Guidance Note - Banks and Deposit Companies Supervisory LTV Limits and Supervisory Guidelines on TDSR for Real Property Loans (May 2014)

Summary

This guidance note sets out supervisory Loan to Value (LTV) limits and Total Debt Service Ratio (TDSR) guidelines that the Bermuda Monetary Authority expects licensed banks and deposit companies to apply when underwriting real property loans. The limits are a supervisory baseline, not a replacement for each institution's own risk-based lending policies, and the Authority will review firms' policies and procedures against this guidance as part of regular prudential supervision.

• Supervisory LTV limits: Maximum LTV of 80% for residential owner-occupied property, 75% for residential non-owner-occupied or multi-tenant property, and 75% for commercial real estate where owner occupation is less than 20% of usable area.
• Exclusions from LTV limits: Loans taken as additional collateral through an abundance of caution, loans sold promptly without recourse to a financially responsible third party, business loans not primarily reliant on real estate for repayment, and loans exceeding limits due to a subsequent decline in property value.
• TDSR methodology: Institutions must standardise TDSR calculation based on gross income, including all outstanding property and non-property debt, recurring home ownership costs, a margin over prevailing interest rates, a haircut of at least 30% on variable income and rental income, and haircuts applied to financial assets converted into income streams.
• TDSR threshold: The Authority regards any real property loan with a TDSR exceeding 60% as imprudent absent mitigating factors; this threshold is initial and subject to future review.
• Documentation and verification: Institutions must verify and maintain documentation supporting a borrower's debt obligations and income used to compute the TDSR.
• Exceptions: Loans exceeding LTV or TDSR limits must be specifically authorised under the institution's policy, clearly identified in records, and reported in aggregate at least quarterly to the Board of Directors; aggregate exception loans underwritten or renewed after issuance of this guidance must not exceed 25% of Common Equity Tier 1 (CET1) capital.

The Authority notes these limits reflect current sector practice and comparisons with other jurisdictions, and states that both the LTV limits and TDSR framework are structural but not permanent, and will be reviewed over time based on property market conditions and observed lending practices.

Key obligations

• Licensed banks and deposit companies should establish internal LTV limits for real estate loans consistent with their approved risk appetite and capital position, not exceeding the Authority's published supervisory LTV limits (80% residential owner-occupied, 75% residential non-owner-occupied or multi-tenant, 75% commercial real estate with under 20% owner occupation).
• Institutions must apply the standardised TDSR methodology, including counting all outstanding debt obligations, recurring home ownership costs, an interest rate margin, a minimum 30% haircut on variable and rental income, and haircuts on financial assets converted to income streams.
• Institutions using alternative TDSR computation methods must demonstrate comparability with the Authority's standard.
• Institutions must verify and maintain documentation on a borrower's debt obligations and income used in computing the TDSR.
• Loans exceeding the supervisory LTV or TDSR limits must be specifically authorised in the institution's policy, clearly identified in records, and the aggregate amount reported at least quarterly to the Board of Directors.
• The aggregate amount of loans underwritten or renewed after issuance of this guidance that remain in excess of supervisory LTV or TDSR limits must not exceed 25% of Common Equity Tier 1 (CET1) capital.
• Institutions should treat any real property loan with a TDSR exceeding 60% as imprudent absent documented mitigating factors.

Applies to

banks, deposit companies