAN's proposal is expected to be subject to a public consultation. The consultation process is likely to last between two and three months, after which a final version of the regulation could enter into force within another few months.
For further information on this topic please contact Karl Rosén or Johan Christian Kongsli at Advokatfirmaet Grette AS by telephone (+47 22 34 00 00) or email ([email protected] or [email protected]). The Advokatfirmaet Grette AS website can be accessed at www.grette.no.
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