As per Section 1-7, Financial Institutions Act, NOR GVT Ministry of Finance adopted a regulation on lending practices on Dec. 9, 2020, known as the lending regulation.
The regulation contributes towards financial stability by imposing requirements on financial institutions' lending standards to prevent financial vulnerabilities.
This includes vulnerabilities in households and financial institutions, and the lending regulation continued existing requirements for banks' lending standards.
On Dec. 9, 2022, NOR GVT amended regulation re stress test of customer's servicing capacity, and extended regulation to loans secured on a basis other than housing.
The regulations apply until Dec. 31, 2024, which has prompted the consultation.
Proposals to Lending Regulations
NOR GVT requested NORFSA to provide an account of how the regulation has functioned with higher interest rates, and how regional differentiation has functioned.
Also, how large and small banks, borrowers and others have adapted to the rules.
NORFSA was also requested to see how the changes from Jan. 1, 2023 have worked, and whether changes to other regulations affect regulation of lending standards.
As a result, NORFSA provided its assessment in a letter and consultation document.
NORFSA's assessment on financial stability indicates that banks' lending standards continue to be subject to limits, and proposes continuation of current requirements.
Such as, loan-to-value ratios, debt servicing capacity, maximum debt-to-income ratio (DTI) and instalment payments, and flexibility quotas be maintained at current level.
NORFSA advises that the lending regulation be adopted without a date of cessation.
Instead, the lending regulation should continue and also be evaluated regularly.
Effectiveness
The lending regulations are expected to come into force Jan. 1, 2025.
Consultation responses can be submitted by Oct. 4, 2024.
NOR FA Lending Regulation Must be Temporary
On Aug. 23, 2024, NOR FA reported concerns on NORFSA's lending regulations.
Kari Olrud Moen, NOR FA CEO, set out that against the background of interest rates rises and falling debt burden, there is a lesser need for an intrusive lending regulation.
Also, extensive research shows this regulation has limited benefits and significant costs, and credit ratings and lending standards should be fully banks' responsibilities.
NOR FA points out that with a declining household debt burden, the core basis for lending regulation has now changed, and house price developments are important.
Specifically, most important driver of household borrowing, so that measures to strengthen housing market functioning will be most effective for household debt ratio.
This and measures that provide balanced house price developments will also be the most effective for achieving a sustainable household debt ratio, according to NOR FA.
NOR FA sets out that if NOR GVT chooses to continue the lending regulation, it should draw up clear criteria for what can and should form the basis for phasing it out.
Also, NOR FA believes that this overriding and intrusive regulation of banks' lending practices should be phased out, and continued regulations contain an expiration date.
Sep. 25, 2024 NOR FA Response
On Sep. 25, 2024, NOR FA published its consultation response to the ministry of finance on the continuation and amendment of the lending regulations.
NOR FA stated that the time has come to gradually eliminate the lending regulation.
Over time, NOR FA has shown understanding for measures aimed at high household debt growth, but at the same time emphasized that in a normal situation, banks' core activities, like credit ratings/lending standards, should be fully the banks' responsibility.
Regulation might restrict access to housing market for many creditworthy consumers and could further benefit those who have financial support from close family members.
The lending regulation was intended as a temporary macro-regulation, and it has now been in effect for almost 10 years without much effect on household debt.
Oct. 3, 2024 NOR CB Response
On Oct. 3, 2024, NOR CB published its response to lending regulation consultation.
Largely supports proposal to continue regulation, retain key elements: requirements for loan-to-value ratios, servicing capacity, debt-to-income ratios and instalments.
Assuming other requirements remain as they are, NOR CB is of the view that it should be considered to change the maximum LTV ratio requirement from 85% to 90%.
The lending regulation should be continued without a date of cessation: it sets limits for banks' lending standards and helps prevent excessive household debt accumulation.
The current debt register scheme only contains information about unsecured loans; NOR CB is of the view the scheme should be expanded to include collateralized loans.
Oct. 9, 2024 Further Comments from NOR FA
On Oct. 9, 2024, NOR FA asserted that lending regulations should be scrapped.
NORFSA recommendation for continuation, but NOR FA believes the premises for the regulation have changed and that it contributes to inheritance of wealth differences.
Given the regulation's modest goal attainment, significant costs, changed macroeconomic premises and lower risk, as well as other regulation that ensures consumer protection, NOR FA believes it is now time to phase out lending regulation.
If decided it will continue, substantial easing should be implemented to mitigate costs.
Oct. 24, 2024 Further Comments from NOR FA
On Oct. 24, 2024, NOR FA published interview given to E24 business newspaper.
NOR FA, called, again, for the lending regulations to be abolished; the Minister of Finance should decide based on precise descriptions of the facts and the risk picture.
NOR FA criticized the figures of the NORFSAMortgage Survey 2024 to make its point.
Dec. 2024 Regulations Adopted
On Dec. 4, 2024, NOR GVT announced issuance of Ministry of Finance Reg of Dec. 4.
NOR GVT is essentially continuing current requirements in the regulations, but is lowering equity requirement for mortgages from 15 to 10%.
In addition, regs amended to better facilitate fixed-rate agreements and emphasized banks can make individual assessments, including for families with children.
Changes enter into force on Dec. 31, 2024, will apply without an expiration date.
Per NORFSA proposals and input from NOR CB, NOR GVT makes the Lending regs permanent in change of current practice of renewing every 2 years.
But Ministry of Finance will nevertheless regularly assess the alignment of the rules.
Re consultation NOR GVT stated many bodies supported continuing the regulations, but several advocated for relaxations, including NOR CB; more detail on changes provided.
Dec. 4, 2024 NOR FA Reaction to Regulation
On Dec. 4, 2024, NOR FA acknowledged adoption of FOR-2024-12-04-2925 and lowering of equity requirement, but said regulation should have been discontinued.
Believes Minister of Finance should have discontinued this intrusive regulation and returned full responsibility for lending practices to the banks, who should be in charge.
Said macroeconomic conditions are totally different from when it was introduced in 2015 and research shows the regulation has limited benefits and large costs.
Also consumer protection is safeguarded through the new Financial Contracts Act.
NOR GVT has made the regulation permanent, but it was situational when introduced and intended to be temporary, NOR FA considers it invasive for both banks and borrowers, restricts freedom of contract, such a measure should not be permanent.
Given its continuation NOR FCA feels it should still contain a specific expiration date.
It is nevertheless positive in isolation that NOR GVT has reduced the loan-to-value requirement, but it should also have abolished the instalment obligation and strengthened the bank's flexibility to deviate from various requirements of regulation.
This would have more strongly mitigated its significant and unintended costs.
