Finanstilsynet supervises banks' work on problem loans
Problem loans
A problem loan is often the term for a non-performing loan, also referred to as a "non-performing loan" and in the banking world a "deferred loan commitment", where the borrower is unable to pay in agreed interest payments or principal payments no later than 90 days after the due date, or where it is judged unlikely that the borrower will repay the entire loan.
We have extensive experience in assisting financial institutions and others in connection with problem loans, either to find solutions if possible or in connection with enforcement, reconstruction or bankruptcy.
Further rules and guidance on the identification of a borrower's default are included in Article 178 of the Capital Requirements Regulation EU 575/2013 and in the European Banking Authority (EBA) guidelines of 1 June 2015. Finanstilsynet (Circular 4/2020) expects Norwegian banks and mortgage companies to comply with the guidelines. These establish requirements for routines defining default and provide examples of events to be considered default, including realisation of collateral, write-downs as a result of impaired creditworthiness, changes in payment terms that reduce the value of cash flow, forgiveness of debt and sale of loans at a discount (the EBA guidelines).
Causes of problem loans
Common reasons why a borrower gets into trouble can include
- loss of or material decline in revenues;
- changes in markets where the borrower sells its goods or services;
- unexpected increases in expenditure as a result of sharp increases in prices of intermediate goods and services, such as energy and food;
- significant changes in public framework conditions, public taxes;
- significant changes in financing terms, such as higher interest rates and changes in repayment periods;
- The borrower has found himself in a situation where the debt exceeds the repayment capacity;
- adverse decisions for the borrower's business; or
- personal difficulties as a result of illness, unemployment or divorce.
Residential mortgage loans
In recent years, the financial authorities have been particularly concerned with consumers' mortgages and possible payment difficulties as a result of high inflation and sharp interest rate increases. Norwegian mortgage borrowers have a high degree of floating-rate loans, which makes them particularly vulnerable to sharp interest rate increases.
One instrument for avoiding undesirable mortgages is the lending regulation, which among other things sets equity capital requirements and limits on borrowing in relation to income (LTV ratio).
The EU Residential Mortgage Loan Directive 2014 has been implemented in Norwegian law, for example through the Financial Contracts Act of 18 December 2020 No. 146, which entered into force on 1 January 2023. Here, creditors are subject to a number of obligations towards borrowers, particularly consumer borrowers, to information and credit ratings prior to borrowing.
In the event that the mortgage can become a problem loan, the creditor must follow the EBA guidelines and inform about public support schemes, have routines for detecting payment difficulties, have dialogue and contact with the consumer borrower, take customer measures and relief measures (including extended maturity and interest-only periods) with a view to avoiding default. On 31 January 2024, Finanstilsynet published a thematic audit report on banks' and mortgage companies' treatment of mortgage customers with payment difficulties and non-performing mortgages, concluding that the institutions still had some work to do before the EBA guidelines are met.
Breach of the duty of dissuasion
In its thematic supervision report, Finanstilsynet reminded that a customer may be entitled to relaxation of its loan obligations if the enterprise has granted loans that should have been rejected.
Termination of mortgage
The borrower may terminate the loan at any time, but is obliged to pay interest and costs until redemption. Any agreement on notice period may not be longer than one month for a consumer, cf. Section 5-13 of the Financial Contracts Act.
A credit provider may terminate a loan agreement that has been entered into indefinitely, if this follows from the agreement and there are justifiable reasons. If the customer is a consumer, the credit provider's notice period shall be at least two months, cf. Section 5-14 of the Financial Contracts Act. However, it must be the prerequisite that the creditor has complied with the requirements set out in the EBA guidelines.
The loan agreement may stipulate that the credit provider cannot terminate the agreement for a specified period of time during which interest or other credit costs cannot be changed (fixed-rate credit).
The credit provider's obligation to make the agreed credit option available to the customer ceases at the expiry of the notice period. The notice period runs from the time when the credit provider notifies the customer of the termination in a written document. At the same time, the credit provider shall provide information on the grounds for termination and when the amount of credit owed, etc., must be paid at the latest to avoid late payment interest, and information about the handling of appeals.
Business loans
There are few mandatory rules on business loans in the Financial Contracts Act, and it is common practice for creditors to require that the Financial Contracts Act shall not apply to business loans insofar as it is permissible to deviate from the Act, cf. Section 1-9 of the Financial Contracts Act. However, the requirement pursuant to Section 5-2 of the Financial Contracts Act that the creditor must make a thorough assessment of the customer's credit ability prior to the loan applies in all cases.
The requirements of the EBA guidelines do not apply to business loans. However, it is common practice in banks to follow up loans that may become problem loans and, as far as possible, discuss measures, including refinancing, that may prevent loans from falling into the category of problem loans. This will particularly apply to enterprises where operations in isolation, i.e. excluding financing costs, can be assumed to show a profit.
Termination of business loans
The parties' right to terminate business loans will most often follow from the loan agreement. If the Financial Contracts Act has not been agreed to be waived, the provisions of the Act may also apply.
Pursuant to Section 5-13 of the Financial Contracts Act, the credit provider may terminate a credit agreement that has been entered into indefinitely, if this follows from the agreement and there are reasonable grounds. Even if it has been agreed that the Act shall not apply to the credit, it must be assumed by case law that a requirement for probable cause will apply in any case. Such an assessment could be very extensive and must be decided on the basis of an overall assessment.
In such an overall assessment, a number of factors may be important, including the amount of the defaulted amount, the significance for the parties of a termination, the duration of the default, whether previous instalments have also been in default, and what collateral the creditor has for the loan. It may also be significant whether the borrower has defaulted on other obligations, both vis-à-vis the creditor in question and vis-à-vis other creditors.
In addition, it must be assumed that the general non-statutory duty of loyalty and care in contractual relationships may impose obligations on the parties in a loan relationship. The overall assessment of whether the creditor has the right to terminate the loan may therefore be both complex and extensive.
The credit provider's obligation to make the agreed credit available to the customer ceases at the expiry of the notice period. However, the credit provider may block the customer's right to use the credit if the conditions for blocking are stated in the loan agreement and objectively justified considerations indicate that the credit should be blocked.
Realisation of mortgage and other collateral
If the credit is terminated and not repaid by maturity, the creditor will, in the absence of an agreement to cover claims, be able to realise mortgage and other collateral. This is described on the website under "Enforcement of Claims".
