Prepared by: Emil Radziszewski – Managing Director for Banking Supervision, Jacek Barszczewski – Director of the Public Communication Department

Lending is one of the core purposes of banks’ business and sources of income. No bank has an interest in introducing restrictions on that source of income without a good business reason. However, since a bank, while granting a loan, places the risk of default on the funds that have been entrusted to it (including clients’ savings) and that it must return, the bank needs to make sure that the risk is minimised. For these reasons, the bank is legally obliged to make the lending conditional upon creditworthiness, i.e. the borrower’s capacity to repay the loan with interest, within the time limits specified in the agreement with the bank. Making the loan conditional upon creditworthiness also protects the borrower against excessive debt and financial hardship that might limit their consumption capacity for a long time or, as in the case of businesses, their production or investment capacity.

The rules for assessing creditworthiness for mortgage loans have been specified by Komisja Nadzoru Finansowego in: Recommendation S on good practices in the management of credit exposures secured by mortgages. In accordance with that Recommendation, in particular:

• creditworthiness assessment should take into account (in addition to a qualitative analysis) a quantitative analysis consisting in establishing the level and stability of the sources from which the loan is to be repaid;
• before deciding to engage in a credit exposure secured by mortgage, the bank must carry out a robust and comprehensive assessment of the client’s creditworthiness based on submitted information about (i) the sources from which the debt is to be repaid, (ii) the subsistence costs typical of the borrower in question, (iii) all financial obligations, and (iv) the defined life of the loan (recommendation 8);
• the bank should carry out a robust and fully objective assessment of the client’s creditworthiness in quantitative and qualitative terms, based on the submitted information about the sources of loan repayment, the subsistence costs typical of the borrower in question (for retail clients), all credit and non-credit financial obligations from which the borrower cannot withdraw, i.e. obligations under, among others, provisions of law or any permanent or irrevocable obligations (in particular on account of all due taxes, charges, contributions, child or spouse support benefits ordered by a court, and annuities), and the defined life of the loan (recommendation 8.1);
• in its quantitative analysis, the bank should take into account the income characterised by stability throughout the period of loan repayment; in the case of irregular income, the definition of the life of the loan should take into account an individual assessment of the level, stability and, in some cases, cyclical nature of the actual income (recommendation 8.4);
• for retail clients who receive irregular or unstable income, creditworthiness assessment should allow for an assessment of the capacity to manage and repay the debt regularly; if the result of such assessment is positive, the bank may grant the loan to such clients, despite the irregular or unstable nature of their income (recommendation 8.5);
• the bank should take into account the manageable income (the income which remains at the borrower’s disposal after deduction of financial liabilities other than the credit liabilities from which the borrower cannot withdraw) in the quantitative assessment of creditworthiness of the retail client (recommendation 8.4); 
• in its quantitative analysis, the bank should take into account the risk of reduction of the client’s manageable income (e.g. due to a decrease in salary or due to an increase in fixed expenses) and the impact of that risk on the borrower’s creditworthiness (recommendation 8.7);
• the borrower’s income, including income from business activities, should be the main source of loan repayment the bank needs to look at (recommendation13.1).

From the above-mentioned provisions of Recommendation S it follows that for the purpose of creditworthiness assessment, the essential thing to assess is the borrower’s income, but not only in terms of the level of income at the time of granting the loan, but also in terms of regularity and stability of the income throughout the period of loan repayment as well as the subsistence costs typical of the borrower in question and all fixed financial obligations affecting the funds being at the borrower’s disposal (the manageable income). The fact that a borrower receives irregular or unstable income does not preclude the bank from granting the loan. However, the bank must properly consider this circumstance in assessing the borrower’s capacity to manage and repay the debt regularly. 

In this context, it is necessary to consider how creditworthiness assessment performed by banks treats the income under the ‘Family 800 plus’ benefit that some applicants for mortgage receive. It is an income whose stability depends on the age of the child for whom the benefit is granted and which can be received over a much shorter period of time than the period for which the loan is granted. It should also be noted that in addition to this income, the bank is obliged to take into account the higher costs incurred by the borrower’s household in connection with the maintenance, upbringing or education of children until they become financially independent, which in Poland usually takes place around the age of 26–27 years (that is 8–9 years after the cessation of the benefit).

The UKNF does not expect banks to refuse to consider the ‘Family 800 plus’ benefit in assessing the creditworthiness of mortgage borrowers. What the UKNF expects, though, is that in assessing creditworthiness, banks should consider and differentiate the period in which the benefit is to be disbursed, i.e. banks should consider the income the borrower can reasonably expect throughout the life of the loan, not only at the time of entering into the agreement. As a rule, banks should not consider the income from the benefit in question as a stable fixed income, if the period in which the income is to be received is shorter than the life of the loan. The decision to take into account the income from the benefit in creditworthiness assessment should also be supported by appropriate assumptions (e.g. assumptions resulting from the statistical models being used), which allow to assume with very high probability that a decrease in income due to the expiration of the ‘Family 800 plus’ benefit will be compensated by a real increase in fixed income (e.g. salary). From this point of view, a lesser impact (if any) on creditworthiness will come from the income under the ‘Family 800 plus’ benefit in the case of a borrower with a stable professional position who receives that benefit for a child at the age of 15–16 years that in the case of a borrower who will be entitled to that benefit over the next 18 years and who is not at an early stage of their professional career.

The UKNF regularly monitors the creditworthiness assessment rules applied by banks, pointing out – in individual recommendations and sector-specific statements – that banks must comply with the standards on prudent and stable conduct in this respect, both when granting consumer loans and mortgage loans. The purpose of these monitoring efforts is to protect the stability of the financial sector by ensuring prudent and stable management of the risk that banks place on the deposits entrusted to them, preventing excessive debt among borrowers and  preventing threats to the financial stability of families. Banks are obliged to carefully assess whether the income of a potential borrower will allow for regular monthly repayments with enough funds remaining for daily expenses, so that clients are not offered loans they could not repay. A monthly payment that is too high might cause problems with paying bills, buying food or paying for children’s education. A loan that is well-suited, i.e. based on proper creditworthiness assessment, reduces the probability of arrears in loan repayment, entry in the register of debtors or enforcement proceedings.