LONDON (Reuters) - Lenders should verify a borrower’s ability to pay back a home loan and impose prudent limits on money lent out, global regulators said in draft guidelines on Wednesday.
The Financial Stability Board (FSB), a global regulatory task force for the world’s 20 leading economies (G20), said the financial crisis revealed how weak lending standards in one country can spread across national borders.
The crisis began in 2007 when loans made to poorer home owners in the United States began defaulting, with the impact rippling through banks globally as the subprime loans had been bundled together and sold off to banks in Europe.
“In all instances, a robust and effective assessment of individual affordability has to underpin any sustainable lending model,” the FSB said in a statement accompanying its draft principles.
After a public consultation opened on Wednesday is completed in December, supervisors in the G20 countries would have to ensure the finalised principles on home loan underwriting are applied from early 2012.
The principles state that high loan-to-value (LTV) ratios consistently perform worse than those with a high proportion of initial equity but the FSB stops short of mandating specific caps on loans.
There should be an “appropriate” level of down payment that is “substantially drawn from the borrower’s own resources and not from another provider of finance, the FSB said.
LTV ratios should not be relaxed in times of a boom in the property market, it added.
Many countries have already tightened their home loans rules since the financial crisis unfolded with Britain, for example, seeking to crack down on “liar” or self-certified loans whereby no proper verification of income is carried out.
The European Union, where home loans are equal to half the bloc’s economic activity, is approving a draft law that will also set out minimum standards in the mortgage market.
Borrowers would be forced to prove they can meet repayments.
The FSB principles aim to act as the first internationally agreed benchmark of best practice.
“After providing sufficient time for implementation, the FSB will conduct a follow-up review to assess progress made in implementing the framework,” the board said.
Reporting by Huw Jones. Editing by Jane Merriman