Finanstilsynet proposes new lending regulations

Relative to disposable income, the aggregate debt of Norwegian households is at a high level, both in a historical perspective and compared to other countries. A large part of total household debt stems from households with a very high debt-to-income ratio.

A high household debt-to-income ratio represents a major source of risk to financial stability. The concentration of borrowing in vulnerable households is a key factor contributing to this risk.

There is a risk that the debt-to-income ratio will increase in the years ahead and that many households will take out large loans, both because the interest rate level is very low and because high house prices give many households the opportunity to take out further loans secured on their residential property.

Loans to households secured on assets other than residential property are not covered by the current residential mortgage lending regulations or the consumer lending regulations. However, financial stability is primarily affected by the aggregate level of household debt and the distribution of such debt among households. Just like unsecured credit, household loans secured on cars and leisure boats etc. constitute a small part of total household debt. Such loans, which often come in addition to the borrower’s other debt, may nevertheless result in a significant increase in risk for vulnerable households and thus also have an impact on financial stability.

In order to ensure financial stability, Finanstilsynet is of the opinion that restrictions must still be set for banks’ lending practices and that the regulations should be extended to include loans to private individuals secured on assets other than residential property. Finanstilsynet further recommends a certain tightening of the requirements of the current residential mortgage lending regulations and consumer lending regulations to counteract the accumulation of debt in vulnerable households. This can most conveniently be achieved by tightening the requirement for the borrower's maximum debt-to-income ratio and the banks' right to deviate from the requirements of the regulations in individual cases.

Finanstilsynet’s proposal includes the following changes:

• The regulation of banks' lending practices is concentrated in one regulation and expanded to include loans to private individuals secured on assets other than residential property.
• The maximum limit for the borrower's total debt when granting new loans is reduced from 5 to 4.5 times gross annual income.
• The flexibility quota for new loans secured on residential property is set at 5 per cent throughout Norway (in the current regulations, the quota is 10 per cent, with the exception of loans secured on residential property in Oslo, where it is 8 per cent).
• There is no flexibility quota for loans other than residential mortgages.
• No expiration date is set for the new regulations. The regulations will be reviewed regularly, for example every two years, and for the first time in autumn 2022.

Regulation of lending practices has a profound impact. The scope and duration of the regulations should be based on proportionality and be adapted to the underlying risk that the regulations should help to reduce. In Finanstilsynet’s view, the proposed requirements of the regulations will entail a moderate tightening of banks' lending practices which meets the need for financial stability under the prevailing economic conditions. Finanstilsynet will revert to the Ministry of Finance to provide advice on changes in, or possibly a rescission of, the regulations if developments in household debt and the consideration for financial stability give reasonable grounds for this.

Background
In a letter of 24 April 2020, the Ministry of Finance asked Finanstilsynet to review the banks' lending practices and developments in house prices and households’ housing and consumer debt, as well as the impact of the regulations. The Ministry of Finance asked Finanstilsynet to assess whether the consideration for financial stability indicates that the current regulation of banks' lending practices should be continued after 31 December 2020. Finanstilsynet was asked to specifically consider whether the rules should be extended to include loans that are not currently covered by the regulations, the duration of possible new temporary regulations and whether the requirements for financial institutions' lending practices should be concentrated in one regulation.