In its new guidance, primarily aimed at banks, FINMA summarises the results of its supervisory activities and explains its expectations with regard to the regulatory requirements in the mortgage lending business.

In the opinion of FINMA, there is a possible need for regulatory improvement in mortgage lending because the principles-based regulation concerning mortgage lending is being exploited by a not insignificant number of banks. This shall relate in particular to the assessment of affordability and valuation practice and shall indicate a possible need for regulatory improvement.

According to the applicable law, banks must ensure through internal directives that the affordability of the loans granted is guaranteed in a systematic manner and in accordance with sustainable criteria. FINMA is of the opinion that many banks tend to set loose affordability criteria in their internal guidelines and grant a high proportion of loans outside the affordability criteria they have set themselves. 

FINMA emphasises the importance of limiting, recording and appropriately monitoring lending transactions with an increased risk profile. It also lists in the guidance examples of affordability criteria that it considers to be sustainable. These affordability criteria shall ensure that potential interest rate increases do not have a negative impact on borrowers’ capacity to pay.

FINMA is also of the opinion that regulatory discretion is also often exploited in valuation practice of the banks. FINMA announces that it has observed qualitative weaknesses that represent a property valuation risk, such as the use of lower capitalisation rates to value investment properties. The industry self-regulation recognised by FINMA represents only a minimum regulatory standard that has to be tightened up by the banks in their own risk policy where necessary. Due to the current risk situation, FINMA advises setting lower loan-to-value limits for investment properties and higher amortisation requirements.

Not really surprisingly, the problem FINMA itself has presented, is – according to press reports – not shared by the Swiss Banking Association and bankers who have commented on it.