RESPONSIBLE LENDING REGULATIONS CHAPTER I GENERAL PROVISIONS

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1 APPROVED by Resolution No of the Board of the Bank of Lithuania of 1 September 2011 (as amended by Resolution No of the Board of the Bank of Lithuania of 28 May 2015) In case of inconsistencies between the Lithuanian and English versions of the Regulations, the Lithuanian version shall prevail RESPONSIBLE LENDING REGULATIONS CHAPTER I GENERAL PROVISIONS 1. The Responsible Lending Regulations (hereinafter the Regulations) aim at promoting the responsible lending by credit institutions, enforcing market discipline and transparency of their activities to mitigate the systemic risk in the sector of credit institutions, misbalanced changes of immovable property prices, the risks of too rapid growth of credit portfolio and excessive risk concentration and with a view to protecting consumers from disproportionately heavy burden of financial obligations and developing habits of responsible borrowing while contributing to the overall stability of the financial system. 2. The Regulations shall apply to banks of the Republic of Lithuania, branches of foreign banks, the Central Credit Union and credit unions (hereinafter credit institutions), except where these entities act as providers of consumer credits within the meaning of the Republic of Lithuania Law on consumer credit. It is recommended that other economic entities providing financial services specified in subparagraphs 2 and 3 of paragraph 1 of Article 3 of the Law of the Republic of Lithuania on financial institutions, except where they act as providers of consumer credits within the meaning of the Republic of Lithuania Law on consumer credit, are recommended to follow these Regulations. 3. The Regulations shall apply to credits including financial hire purchase transactions (hereinafter credit) granted to natural persons (households). 4. The Regulations shall not apply to: 4.1. credits granted to farmers for the development of the farmer s activities provided for in the Republic of Lithuania Law on the farmer s farm; 4.2. credits granted for the renovation (modernisation) of the blocks of flats in accordance with the procedure set by the Republic of Lithuania Law on state support for the renovation (modernisation) of blocks of flats; 4.3. credits being restructured; 4.4. credits granted to students in accordance with the procedure set by the Republic of Lithuania Law on higher education and research. 5. The Bank of Lithuania may change the ratios of the credit amount and value or price, whichever of the two is lower, of the mortgaged, leased assets (hereinafter value of mortgaged assets) and (or) the average amount of payment of all liabilities to financial institutions under credit and other agreements and income, as specified in the Regulations, considering the rates of change of risks related to the real estate market and portfolio of credits secured by mortgage of real estate, as well as other macroeconomic indicators, if this is likely to further misbalance the economic development and endanger the stability of the country s financial system. CHAPTER II RESPONSIBLE LENDING

2 2 6. The responsible lending is understood as the development of lending activities of credit institutions where credits are granted in compliance with certain provisions creating preconditions for the proper assessment of the borrower s solvency and preventing from assuming the excessive credit risk. 7. The responsible lending shall be based on the following provisions: 7.1. Prior to deciding to grant a credit, credit institutions shall make full assessment of the borrower's ability to repay the credit and all related amounts with a view to avoiding the default on the granted credits, their repayment in violation of contractual obligations or their forced recovery from assets mortgaged by the borrower The assessment shall cover all objectively implied material factors on the basis of information provided by the borrower and available to a credit institution that might influence the borrower s solvency, in particular, the sustainable income and credit history of the borrower, and likely changes (increase and decrease) of income The lending shall be based on the ratio of the credit amount and market value or price, whichever of the two is lower, of mortgaged immovable property, which is being acquired or constructed, applying the loan-to-value ratio The lending shall be based (considering the historic data and cyclic nature of economy) on the limited debt service-to-income ratio The lending process and conditions (including subsequent credit reviews or change of credit conditions) shall be based on the ability of prompt response to the changing situation of the borrower s creditworthiness The borrower shall have the possibility of early repayment of the credit. In that case credit agreements shall explicitly stipulate the procedure and conditions of the calculation and application of fees for the early repayment of the credit Prior to concluding a credit agreement, a credit institution shall notify the borrower of the terms and conditions of the credit agreement having regard to the priorities identified and information provided by the borrower to adopting an informed decision on the conclusion of a credit agreement. CHAPTER III LOAN-TO-VALUE RATIO 8. Prior to granting a credit, a credit institution shall assess the value and quality of the property being mortgaged and (or) obtain a property valuation report drawn up in compliance with requirements of legal acts. 9. The maximum ratio of the amount of the credit granted for the purchase or construction of the immovable property and of the market value or price, whichever of the two is lower, of mortgaged immovable property being acquired or constructed, may not be in excess of 85 per cent. This ratio requirement shall not apply to credits aimed at the refinancing of credits granted in another credit institution, provided that all of the following conditions are met: 9.1. the credit balance does not increase; 9.2. the property mortgaged for the credit does not change or additional property is mortgaged; 9.3. credit repayments are not delayed for more than 60 calendar days. 10. The maximum ratio of the amount of the credit granted for the purchase or construction of the immovable property and the of the market value or price, whichever of the two is lower, of mortgaged immovable property being acquired or constructed, as specified in paragraph 9 of the Regulations, may be increased up to 10 percentage points inclusive, where the credit intended for the purchase or construction of residential property is supported by and complies with the requirements established in the Republic of Lithuania Law on state support for the purchase or rental of a dwelling. 11. The limit on credits granted to the same borrower for purchase of more than one unit of residential property shall be more stringent than the limit established in paragraph 9 of the Regulations, except for the credit which is aimed at the property (dwelling), which the borrower deems to be his principal place of residence. Credit tranches for purchase or construction of the same immovable property shall be treated as one credit.

3 3 12. The maximum ratio of the amount of the credit granted for purchase of agricultural parcel and the market value or price, whichever of the two is smaller, of mortgaged parcel being acquired, except for agricultural parcels acquired by farmers and intended for the development of the farmer s activities provided for in the Republic of Lithuania Law on the farmer s farm, including parcels the use of which is planned to be changed, may not be in excess of 40%. The valuation of a parcel shall not take into account the changes in value which might be predetermined by the circumstances of change of the use of the parcel. 13. It is recommended that the limits on credits granted for purchase or construction of the immovable property outside the European Economic Area should be increased by 15% compared to the limits established in paragraphs 9, 10 and 11 of the Regulations. 14. The loan-to-value ratio of a credit secured by mortgage of different types of immovable property shall be calculated for each property separately within the limits of maximum amounts established in the Regulations. 15. A credit institution shall satisfy itself that the part of the price of the property being purchased, which is in excess of the ratios set in this Section, will be paid before the disbursement of the bank credit and seek the borrower s confirmation that the aforementioned part of the price had been paid from own (rather than borrowed) funds of the borrower. A credit institution may not grant a credit for the financing of the part of the price of the immovable property being purchased, which is in excess of the ratios set in this section. An exemption shall be possible only where the borrower seeking to change the living conditions acquires another dwelling and undertakes to reduce the assumed liability by the required part of the amount of own funds within the reasonable time limit. CHAPTER IV DEBT SERVICE-TO-INCOME RATIO 16. The average amounts of instalments of the principal and payments of interest of the borrower calculated dividing the total amount of instalments of the principal and payments of interest by credit maturity for all liabilities may not be in excess of 40% of the person s (household s) income recognised by a credit institution to be sustainable income, except in the cases referred to in paragraphs 17 and 18 of the Regulations. In addition, the credit institution should ensure that this size amounts to no more than 50 per cent, using the 5 per cent interest rate for calculating the interest contribution, of the individual s (household s) income, which the credit institution has recognised as sustainable, not including the exception provided in Article 17 of the Regulations. For credits not repayable in instalments the average relative amount of instalments of the principal and payments of interest shall be calculated dividing the total amount of the principal and interest of the credit by its maturity. 17. A larger value than established in paragraph 16, but not above 60 per cent, of a borrower s average credit tranche and interest, which is calculated by dividing the entire amount of credit tranches and interest by the credit maturity, under all liabilities throughout a calendar year can be applicable to that amount of housing loans which accounts for not more than 5 per cent of the total value of new housing loans granted by a credit institution during that calendar year. This facility is applicable when such an excess has been recognised by the credit institution as reasonable and justifiable in seeking the objective specified in paragraph 1 of the Regulations. Loans, which are considered as new loans, shall be granted under new loan agreements or when there are amendments to the existing loan terms, when the amount of the loan is increased. 18. Not taking into account paragraph 17 of the Regulations, the value in excess of that established in paragraph 16 of the Regulations may apply temporarily (for a reasonable period) when a borrower is granted a credit for the purchase of another dwelling which the borrower acquires in order to improve his living conditions. In that case a credit institution must satisfy itself that the borrower s liabilities under the previously concluded credit agreements will be met before starting the credit repayment. 19. A decision to grant a credit shall be based on the average amount of sustainable earnings of at least 6 last months and on the assessment of the long-term sustainability of the earnings. For the purpose of calculating the credit repayment amount, a credit institution shall assess the borrower s expenses that are and (or) might be known to the credit institution related not only to the

4 4 credit repayment, but also to other existing obligations of the borrower (financial leasing, payments under the credit card limit repayment schedule, etc.) and income remaining after repayment of the principal and payment of interest. CHAPTER V CREDIT MATURITY 20. The maximum credit maturity shall not exceed 30 years. CHAPTER VI ASSESSMENT OF THE BORROWER 21. A credit institution s decision to grant a credit shall be based on the prudential and wellfounded assessment of the long-term (during credit maturity) creditworthiness of the borrower. The lending policy of a credit institution shall rely on the assumption that a credit will be repaid from cash flows (income) generated by the borrower s earnings, rather than through forced recovery from mortgaged property or changes in its value. 22. Prior to concluding a credit agreement, a credit institution shall assess the borrower s solvency on the basis of information obtained from the borrower and shall check the information in the databases used for the assessment of solvency and accessible to the credit institution. The assessment shall cover sustainable sources of the borrower s income, their diversity, sustainability and potential changes in the future, the main groups of the borrower's expenses related to debts to financial institutions and other entities. 23. Borrowers whose income might change considerably (e.g., income from dividends, members contributions, immovable property, investment activities or sale of immovable property, etc.) or the sustainability of whose income is doubtful, shall be assessed more conservatively and credits granted to them shall be subject to more stringent values than the maximum values of the loan-to-value and debt service-to-income ratios allowed in the Regulations and (or) to the higher credit price. 24. Where the parties concluding a credit agreement agree to change the total amount of the credit before each more significant increase of the credit amount, a credit institution shall update the information available to it about the borrower and mortgaged property and shall make a new assessment of the borrower s solvency and value of mortgaged property. 25. If currencies of the credit and the borrower s income differ, a credit institution shall apply more stringent limits than those provided for in paragraphs 9, 10, 11 and 13 of the Regulations, and (or) to apply the ratio lower than the ratio set in paragraph 16 of the Regulations in consideration of the exchange rate fluctuation risk. CHAPTER VII INFORMATION PROVIDED TO THE BORROWER 26. In implementing provisions of subparagraph 7.7 of the Regulations, credit institutions mutatis mutandis shall comply with Commission Recommendation 2001/193/EC of 1 March 2001 on pre-contractual information to be given to consumers by lenders offering home loans (OJ L 69, , p ). 27. Prior to granting a credit with variable interest, a credit institution shall analyse the borrower s creditworthiness in the event of an adverse shock of interest rates and notify borrowers of likely credit repayment costs. To that end credit institutions shall calculate the amounts of repayment of the principal and payment of interest applying the interest rate base existing at the

5 5 moment of granting a credit increased by 4 and 8 percentage points. If credit institutions deem necessary, credit repayment amounts may be calculated applying the values other than those established in this paragraph. 28. Prior to granting a credit in a foreign currency, a credit institution shall inform the borrower about the risk related to changes in the exchange rate of a foreign currency and the possible impact of this risk on the borrower's ability to repay the credit when due. CHAPTER VIII FINAL PROVISIONS 29. Credit institutions shall supplement the relevant internal risk management and business policy documents as well as other documents having regard to the Regulations. Documents regulating the implementation of the Regulations shall be drafted by credit institutions considering the nature and scope of their activities, assumed risk and performed operations.