11.2.1

Establishment of Mortgage Market

Rules and Legislation – UkraineThe Project has been implemented by TECHNITAS Consortium 1 The Project in funded by

the European Union

Guidelines for mortgage lending in Ukraine

Contents

1. INTRODUCTION..................................................................................................................................3

2. CREDIT SCORING............................................................................................................................3

3. CREDIT CULTURE OF A BANK...............................................................................................4

4. TERMINOLOGY.................................................................................................................................5

5. PRINCIPLES OF LENDING..........................................................................................................6

6. PRE-QUALIFICATION TO ASCERTAIN POTENTIAL BORROWER’S COMPLIANCE WITH THE BANK’S KEY CRITERIA.....................................................................9

7. LOAN APPLICATION PROCESS SUBSEQUENT TO PRE-QUALIFICATION.10

7.1. EXAMPLES OF RATIOS DETERMINING A BORROWER’S CREDITWORTHINESS...10

8. INTERVIEWING PRINCIPLES.................................................................................................12

8.1. INTRODUCTION.......................................................................................................................138.2. STAGES OF THE INTERVIEW PROCESS.....................................................................................138.3. CONDUCT OF THE INTERVIEW................................................................................................148.4. INTERVIEW APPROACH...........................................................................................................148.5. QUESTIONING TECHNIQUES....................................................................................................148.6. TIME INPUT............................................................................................................................168.7. CONCLUSION OF INTERVIEW..................................................................................................168.8. ACTION SUBSEQUENT TO THE INTERVIEW.............................................................................16

9. PROCEEDING WITH AN APPROVED LOAN APPLICATION.....................................................16

10. SUBMISSION OF DOCUMENTATION AND ITS VERIFICATION.......................18

10.1. DOCUMENTS EVIDENCING OWNERSHIP OF SHARES (UNITS OR STAKES IN STATUTORY CAPITAL).....................................................................................................18

10.2. BUSINESS PERSONS WITHOUT A LEGAL ENTITY STATUS.......................................1910.3. DOCUMENTARY REQUIREMENTS TO PERSONS RECEIVING INCOME IN THE

FORM OF DIVIDENDS FROM THEIR OWN BUSINESS..................................................1910.4. DOCUMENTS CONFIRMING BORROWER’S OBLIGATIONS AS OF THE LOAN

DOCUMENTATION SUBMISSION DATE..........................................................................2010.5. DOCUMENTS EVIDENCING BORROWER’S EXPENSES AS OF THE LOAN

DOCUMENTATION SUBMISSION DATE..........................................................................20

11. FURTHER CREDIT ASSESSMENT FACTORS................................................................20

11.1. VERIFICATION OF CREDITWORTHINESS.....................................................................2111.2. VERIFICATION OF BORROWER’S INCOME SOURCE..................................................2211.3. ANALYZING BORROWER’S EXPENSES.........................................................................2411.4. ANALYZING CASH AND OTHER TANGIBLE ASSETS OF A BORROWER................2511.5. ANALYZING BORROWER’S CREDIT HISTORY............................................................2511.6. ANALYZING RISK FACTORS AND MAKING A DECISION ON THE BASIS OF

CREDIT ASSESSMENT........................................................................................................27

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11.7. ANALYZING COMPENSATORY FACTORS WITH REGARDS TO LOAN DECISION. 2711.8. CALCULATION OF MAXIMUM LOAN AMOUNT - EXAMPLE:...................................2711.9. ACCOUNT OFFICER’S RECOMMENDATIONS...............................................................2911.10. CREDIT ASSESSMENT REPORT...........................................................................30

12. CREDIT APPROVAL......................................................................................................................31

13. PROPERTY ANALYSIS.................................................................................................................31

13.1. OBLIGATIONS OF ACCOUNT OFFICER..........................................................................3113.2. MINIMUM REQUIREMENTS TO MORTGAGE PROPERTY...........................................3113.3. LOAN AMOUNT TO MORTGAGE PROPERTY VALUE RATIO (LTV).......................3213.4. MORTGAGE PROPERTY APPRAISAL..............................................................................32

14. PREPARATION OF LOAN TRANSACTION CONTRACTS, INCLUDING INSURANCE PROCEDURES, AND LOAN DISBURSEMENT....................................................34

14.1. TRANSACTION DOCUMENTS..........................................................................................3414.2. EXECUTION AND NOTARY CERTIFICATION OF PURCHASE-SALE AND

MORTGAGE CONTRACTS.................................................................................................3514.3. STATE REGISTRATION OF PROPERTY PURCHASE-SALE AND MORTGAGE

CONTRACTS........................................................................................................................3814.4. Loan disbursement and servicing................................................................................39

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1. Introduction

Mortgage lending is a traditional loan origination process of Ukrainian banks that envisages:

1. Receipt of a complete set of documentation related to a loan transaction (including security documents);

2. Its analysis by all involved departments of the bank (business development, credit, legal and security);

3. Consideration and either approval or rejection of the loan either by delegated credit authorities or by a credit committee; and

4. If approved, loan disbursement.

This process is efficient in case of a small number of loan applications, complex lending projects, and large loan amounts. However, from a perspective of retail (including mortgage) lending that envisages a large number of standard transactions, the use of such an approach is rather limited in terms of efficiency and as a consequence other methodologies involving the credit scoring of transactions are being introduced.

It is worth mentioning that mortgage lending to individuals has increased at a fast pace in Ukraine since 2002. Over this period, the volume of mortgage loans made by Ukrainian banks has grown 25-fold. As of 1st of October 2005, the mortgage loan portfolio stood at UAH 7.5 billion in Ukraine (according to the Ukrainian National Mortgage Association), growing 2.3 times in 2005 alone. Despite this, Ukraine’s mortgage lending market is still in the embryonic stage, accounting for less then 1% of the country’s GDP while Ukraine’s neighbours (Poland, Czech Republic, Slovakia) boast 5 percent to 7 percent levels. The average figure for the European Union countries stands at 24% of GDP1. Thus, prospects for further growth of mortgage lending in Ukraine are quite robust.

A developing retail (including mortgage) business requires that a relevant approach to be followed in order to ensure efficient sales and support of retail credit products. The recommendations below envisage the development of the process for the pre-qualification of the loan application, the loan application, the applicant interview, a manual credit approval process and the parallel and on-going development of a credit scoring system that could eventually supersede the manual approval process for maximum agreed loan values. Depending on the effectiveness and accuracy of the credit scoring system with regards to minimizing the probability of default and loss given default in the mortgage portfolio, the maximum agreed loan values for credit score approval would be reviewed on an annual basis.

2. Credit Scoring

In order to support the development of credit scoring in the retail mortgage lending in Ukraine, a detailed description of scoring methodology is attached as Appendix 6.3.2.4.1.3 to the Final Report. This includes selected methods of credit scoring and explains some of the details/data necessary to produce a scorecard and to assess its predictability.

1 Hypostat 2004

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In support of this methodology paper a prototype showcase of a retail loan application scorecard was developed. The assumptions for this prototype are described in Appendix 6.3.2.4.1.4 to the Final Report, which could be used in a similar form by banks for their retail banking/mortgage lending business.

The aim of these papers is to demonstrate the feasibility of credit scoring and to encourage the development of credit scoring techniques as early as possible in the Republic of Ukraine.

3. Credit Culture of a bank

1 The Credit Culture of a bank will determine if it is a high, medium or low risk taker. A bank with a weak Credit Culture will almost inevitably be a high risk taker seeking asset growth at the expense of adequate returns on higher risk assets. In addition, the business teams will tend to overshadow the authority of the credit teams. A bank with a strong Credit Culture will tend towards a more conservative approach to risk. However, more importantly the credit approval process will be a collegiate decision making an environment with mutual respect between the business and credit teams.

2 The reward for having a strong Credit Culture and taking on good quality credit risk with adequate risk return is that it should ensure additional positive contributions to a bank’s financial performance. It should also enhance a bank’s reputation among its customers and competitors as an institution skilled in credit risk management.

3 It is the ultimate responsibility of the President or Chairman to influence the “Credit Culture” of a bank. However, it is also the personal responsibility of each business manager and each account officer to ensure that the credit quality of the customer is satisfactory. The Bank must be placed before the customer. The acid test is “would I lend my own money to the customer”. It is the responsibility of the credit officer and/or the account officer to demonstrate the credit worthiness of a customer by sustainable facts and credit analysis.

4 In a business growth environment, it is particularly important to ensure that the overall Risk Return for a particular customer is adequate to compensate for the level of perceived risk acknowledged within a bank. Too often pricing is driven by competitive pressures rather than the price for the risk.

5 By recommending or concurring in the extension of any credit facility through his signature on the credit application, the business manager and loan account officer certify commitment and responsibility for the monitoring of the credit facility until its final maturity.

6 In many cases it is the ability to say “no” rather than “yes”, which will best serve a bank. Loans with payment delays and loan delinquencies absorb considerable amounts of staff and senior management time, as well as the potential loss of principal and interest.

The quality of the portfolio should not be sacrificed for growth, profits, or personal satisfaction and should be maintained in balance with a bank's stated objectives.

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4. Terminology

“Account officer” – the employee of the bank responsible for the interface with the customer/borrower.

“Applicant Interview” – Once the Loan Applicant has completed and signed the Application Form an interview should be arranged at the bank either immediately after completion of the Form or at a subsequent mutually acceptable time. This will depend on the required Authority Level of the Loan Officer/Loan Manager for the Applicant Interview.

“Borrowers” - individuals that enter into loan contracts with a bank.In case of dual income families, it is recommended that the spouse with the higher income should be the borrower.

“Credit product” – fixed conditions and parameters of a loan transaction including: Loan maturity and amount; Interest rate and/or its calculation; Interest accrual schedule; Loan and interest repayment schedule; Bank charges (one-off and/or monthly (annual)) Borrower’s liability for failure to meet (or improper meeting of) the obligation with respect to the loan and interest repayment; Requirements to secure borrower’s obligations under a loan contract; Procedure for loan prepayment.

“Credit officer” – the employee of the bank responsible for the initial credit assessment of proposed mortgage loans.

“Credit Approval Authority” – The Credit Approval Authority for a Loan Application must be one or more delegated persons or a Credit Committee separate to the interviewing process to ensure independence and a second opinion of the loan application. The sponsor of the Loan Application within a bank will either be the interviewer or the responsible person at a bank’s branch for Mortgage Loans. The Credit Approval Authorities of the bank will be separately established to cover all products having a risk element and will generally be determined according the product, the amount and the maturity of the proposed transaction.

“Credit Scoring” – a formal solvency assessment of a potential borrower on the basis of pre-determined loan application data processing techniques. The data for credit scoring is likely – initially at least - to be derived from the Loan Application Form. Depending on the technical levels of the process the calculation of the scoring from the Application Form may need to completed manually or eventually automatically based on the data input. However, the detailed manner and calculations of the scoring will need to be kept confidential to each bank as this will represent proprietary information and should also not be disclosed to the Loan Applicant.

“Guarantor” – an individual or a legal entity entering into a surety contract with a bank envisaging joint and several liability with respect to a borrower’s obligations under a loan.

“Interview Authority” – Separate to the Approval Authority of a Mortgage Loan, the bank will need to arrange interview technique courses for it’s staff for the interviews with Loan

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Applicants. Staff will only be eligible to conduct Loan Applicant interviews if they have attended, to the satisfaction of the tutor” the respective interview courses. Normally a bank would have a “Basic” interview course, which would normally be adequate for an Applicant Interview for a loan value limit to be set by the bank and a more advanced course for interviews involving applications for larger amounts and/or for sensitive situations.

“LTV (loan-to-value)” – the percentage of the loan amount to the mortgaged property value.

“Loan Applicant” – The individual applying to a bank for a Mortgage Loan.

“Loan Application Form” – The template used by a bank and to be completed by the Loan Applicant when requesting a Mortgage Loan. It may be available for completion either from a bank’s web site or available at branches. If at a branch, the Application Form will be completed by a loan officer in the presence of the Loan Applicant. Once completed the Loan Applicant will sign and date the Form confirming the accuracy of the data. The Form will include data comprising personal data of the Loan Applicant and Guarantor as the case may be and the proposed property to be purchased and mortgaged.

“Mortgage loan” – a loan made to an individual to finance the purchase of housing property that is to be transferred into ownership to such an individual. The bank takes a mortgage of such housing property and may supplement this security with a mortgage on other property of the borrower meeting the bank’s requirements.

“OTI” (total obligations to income)” – the percentage of the borrower’s total payment obligations to the borrower’s net disposable income for the same period.

“Net disposable income” – income after health insurance contributions, pension contributions and tax.

“PTI” (debt service payments to income)” – the percentage of the mortgage loan debt service to the borrower’s net disposable income for the same period.

“Pre-qualification of the Loan Application” – To ensure that the Loan Applicant is able to meet key Mortgage Loan criteria of the bank, prior to proceeding with a full Loan Application. It also helps to facilitate the efficient provision of documents by the Loan Applicant should he/she meet the key criteria.

“Property” – residential real estate that is not and/or will not be used for commercial purposes.

5. Principles of Lending

The credit assessment process for Mortgage Loans should follow the general principles of unsecured lending expanded to take into consideration the type and value of property being financed.

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Until a reliable form of credit scoring can be introduced, a bank will need to apply traditional judgmental credit assessment techniques using the data provided in the Credit Application form and the results of a personal interview with the Loan Applicant. One credit assessment technique is to apply an analysis framework to the Loan Application and Interview using the “mnemonic” “PARSER”, where:

P represents factors relevant to the “person”A represents factors relevant to the “amount”, maturity and purposeR represents factors relevant to “repayment”S represents consideration of the “security”E represents factors relevant to “expediency”; andR represents product “remuneration”.

The above features will now be considered in greater detail.

P Person

The following are examples of the factors. Others that may arise from the interview may be equally or more important. Each Loan Applicant must be treated on a case by case basis.

A Factual

Suitable personal identification with photograph of the applicant with visual identification by the interviewer;

Current address, length of time at address, evidence of current living address e.g. bank statement, telephone bill and type of occupancy e.g. sole or joint tenancy or freehold;

Details of age, family status and number of children and other family responsibilities e.g. supporting parents etc.;

Details of existing bank current accounts together with statements showing transactions for the previous three months (clearly not necessary, if the same bank, as the Interview officer will be able to review the records for a longer period). This review enables the bank to consider the account behaviour for adverse or positive factors;

Qualifications, employment description and history and career prospects and ambitions; and

General information with regards to lifestyle and hobbies.

B Non factual

The interviewer should take the opportunity during the interview to form an opinion on the integrity, reliability, competence and attitude with regards to the responsibility of meeting the debt obligations on the due dates.

Copies of all relevant documents should be taken for the bank’s customer file.

A Amount, “maturity” and “purpose”

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Is the Mortgage loan amount within the overall policy guidelines of the bank with regards to loan to value % and total expense and debt service ratios?

Is the amount generally reasonable with regards to the property purchase being proposed?

Does the Loan Applicant have adequate additional resources to pay for other costs associated with the property purchase e.g. professional fees, taxes and duties and ongoing insurance and other maintenance costs?

Is the final maturity and do the repayment terms fall within bank policy? Does the final maturity and do the repayment terms make sense with

regards the type of property and the income streams considered below? Is the type of property being proposed within the policy guidelines of the

bank e.g. certain types of apartments in certain geographic areas may be excluded for policy reasons?

R Repayment

Details of both monthly current expenditures and incomes should be provided in the Application Form;

Question the stability/volatility of the income stream(s); Question the currency of the income stream. An element of hard currency

income is likely to be a positive factor for the lending decision if the loan is either denominated in UAH or hard currency. However, if income is only likely in UAH and the loan is in a hard currency this would be a negative factor;

Details of debt service costs of the proposed new loan will be added by the bank interviewer;

Details of other assets and liabilities of the Loan Applicant will be shown in the Application Form; and

Prospects of future income decreases or increases should be noted.

Evidence should be obtained of the major items of income (e.g. salary chits) and expenditure (e.g. rental receipts) should be obtained and copied.

If the income stream appears to be volatile then a loan would probably be imprudent.

S Security

Because of the legal and practical difficulties of enforcing property security, the prime source of loan repayment should be the underlying cash flow of the loan applicant. Repayment through the sale of the security should only be considered as a secondary source;

Does the security fall within the bank’s policy guidelines? What is the bank’s policy towards mortgages other than 1st Mortgages?

The risks associated with Mortgages other than 1st Mortgages e.g. 2nd and 3rd are considerably higher than those applying to 1st Mortgages;

As a matter of bank policy, certain types of property and property in determined geographic locations may be prohibited as allowable security for a Mortgage Loan; and

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Although not specifically a “security” point, there are considerable benefits if a bank can arrange for monthly loan repayments to be made by the borrower’s employer as a direct deduction from salary.

E Expediency The credit assessment of a loan should be proposed and considered on a

stand alone basis on the basis of the facts presented. The process should not be influenced either internally or externally by pressures or references.

A loan should not be made on the basis that “if we do not make the loan then this or that will happen”.

R Remuneration

Fees and interest rates should be consistent with bank policy.

In all of the above cases, if any of the proposed terms and conditions of a loan fall outside bank policy these should normally be referred to a higher level of Credit Approval Authority.

The acid test of a credit assessment decision is: “if it were my money would I make the loan”.

These principles are covered in further detail in Section 9 below.

6. Pre-qualification to ascertain potential borrower’s compliance with the bank’s key criteria

The combined Pre-qualification and Loan Application form is attached as Appendix 2

Three examples of pre-qualifying a mortgage loan applicant:

by an employee at a bank’s call-centre within the scope of primary consultation and preliminary evaluation; or

by relying on information provided for a prospective borrower at the bank’s web site; or

through an informal meeting at one of the bank’s branches.

The purpose of pre-qualification is to arrive at a group of potential borrowers that have met a bank’s key lending criteria before embarking fully on the full Loan Application process for a Mortgage Loan. Key criteria will include the ability to provide full identification details, be able to demonstrate minimum income levels and the ability to meet mortgage payments and the suitability of the mortgage property being proposed.

Preferably a bank’s credit systems will enable the key criteria/lending ratios to be automatically calculated during completion of the Pre-qualification form. This will avoid the need for manual input and enable a Loan Applicant, if he/she pre-qualifies, to proceed immediately with the Loan Application form.

The pre-qualification process could also demonstrate additional information such as:

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The bank’s loan to value policy; Current interest rates and the bank’s policy on loan maturity and

repayment; A general indication of the bank’s Mortgage Loan products; A sample Loan Application form; The calculation of an approximate amount of available funds that the

borrower must have in order to make a down-payment and to cover expenses related to the execution of a property purchase transaction e.g. loan and mortgage contracts insurance contracts and the property purchase contract; and

Contact details of the bank and staff member in order to proceed with a full Loan Application if the pre-qualifications have been met.

7. Loan Application Process subsequent to pre-qualification.

Once the prospective borrower feels that he or she might qualify for a Mortgage Loan, the Loan Applicant will then complete the Loan Application Form (Appendix 2) either manually or automatically from the bank’s web site.

The Loan Applicant would then arrange an appointment with the bank and the data input by a member of staff into the bank’s systems. For the reasons detailed under Section 8 below (“Interviewing Principles”), it is recommended that the Loan Applicant return to the bank for a formal Loan Application interview.

One of the key features of the application will be the ability of the borrower to comply with the bank’s financial criteria for Mortgage Loans. However, in view of the dangers of misinterpretation of data by prospective borrowers in completing the Loan Application Form it is strongly recommended that the bank’s respective financial ratios are not automatically calculated if the form is completed on the bank’s web site.

The respective ratios would only be calculated based on the financial data input by the staff member imputing the Loan Application data jointly with the Loan Applicant into the bank’s systems. This would then ensure accuracy and compatibility of financial data input.

The following are typical financial criteria examples for Mortgage Loan applications. However, each bank will have its own preferences for both the structure of the ratios and the perceived minimum or maximum acceptable values for credit worthiness.

7.1. Examples of ratios determining a borrower’s creditworthiness

1) The percentage of monthly mortgage loan payments (principal, interest, (or the annuity as the case may be) and bank charges) to disposable income (i.e. income after health insurance contributions, pension contributions and tax) for a respective period (Debt Service Payments to Income or “PTI”):

Monthly principal, interest and bank charge payments under the proposed mortgage loan

PTI = -------------------------------------------------------------------- x 100

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Aggregate monthly disposable net income

2) The percentage of total monthly obligations to disposable income for a respective period (Total Obligations –to Income or “OTI”)

Total monthly payments including

the proposed new mortgage loan OTI = ----------------------------------------------------------- x 100

Total monthly net income

Income of a prospective borrower may also include income of his/her spouse if such income is considered reliable and stable for the creditworthiness calculations. A bank will need determine specific criteria with regards to the extent to which spouse’s income can be included in the income calculations.

3 The ratio of the proposed Mortgage Loan principal to annual salary.

This ratio is often used as a general guideline subject to the proposed loan to value percentage criteria discussed below and the debt service percentages discussed above and below. The ratio is also very dependent upon interest rate levels at the time the ratio is set by the bank. At times of stable low interest rates (say 3.0% to 7.0%), ratios as high as 5.00x may be seen. However, during times of higher and/or volatile interest rates this ratio can fall to as low as 2.50x.

The PTI ratio

Estimated future monthly expenses related to the to-be-acquired property would include:

Principal, interest (or the annuity as the case may be) and possible monthly bank charges under a mortgage loan;

Taxes related to acquired property (calculated on a monthly basis); Monthly property insurance payment; Monthly life and disability insurance payments (borrower and his/her

spouse); Monthly property title insurance; Payments related to technical maintenance (condominium and other

regular charges (monthly or annual, re-calculated on a monthly basis), mandatory contributions related to utilities (electricity, gas, water), property management costs, security costs and property maintenance costs); and

Other regular payments related to the acquired property.

The following table provides a guideline as to the multiplier factor that a bank may apply to the monthly minimum income level set by the Government and PTI percentages that may be acceptable (together the “Mortgage Factors”). A bank will

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need to examine the Mortgage Factors at least annually to determine the impact they are having on the preferred levels of new business and the payment record of the existing portfolio. As the Mortgage Factors will change over time it is essential with regards to monitoring payment records based on original Mortgage Factors, that the original Mortgage Factors remain as part of the data profile of the mortgage loan/customer.

Multiplier factor PTIX %

2.0 352.2 362.4 372.6 382.8 393.0 403.2 413.4 423.6 433.8 444.0 454.2 464.4 474.6 484.8 49

5.0 and higher 50

The OTI ratio

Examples of payments other than the proposed new mortgage loan costs as detailed above will include:

1. All other household costs namely food, clothing, utilities and services, telephones and household goods;

2. Transport costs; and3. Entertainment costs including smoking and alcohol costs.

In considering the level of this ratio it will be appreciated that a ratio exceeding 80% would allow very little room for adverse events such as unemployment, interest rate increases or currency depreciation factors if the Mortgage Loan was denominated in a currency different to the earning’s currency.

As demonstrated in the examples noted in Section 10.8 below it would be prudent for a bank’s lending criteria to take the lower of the related PTI and OTI percentages.

8. Interviewing Principles

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8.1. Introduction

Combining the imputing of the Loan Application data onto the bank’s systems with the Loan Applicant and at the same time conducting the Interview is strongly not recommended.

Both activities require separate focused attention to ensure accurate and compatible data input on the one hand and a disciplined and thorough approach to the Interview for credit evaluation purposes.

Although the interview with the Loan Applicant could take place immediately after the input of the Application Form data into the bank’s systems by the same staff member, initially at least, until adequate staff are trained in the techniques of Mortgage Loan credit appraisal and interviewing it is strongly recommended that the Interview should take place at a subsequent occasion by a more senior member of staff. The designated account officer should have the required skills.

The purpose of the interview is to discuss and test the data provided by the Loan Applicant to ensure that the interviewer is reasonably confident with the quality of the data shown in the Application Form and to form a judgment as to the integrity, reliability, competence and attitude with regards to the responsibility of meeting the debt obligations on the due dates. This will enable the interviewer to either sponsor the Loan Application as being worthy of positive consideration by the Approval Authorities or to recommend rejection for reasons noted by the interviewer. In addition the interviewer will also consider with the Loan Applicant the structure of the proposed loan with respect to the proposed maturity and repayment profiles and also with respect to the property proposed for the Mortgage Loan.

If as a result of the interview, changes are needed to the Application Form, then amendments will be made and the revised Application Form signed by the Applicant and the earlier draft stamped “cancelled” and signed by the interviewer.

8.2. Stages of the interview process

Despite the range of interviews, all interviews have a great deal in common and comprise three distinct stages:

1. Preparation before the interview;2. Conduct during the interview; and3. Follow-up after the interview.

Preparation Confirm the appointment time and place in writing and obtain

confirmation from the Loan Applicant; Ensure adequate contact (telephone) information is provided to the Loan

Applicant to enable emergency contact in case of delay or cancellation (this may determine the reliability or unreliability of a Loan Applicant if he/she fail to contact the interviewer);

Allow a minimum of 10 minutes to consider the Loan Application data before the arrival of the Loan Applicant;

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Produce a check list of important areas to be covered; Allow adequate time between interviews; Ensure that any relevant supplemental documents are readily at hand; Ensure the availability of adequate interview space and privacy; and Ensure no interruptions.

In considering the Loan Application, the interviewer should consider the Principles of Lending as discussed above and identify from the Application Form the apparent major positive factors and major negative factors. The major positive factors should be tested and explored during the interview and with regards to the major negative factors, the interviewer should determine whether or not there are any major mitigating circumstances for them.

8.3. Conduct of the Interview

Opening:

Friendly welcome; Small talk – care with regards to family e.g. unknown recent deaths

and/or other family issues; Put the Loan Applicant at ease; and Generally establish a good rapport with him/her.

The interviewer would then explain the purpose of the interview, namely to consider the Loan Application and its facts with the Loan Applicant prior to making a recommendation (which could be positive or negative) to the Approval Authorities.

8.4. Interview approach

Be seen to be listening and maintain eye contact; Encourage the interviewee with expressions such as “I see” and “I

understand”; Show interest through your factual expressions; Watch for body language clues with regards to the honesty and approach

of the interviewee; and Be patient – use the power of silence.

8.5. Questioning techniques

An integral part of interviewing. The proper use of questioning will ensure that:

The interviewer remains in control; The interview is purposeful and structured, albeit it must not be like an

interrogation; Essential information emerges quickly e.g. identifying mortgage loans

that may fall outside bank policy because of the type of property being proposed or the geographic location of the property;

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Comprehensive factual or fact confirmation is obtained; and Irrelevances are kept to a minimum.

The types of questions most frequently encountered are:

Open Questions

These are questions that often begin with “what”, “how”, “when” and “where” etc and require an expansive answer.

As a first question, this type can often help the interviewee to relax; Valuable for obtaining information which can be explored in more detail

if required; and Make the interviewee think.

Such questions can also be integrated with “tell me about” and “describe to me”.

Closed Questions

These are questions that can only be answered “yes” or “no” but: Guarantee that minimal information will be obtained; Allow you as the interviewer little time to think and ask the next relevant

question; May become frustrating for the interviewee if too repetitive; and Are useful for confirming facts or controlling talkative people.

Specific Questions

For example “how many children do you have”. Such questions: Invite brief answers; and Useful where factual information is required.

Reflective Questions

In such cases the interviewer may be paraphrasing or repeating in his/her own words what the interviewee has said for example “so what you are saying---------”. Such questions are useful for:

Clarifying the interviewee’s understanding; Refocusing the interview; or Regaining control.

Leading Questions

For example “you will be able to cope with the proposed repayment schedule won’t you”. Such questions should be avoided as they potentially place both sides in an uncompromising situation and creates a negative environment. Remember the interviewer is not the Approval Authority.

Hypothetical Questions

The “what if------” type of question may be very useful in difficult situations for influencing people to the interviewer’s point of view or for making the interviewee think about areas he/she may not have considered.

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8.6. Time input

Generally the interviewee should account for at least 60% of the interview time.

8.7. Conclusion of interview

Highlight any key matters that have arisen during the course of the interview;

Explain the next internal bank steps that will take place and provide an indication on the timing of the bank’s response to the interviewee;

Ascertain if the interviewee has any further questions; and End on a positive note.

8.8. Action subsequent to the interview

Immediately after the interview, make any necessary notes and finalise the recommendation (it is essential to do this at this stage whilst the interview is fresh in the mind);

Ensure that the Loan Application is recorded and the status noted within the bank’s booking procedures;

Pass the Loan Application and recommendation together with the supporting documents (together referred to as the “Credit Package” to the relevant Approval Authority (probably initially the relevant credit officer) for approval subject to the bank’s documentation verification process or for rejection;

On a regular basis ascertain the status of the Loan Application package and as necessary liaise with the Loan Applicant with regards to any queries raised by the Approval Authority; and

Upon approval, pass responsibility of the Loan Application to the bank’s loan processing team for verification of the identification and other documents provided or upon rejection, the interviewer or his/her superior, advise the Loan Applicant of the rejection and reasons why. As a matter of policy, some banks may make it clear to Loan Applicants at the initial application stage, that reasons for rejection may not be given.

9. Proceeding with an Approved Loan Application 9.1.1. Upon approval of the Loan Application by the applicable Approval Authority a

prospective borrower receives necessary information regarding the procedures and conditions set forth by the bank with respect to mortgage loans, specifically:

1) Memorandum of understanding regarding the key loan parameters; 2) Bank requirements regarding the security of loan repayment through mortgage of

property, with the indication of the LTV, as well as other possibilities to secure the loan;

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3) List of documents required to confirm information regarding a prospective borrower (Appendix 3) and the procedure for using this information by the bank;

4) Procedure for entering into a loan contract, property purchase-sale contract, property mortgage contract, rights and obligations of the parties arising from execution of such legal documents;

5) Bank requirements regarding valuation of the mortgage property, its physical condition and legal status;

6) In view of the legal requirement for an external value appraisal of the mortgage property, it may be more efficient to initially have an internal team specialized in property valuations to consider the valuation parallel to the document verification procedures to ensure that the proposed mortgage property did in their view fall within the bank’s policy parameters. If the internal appraisal team considered that the property did not meet the relevant criteria, then the Loan Application would need to be reconsidered again by the Approval Authorities before being processed further;

7) Bank requirements for insurance of mortgage property, insurance of life and disability of the borrower and property title insurance (if applicable); and

8) Information on the likely costs of the loan, as well as other costs related to entering into a mortgage transaction (e.g. notary costs, Technical Inventory Bureau “TIB”, insurance, etc.)

9.1.2. Information provided to a borrower.

A prospective borrower is provided with the information describing the procedure and timeline for entering into the necessary contracts, including the procedure for effecting all actions related to mandatory state registration of the mortgage, notary certification of selected documents, receipt of respective consents from custody authorities (if applicable). A bank also explains the procedures and timelines regarding the making and repayment of a mortgage loan, as well as rights and obligations to the prospective borrower.

9.1.3. The bank must inform the borrower that pre-qualification is not a guarantee of making a loan and that final approval of a loan application is subject to verification of information provided by the borrower.

9.1.4. The borrower must obtain sufficient information in writing and all required explanations verbally in order to have a clear understanding of the lending terms, as well as legal and financial obligations arising from entering into a mortgage loan contract. Specifically, and pursuant to the laws, the bank must provide the following information in writing:

1) Description of all obligations and costs arising from a mortgage loan;2) Principles determining payments under the mortgage loan contract;3) Inflation clause (if applicable);4) Procedure for early fulfilment of the main obligation in case of debtor’s

insolvency or failure to honour obligations under a mortgage loan contract, as well as legal implications of such failure;

5) Debtor’s right to notify a creditor of a possible failure to meet the main obligation; and

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6) Other conditions as the creditor may think fit.

10.Submission of documentation and its verification

Upon the Loan Application being approved subject to the bank’s verification procedures, the Loan Applicant will receive a list of documents that are to be submitted to the bank for verification of information prior to finalizing the approval process.

An example of such a list is attached as Appendix 3.

If need arises, the account officer may request additional documents.

10.1. Documents evidencing ownership of shares (units or stakes in statutory capital)

If a prospective borrower holds shares (units or stakes in statutory capital) of any commercial entity, and if the income derived from such holdings is to be considered in determining his/her creditworthiness, the prospective borrower must submit the following documents:

Copies of constitution documents certified by an appropriate official (charter, foundation agreement, certificate of registration or incorporation);

Copies of a statistics committee confirmation evidencing assignment of the Unified State Register of Enterprise and Companies of Ukraine code;

Copy of balance sheet (certified by the tax authorities and the company) for the most recent quarterly and annual reporting periods;

Copy of income statement (certified by the tax authorities and the company) for the most recent quarterly and annual reporting period;

Copy of a cash flow statement for the past 12 months but not older than one month before the loan application date;

Copies of documents confirming credit history and current liabilities (copies of loan contracts, confirmation of debt position, creditors’ letter/notification);

Office, warehouse, production facility rent contracts; Copies of contracts (between 3 and 5 contracts) with major buyers, suppliers or counter-

parties; and Copies of licenses, certificates, patents (signed by a director and sealed).

10.2. Business persons without a legal entity status

Business persons without legal entity status must provide the following additional documents:

Copy of a certificate of state registration of a business person; Licenses required for engaging in the professional activity; Tax declarations for the past calendar year and full quarters of the current year, and a

certificate of single tax payer; Copies of a statistics committee confirmation evidencing assignment of the Unified State

Register of Enterprises and Companies of Ukraine code; Documents evidencing payments to government social non-budgetary funds;

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Account statements from banks for the past 12 months; Revenue and expense record book (in the tax authority format) with respective

certifications from the tax authority (if available); Confirmation of other income, if available; and Private notaries, lawyers, detectives, security guards, and other persons that provide

service on the basis of other (than employment) contracts, have to provide documents confirming their right to engage in the respective activities (licenses, permits etc), as well as documents confirming their income for the past calendar year and full months of the current year accompanied by confirmation of individual income tax payments.

10.3. Documentary requirements to persons receiving income in the form of dividends from their own business

If a prospective borrower receives income in the form of dividends from his/her own business, and such income forms part of the creditworthiness judgement, then the following additional documents should be requested:

Title documents:

Notary certified copies of constitution documents; Document confirming state registration of a legal entity; and Business permits or licenses, if applicable.

Financials and other confirmations:

Copies of dividend payment vouchers, certified by the business; Copies of balance sheet and income statements (certified by tax authorities and

the business) for the most recent annual and quarterly reporting periods; Description of current accounts payable and receivable, specifying respective

dates; Notary certified sample signature and seal cards; Auditor’s report (if available); Current and currency account statements, not older than one calendar month prior

to the loan application date; Annual business plan showing quarterly revenue and expense break-down; and Contact telephone numbers of a director, deputy director and/or chief accountant.

10.4. Documents confirming borrower’s obligations as of the loan documentation submission date

Copies of loan contracts (credit contracts, purchase and sale contracts) along with account statements evidencing loan draw-down;

Leasing contracts accompanied by payment documents; Copies of surety contracts; and Copies of other contracts evidencing other financial obligations.

10.5. Documents evidencing borrower’s expenses as of the loan documentation submission date

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Names of dependants; Rent commitments; Car maintenance evidence; Alimonies; Evidence of debt service amounts for other loans; Evidence of education costs; and Description of other expenses.

The employee of the bank responsible for collection and verification of borrower information should request the security department to verify information regarding a prospective borrower and his/her employment. Based on such verification, the security department issues a written report confirming existence/absence of negative information on a prospective borrower and his/her employer.

11.Further credit assessment factors

The credit assessment will comprise:

Verification of creditworthiness of a prospective borrower: Borrower’s ability to service the loan on the basis of analysis of his/her income and expenses.

Verification of solvency of a prospective borrower on the basis of analysis of his/her credit history indicating his/her readiness to honour assumed obligations.

Verification of sufficiency of cash funds (and their source) available to a prospective borrower for a down-payment and other transaction-related expenses.

When considering a loan based on joint incomes from a marriage the account officer will consider the income of both spouses unless there is a marriage contract in place that envisages separation of property between the spouses. If a portion of income (after taxes) of one of the spouses’ accounts for more than 50 percent of the total net disposable income of the family, then it is recommended that such a spouse would act as the borrower whilst the other spouse would act as a guarantor.

The credit assessment will consider the debt service capability of a prospective borrower. If the assessment of the three key credit assessment indicators (creditworthiness, solvency and sufficiency of own funds) does not meet the bank’s requirements for lending, the credit assessment procedures are discontinued and a negative loan decision is made.

Credit assessment of a guarantor-spouse:

If the amount of the loan applied for by a prospective borrower does not exceed his/her creditworthiness cap and the spouse’s income is not considered in arriving at a maximum loan amount then a credit assessment is not performed with respect to the guarantor spouse.

If the amount of the loan applied for by a prospective borrower exceeds his/her paying ability cap and the spouse’s income is considered in arriving at the

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maximum loan amount, the credit assessment procedures are performed with respect to the guarantor-spouse identical to the borrower.

11.1. Verification of creditworthiness.

The key component of credit assessment is to evaluate the creditworthiness of a prospective borrower in terms of his/her ability to meet regular and timely payments under the loan. Such an assessment calls for collection of information with regards to stability of employment and income of a prospective borrower as well as his/her expenses in order to decide whether a prospective borrower is capable of servicing the loan and interest.

11.1.1. Stability of employment. Borrower’s stability of employment, both at the loan application time and in the future. This is one of the most important indicators of the borrower’s ability to service the loan. The main criteria to be relied upon by the bank include:

1) Uninterrupted employment over the past two years. A prospective borrower must explain each and every employment interruption longer than one month.

2) Frequent employment changes over the past two years.

It is necessary to determine reasons and circumstances that have led to frequent employment changes paying special attention to the following factors:

a. Initiated by the prospective borrower or his/her employer;b. Due to expiry of an employment contract;c. Due to circumstances beyond the borrower’s control (company closure,

reorganization, etc);d. Within the scope of the same or different business sectors;e. Accompanied by education and professional development of a borrower;f. Accompanied by salary increases or decreases; andg. Accompanied by career promotion or demotion of a borrower.

11.1.2. Borrower’s education, professional experience, qualifications, employment in a steadily developing and potentially lucrative market segment. Analysis of these factors will enable the bank to evaluate stability of prospective borrower’s employment, possibilities for professional and career growth, and his/her ability to find alternative employment with a similar pay level if need be.

11.1.3. Other Employment Factors

1) Stable and uninterrupted (excluding interruptions under one month) employment in the same business or profession over the past two years is a positive factor. However, the bank does have to consider that many potentially reliable borrowers have had to change employers and business sectors many times due to social and economic transformations in Ukraine. Such circumstances should not automatically lead to loan rejection. The account officer has to evaluate the current status of a borrower and his/her ability to find a new job (with a similar pay level) in case of employment loss.

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2) It is necessary to consider potential opportunities for professional and career growth of a borrower given his/her education, experience, qualifications and age.

11.2. Verification of borrower’s income source

Calculation of the maximum amount of loan that may be made to the borrower is based on the officially confirmed documentary evidence of income , as well as unconfirmed income as per Item 11.2.1and Item 11.2.4 below. The borrower must submit documents evidencing stable income for the past 12 (twelve) months. If, due to valid reasons, the borrower may not be able to provide documentary evidence of income for the past 12 months, the bank may consider the borrower’s income for the past 6 (six) months. The bank must have reasons to believe that the borrower will continue to receive adequate income during the life of the loan. In order to verify the accuracy of a potential borrower’s income, information provided by his/her employer as well as declared by the borrower himself/herself, should be compared with the average salaries paid in the respective sectors.

11.2.1. Sources of documentary confirmed income to be considered by the bank for calculation of the maximum loan amount:1) Salary and wages paid by the main employer, including overtimes and bonuses;2) Income from part-time jobs; 3) Net income from business operations if a borrower owns a business;4) Income in the form of dividends from investments;5) Income in the form of interest paid on bank deposits;6) Pensions and stipends;7) Rent income (net after expenses and taxes);8) Alimony and family allowances;9) Other documentary confirmed regular income; and10) Declared but non-documented income assessed as per Item 11.2.4

11.2.2. Calculation of aggregate income. The bank evaluates borrower’s (his/her spouse’s) income on the basis of the aggregate average monthly net income for the past 12 (6) months.

11.2.3. Salary and wages paid by the main employer. The bank uses information provided by the employer (salary confirmation) to calculate average monthly income.

11.2.4. Declared (but non-documented) income of a prospective borrower. Should a prospective borrower have income that may not be documented, the bank may consider such income for calculating the paying capacity subject to the following provisos:1) Declaration of monthly non-documented income for the past 12 (6) months in

writing, accompanied by detailed description of the sources of such income;2) Indirect evidence of unconfirmed income – documentary evidence of large

expenses for the past 12 months, confirmations of regular loan repayments etc).

3) Each bank must determine its own policy on the acceptable multiple of unconfirmed income to confirmed income.

11.2.5. Income from part-time jobs. Income paid for part-time jobs (not the main employer)

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may be considered subject to availability of documentary confirmations for the past year and the likelihood of sustaining such income in the future.

11.2.6. Income in the form of dividends on shares. Such income may be considered by the bank subject to availability of documentary evidence and description of payment procedures and frequency.

11.2.7. Income in the form of dividends from own business.Borrowers with own businesses includes persons holding stakes in excess of 25 percent in any company for at least 18 months. Self-employed borrowers (private persons conducting business without setting up a legal entity) must submit documents evidencing sustainability and viability of their business, as well as income generated by such businesses. Account officers are recommended to seek assistance of a relevant employee of the bank to obtain additional evidence of a borrower’s business viability and accuracy of financial reports (if the borrower is self employed).

11.2.8. Pension payments. Pension data may be used subject to availability of documentary evidence. The bank has to verify the period the prospective borrower is entitled to pension benefits.

11.2.9. Rent income. A rent contract executed in accordance with the law has to be provided to confirm rental income, along with confirmation that applicable taxes have been paid. Net rental income is calculated by deducting mandatory monthly expenses (mortgage loan payments, taxes, insurance payments, operational expenses etc) from the total rent received.

11.2.10. Alimony and family allowances may be taken into consideration if the borrower has received such benefits for the past 12 (6) months and has the legal right to sustain such benefits for the following two years.

11.3. Analyzing borrower’s expenses

11.3.1. The following categories should be singled out in the structure of borrower’s expenses:

1) Future monthly expenses related to the to-be-acquired property (property tax, property insurance, maintenance, mortgage loan payments, other possible regular charges and payments arising from the property);

2) Existing monthly expenses related to the borrower’s (his/her spouse’s) existing property (property tax, property insurance, maintenance, mortgage loan payments, other possible regular charges and payments arising from the property);

3) Monthly (or recalculated on a monthly basis) expenses related to income tax, as well as tax and insurance payments related to other movable and immovable properties;

4) Regular living expenses (food, child education, medical care etc);5) Vacation, entertainment and hobby expenses; and6) Other regular and mandatory expenses incurred on a monthly (or other) basis

during a year.

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11.3.2. It is required to determine and take into consideration one-off expenses arising from the purchase of a property and receipt of a mortgage loan:

1) Costs of execution and registration of purchase-sale contract, mortgage contract (state duty on registration of purchase-sale and mortgage contracts, mandatory state pension, insurance duty on property transactions, notary costs (notary certification of contract, notary copies of contract, certificates, etc).

2) Realtor fees; 3) Property appraisal costs;4) TIB related costs;5) Bank charges related to loan origination, opening current and/or loan accounts,

and loan application processing;6) Annual property insurance costs; 7) Annual life and disability insurance costs; 8) Annual property title insurance costs (for the first three years of a loan); and9) Costs related to possible repairs and the move.

11.3.3. The excess of average monthly income of a borrower over his/her total expenses will demonstrate the ability of a prospective borrower to respond to possible adverse changes such as a decrease in income and an increase in expenses, thus, affecting borrower’s ability to meet the debt service obligations.

11.4. Analyzing cash and other tangible assets of a borrower

11.4.1. A minimum cash amount necessary for a property purchase-sale transaction and a mortgage loan is calculated by the account officer on the basis of cash funds that are at the prospective borrower’s disposal at the time of the mortgage loan origination.

11.4.2. Cash at borrower’s disposal at the time of making a mortgage loan should not be less

than the down-payment requirement plus additional funds to cover transaction-related expenses as per Item 11.3.2.

11.4.3. Acceptable sources of funds. The bank must analyze sources of borrower’s funds prior to entering into property purchase and loan contracts paying attention to the fact that the funds should not come in the form of borrowings, while their origin must confirmed by documentary evidence from the borrower.

The following sources of funds may be treated as acceptable:1) Borrower’s savings;2) Borrower’s own funds received from sale of his/her movable and immovable

properties. The sale must be completed prior to the loan draw-down; 3) Gifts from family members [of the first relation degree (parents, children and

spouse) under the laws of Ukraine] accompanied by a written confirmation that no repayment will be claimed;

4) Gifts and grants from non-profit organizations, accompanied by a written confirmation that no repayment will be claimed;

5) Non-returnable gifts and grants from an employer within the scope of employee assistance programs; and

6) Government housing subsidies.

11.4.4. Verification of bank deposits. The bank should verify sources of all funds earmarked for the down-payment. If a borrower keeps funds in a bank account , the

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account officer should analyze balances in the current period and the average balance for the past two months. In case of a significant deposit over the past two months, the bank should check to ensure that such funds are not of a debt nature . A significant amount means the amount in excess of the borrower’s average monthly income. The borrower must provide documentary evidence of the source of significant funds deposited over the past two months. If cash assets significantly exceed a borrower’s monthly income, the account officer should check sources of such funds irrespective of the time of their receipt.

11.4.5. Evaluation of non-cash assets. Borrower’s property (such as cars, holiday homes, jewels, objects of art, antiques and other valuables, as well as other movable and immovable property) should not be considered in calculating ratios, and setting a maximum loan amount. However, availability of such properties and their appraisal value may be considered by the bank as a positive factor in the overall credit assessment of the borrower.

11.5. Analyzing borrower’s credit history

11.5.1. Analysis of a borrower’s willingness to repay a loan calls for an assessment of the borrower’s trustworthiness on the basis of a subjective assessment of his/her character.

11.5.2. Verification of credit history. Since Ukraine does not have a central credit agency banks must try to verify credit histories independently through a variety of information sources such as known creditors of the borrower, landlords and utility companies.

11.5.3. Borrowers that conceal information on their past credit obligations may also conceal other information related to the loan application. If such instances are identified, the bank must demand explanations and perform strict credit assessment procedures. Loan contracts with borrowers should state that loan prepayment may be demanded by the bank if the borrower conceals information or provides false information.

11.5.4. Analysis of borrower’s existing debt obligations. Credit history for the past 12 (6) months should serve as a sufficient basis for the account officer to make a conclusion with respect to obligations assumed by the borrower under a new mortgage loan.

Special attention should be paid to a borrower’s punctuality in meeting his/her obligations.

11.5.5. Analysis of borrower’s mandatory housing charges. Since a mortgage loan presents a future obligation arising from a housing property, the borrower must provide evidence of his/her ability to meet past housing bills on a regular basis. The account officer must verify the borrower’s punctuality in settling housing and utility bills as well as property taxes over the past twelve months.

Housing bills. Some borrowers fail to settle their housing bills on time. This is not necessarily an indication of neglect with respect to past credit obligations but the account officer should establish grounds for all violations over the past 12 months and their influence upon future obligations.

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Rent. If the borrower used to pay rent in the past this can serve as a good indicator of his/her attitude to meeting financial obligations. Any outstanding rent payments over 30 days call for written explanations. Bills outstanding over 30 days over the past 12 months may serve as a valid reason to reject a loan application.

Utility (technical maintenance, water, gas, electric power) and phone bills . Settlement of such bills is verified by checking respective payment record books or other payment documents evidencing bill settlement. The account officer is expected to identify any outstanding bills in the past and whether they resulted from borrower’s neglect or interrupted services. However, the borrower must have no outstanding bills at the time of application for a loan. Interrupted services in the past due to borrower’s failure to settle bills may be treated as a valid reason for rejecting a mortgage loan application.

11.6. Analyzing risk factors and making a decision on the basis of credit assessment

While analyzing risk factors and making a loan decision, the bank should be guided by the following:

11.6.1. Critical attention should be paid to the borrower’s ability to repay the loan. Great importance is attached to such risk factors as instability of employment, frequent job changes, decreasing income, or slower (than inflation) growth of income.

11.6.2. The next step is to verify sufficiency of cash funds for a down-payment and covering transaction-related expenses.

11.6.3. The final step is to check in depth the Loan Application Form and analyze the credit history of a borrower. Absence of credit history (credit cards, consumer loans) should not be treated as a negative factor upon the availability of compensatory factors as per Item 11.7.

11.7. Analyzing compensatory factors with regards to loan decision

Normally, compensatory factors are of subjective nature and may not be reflected in numerical evaluation. The account officer must define whether a compensatory factor or a combination of such factors is sufficient to overcome certain negative aspects pertaining to the amount and stability of borrower’s income. In some situations, a compensatory factor may validate a positive decision of the account officer. Below are examples of such factors:

11.7.1. Availability of a significant amount of cash or liquid assets in excess of the down-payment requirement, costs associated with the execution of purchase-sale, mortgage and loan contracts may be viewed as a material compensatory factor evidencing availability of additional sources of funds, besides monthly income, that may be used to service loan payments.

11.7.2. Availability of significant moveable and immoveable assets may serve as a material compensatory factor influencing a positive loan decision since it evidences a borrower’s ability to save and, if need be, use the savings in case of an income

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decrease.

11.7.3. Age. A young age of a borrower, a good education and profession may be considered a material compensatory factor. The level of education and age of a borrower may provide a basis to believe that his/her income will be increasing throughout the life of the loan while the monthly payment burden may be decreasing.

11.7.4. Availability of a guarantee from a legal entity (e.g. the employer) with a high solvency and good reputation may make a positive impact on a borrower’s credit risk and may be considered a compensatory factor. In this case, however, the account officer must assess the guarantor’s solvency.

11.8. Calculation of maximum loan amount - example:

11.8.1. An example is provided below using the following assumptions:

1). Borrower’s monthly average income*: USD 1,2002). Borrower’s current total monthly obligations*: USD 250 3). Appraised value and purchase value of property: (USD 48,000)4). Loan maturity: 10 years (i.e. 120 months)5). Interest rate: 15% per annum

* For convenience, borrower’s income (in UAH) and monthly obligations (in UAH) are shown in USD at the NBU exchange rate as of the calculation date.

The account officer should determine the maximum acceptable monthly annuity payment of the borrower taking into account the banks lending criteria.

11.8.2. Calculation of borrower’s proposed mortgage debt service to income ratio. Maximum acceptable amount of monthly payment on mortgage loan = borrower’s total monthly disposable income х PTI.

Example:PTI* = 50% (assuming the guidelines noted in Section 6.1 above)Total monthly income = USD 1,200Maximum acceptable mortgage loan payment = USD1200 х 0.50= USD 600

* Since the disposable average monthly income is $1,200, i.e. 5 times over the living wages (as per Article 65 of the Law of Ukraine “On 2006 National Budget”, the PTI guideline percentage is 50 percent.

11.8.3. Calculating the OTI reference ratio.

Assume existing monthly household costs of USD 250

Assume additional new property monthly household expenses (excluding the monthly annuity) of USD 180

Therefore total projected monthly household expenses excluding the monthly annuity USD 430

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Assume maximum allowed bank OTI ratio of 80% or maximum aggregate monthly household expenses and new annuity of USD 960. This would allow maximum additional monthly annuity of USD 530 (USD960 minus USD430) as against USD 600 under the PTI test.

11.8.4. Calculating the maximum loan amount. The formula below is used to calculate the maximum loan amount available to the borrower (1-1):

Loan Amount = P*(1-(1+i)^(-(n-2)))/i, (annuity-based)

where:n = Number of payment periods (months – in case of monthly repayment), i = Interest rate in a respective period (month),P = Maximum monthly payment under a loan, including principal and interest.

Example:Maximum acceptable monthly annuity payment = USD530Loan maturity = 10 years (120 months)Interest rate = 15% per annumLoan amount calculated under this formula = USD37,500

Calculating the maximum loan amount based on the value of proposed mortgage property.

Example:“LTV” ratio = 70% (a guideline only – refer Section 12.3.1 below) *Appraisal value of the property = USD 48,000Maximum loan amount = USD 48,000 x 0.7 = USD 33,600

11.8.5. Maximum acceptable loan amount. Based on borrower’s cash flow, the maximum acceptable loan amount for the borrower stands at USD37,500. However, based on the value of the available mortgage property, the maximum loan amount stands at USD 33,600. Since the bank should choose the smaller of the two values, the maximum acceptable loan amount is adjusted to USD 33,600 in this specific case.

11.9. Account officer’s recommendations

11.9.1. The account officer analyses the following aspects in order to arrive at the maximum acceptable loan amount:

1) Loan amount requested by the borrower;2) Maximum acceptable loan amount calculated on the basis of borrower’s

income; 3) Maximum acceptable loan amount calculated on the basis of the value of

mortgage property (if available); and4) Cash available for the transaction.

11.9.2. If the amount applied for by the borrower is higher than the loan amount calculated on the basis of borrower’s creditworthiness, the account officer must determine:

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1) If the borrower has necessary cash funds or liquid assets to be sold in order to increase the down-payment;

2) If the borrower has sufficient compensatory factors enabling him/her to meet the loan repayment schedule; and

3) If the borrower can find another property meeting his/her income parameters.

11.9.3. If the amount applied for by the borrower is higher than the loan amount calculated on the basis of the value of mortgage property, the account officer may consider the other lending criteria. Consequently if the proposed loan amount falls within the borrower’s disposable income criteria, the account officer may consider the extent to which the higher income compensates for the property value risks. However, any deviations from the bank’s LTV ratio must be considered by the bank’s Credit Committee.

11.10. Credit Assessment report

Upon completion of the credit assessment of the proposed borrower’s solvency and creditworthiness, as well as calculation of the maximum loan amount, the account officer of the origination unit should prepare a credit assessment report on the expediency or otherwise of making a loan, supported by his/her respective arguments.

The credit assessment report should reflect any major issues with regards to the credit assessment, for example with regards to:

Passport data; Marital status, family composition, and number of dependants; Permanent (temporary) registration address and actual residence; Validation for registration (residence) in Ukraine; Education and qualifications; Employment record (for the past three years) specifying reasons for dismissals and/or

interruptions; Information on employer (business area, market position etc); Job description and status; Existing assets and property; Negative and compensatory factors; Total income after taxes over the past 12 (6) months, accompanied by a break-down

of mandatory expenses over the past 12 (6) months (if necessary); Outcome of database searches for existence/absence of loan indebtedness evidence to

the bank and other financial institutions and quality of borrower’s credit history; Credit scoring – if available; PTI and OTI percentage calculations; and Final conclusions regarding expediency of making a mortgage loan, its amount,

maturity, mortgage property specifications (if mortgage property is to be selected upon a loan decision), pricing and credit risk rating.

The credit assessment report will be signed by the account officer and the head of the origination unit and, depending on the levels of delegated credit authority within the bank, forwarded to Risk Management for consideration by an authorised credit officer of the bank or as need be, by the Credit Committee.

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12.Credit Approval

Banks will already have established procedures for the approval of loan transactions. Suffice it to say therefore that Mortgage Loans is a specialised product requiring specialised skills. As a consequence a separate department within Head Office Risk Management should handle the approval process. However, over time it may be possible to delegate responsibility up to determined values and maturity periods to specialised credit officers at the branch level or regional level.

13.Property analysis

13.1. Obligations of account officer

13.1.1. The account officer should consider the independent appraisal report in line with the following guidelines:

1) Compliance with the methodology envisaged by Item 13.4 “Mortgage Appraisal”;2) Compliance of the property with the bank’s standards;3) Date of valuation (no later than 60 days prior to the loan approval decision);4) Appraisal performed by a bank accredited appraiser properly licensed to

perform appraisals under the laws of Ukraine; and5) Consistency of information relied upon by the appraiser and the information on

the credit file.

13.1.2. The account officer must also perform assessment of sufficiency of security with regards to determining the value of property with respect to the requested loan amount, as well as an assessment of the condition of the property.

If the account officer ascertains that the appraisal is deficient in terms of timing or accuracy, the account officer may request a new appraisal from a different appraiser (agreed upon with the borrower).

13.2. Minimum requirements to mortgage property

Mortgage property should meet the following minimum criteria:

1) Separate (from other apartments or houses) kitchen and bathroom; 2) Connections to electricity, steam or gas heating systems covering the entire area

of the premises;3) Connection to hot and cold water supply; and4) Properly functioning waste and water drains, doors, windows and roof ;

The building where the mortgage property is located should: 1) Not be in an emergency condition;2) Not be scheduled for major repair; 3) Have a cement, stone or brick foundation; and4) Have metal or reinforced concrete floors.

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13.3. Loan amount to mortgage property value ratio (LTV)

13.3.1. Upon analysis and approval of the appraisal report, the account officer calculates the ratio of the proposed loan amount to the value of the proposed mortgage property.

The calculation of the proposed loan should be based on the smaller of:

The agreed property sale price (as per a purchase-sale contract); or The appraisal value of the same property.

The LTV ratio determines a bank’s policy on the maximum amount of loan in relation to the mortgage property value. The ratio will vary according to a bank’s risk appetite and should be reviewed on a regular basis – at least every six months to take into account economic conditions and the payment performance of the bank’s existing mortgage portfolio. A high ratio of 95% would demonstrate a bank’s confidence in the economic environment, low stable interest rates for the foreseeable future, stable currency factors if the loan is denominated in a hard currency and borrower earnings are in a potentially soft currency and an aggressive new business strategy. A low ratio of 50% would represent contrary views.

The LTV ratio is calculated as follows:

Loan amount in USD “LTV” = ---------------------------------------------------

Value of mortgaged property in USD

Deviations from a bank’s LTV ratio policy must be treated as exceptions and should only be approved at Credit Committee or even Board level.

13.4. Mortgage property appraisal

If the borrower fails to meet his/her obligations under a loan contract , the bank has the right to foreclose on the mortgage in accordance with the legislatively established procedure. In appraising the mortgaged property, the account officer must analyse three factors (if need be, the account officer should seek advice from other units of the bank): Legality (legal clearance) of title to mortgage property at the time of transaction; Estimated current property value to outstanding loan amount ratio; Physical condition of property; and Overall financial position of the borrower.

13.4.1. Verification of the underlying title documents

The bank’s legal department checks the underlying title documents, legality of title and existence or absence of third party rights to the mortgage property.

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13.4.2. Requirements for property appraisal

The bank refers to a properly licensed (under the laws of Ukraine) appraiser for appraisal of the property. Based on the property appraisal results, the appraiser produces a “Property Appraisal Report”. All reports are subject to evaluation by the bank’s account officer (and specialised property team – considered below - as may be required by a bank) and must be considered satisfactory by him or his colleagues. The mortgage appraisal report should be kept in the borrower’s credit file.

A comprehensive study on “Valuation of Residential Property for Mortgage Lending Purposes”was completed during 2006 by Nataliya Lebid, Vice President of the Ukrainian Appraisers Association. A full version of this study can be obtained through the Ukrainian National Mortgage Association’s offices. However, for the benefit of bank account officers, a substantially abridged version of this Study is attached as Appendix 4.

13.4.3. Obligations of appraiser

The appraiser provides the bank with detailed specifications of the property and its market value, i.e. a price that a buyer is willing to pay to a seller in the open market. The appraisal report must include the following items:

1) Analysis of mortgage property: The appraisal report should describe the property itself (with floor plans) and if part of a property block, then the block also. It should explain in detail the key structural features of the property and its services (e.g. heating, water and wastewater systems etc) noting the condition and any need for repairs.

2) Analysis of adjacent territory.The appraiser must describe the adjacent territory indicating proximity to highways , transport conditions, existence and proximity to industrial enterprises, ecological conditions, prestige level of the neighbourhood and its attractiveness to residents , and average price of a square meter of residential area and the price prospects in the given neighbourhood.

3) Determining market value.The appraiser determines the current market value of the proposed mortgage property as of the appraisal date based on his/her analysis of all collected data as per the appraisal standards accepted in Ukraine.

1. Valuation based on comparable sales: The appraiser must compare the proposed mortgage property to at least three comparable properties (in terms of location, size, specifications) sold over the past six months and draw conclusions on the sale price of the proposed property;

2. Cost-based valuation: The valuation is based on the cost of building a property similar to the proposed mortgage property;

3. Income-based valuation: The approach is based on projecting income that might be generated through renting the property and possible sale of the property (income capitalization technique);

4. Liquidation-based valuation: The value that could be obtained through a distressed/urgent sale of the mortgage property; and

5. Future (tentative) market value: Projecting most likely trends of the value of the property in one year from the date of purchase.

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13.4.4. Property Specialist Team

In view of the substantial risks inherent in real estate lending, banks may wish to consider establishing a specialised team to advise on real estate issues. The team would report to the Senior Credit Officer.

Unlike other sectors, property values can be affected by a combination of several factors:

1. Oversupply per se through excess speculative development;2. A rise in interest rates will result in a direct fall in property values to equate revised

alternative investment return criteria; and3. A rise in interest rates will result in a slowing down of the economy and demand for

property and consequently an increase in both property (rental) voids and unemployment impacting persons ability to meet mortgage repayments and rental obligations. These factors will usually result in property value falls.

Responsibilities of the team would include:

1. Advising on the respective criteria e.g. PTI and OTI percentages and LTV ratios to be used by a bank for evaluating Mortgage Loans;

2. Recommending the policy for the type of property that would be acceptable and/or unacceptable for Mortgage Loans;

3. Advising on other property assets proposed by other bank business teams as security for loans;

4. Recommending the pool of external appraisers to be used by a bank for Mortgage Loan valuation purposes;

5. Monitoring the quality of appraisers valuations; and6. Being available to consider ad hoc property queries raised by bank staff in assessing

the credit quality of both new and existing loan exposures.

14.Preparation of loan transaction contracts, including insurance procedures, and loan disbursement

14.1. Transaction documents

14.1.1. The parties could enter into the following contracts in the process of a mortgage loan:1) Loan contract;2) Potentially a surety/guarantee contract (with borrower’s spouse);3) Purchase-sale contract;4) Property mortgage contract;5) Property insurance contract;6) Life and disability insurance contract;7) Title insurance contract (if agreed upon); and8) Local and hard currency account opening agreements.

14.1.2. Legal format of contracts:1) Loan, surety/guarantee, insurance and account opening contracts are executed in

simple written form; and

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2) Purchase and sale and mortgage contracts are subject to notary certification ; the purchase-sale contract is further subject to a mandatory state registration of title to property with the Technical Inventory Bureau, while a mortgage contract is further subject to registration with the state mortgage registry and the state property liens registry.

14.1.3. If the borrower has under-aged children, a written confirmation of registration of such children in a housing property, other then the mortgaged one, is required.

14.1.4. In order to avoid risk of the mortgage contract being rendered invalid, it is recommended to obtain preliminary consent from custody authorities for entering into a mortgage contract if the borrower co-resides with under-aged children.

14.1.5. At the time of entering into a mortgage contract but prior to its certification, the bank must ensure that there are no encumbrances upon the mortgage property by receiving statements from the state mortgage registry and the state property liens registry.

14.2. Execution and notary certification of purchase-sale and mortgage contracts

14.2.1. When mortgaging property for general funding purposes (i.e. the loan is not being used to pay for the property), contracts are executed in the following sequence:

1) Loan contract, 2) Property mortgage contract,3) Purchase-sale contract.

14.2.2. While mortgaging property (to which the borrower will obtain title in the future on the basis of a purchase-sale contract) purchased with borrowed funds, the following actions are taken in the following sequence:

1) Execution of purchase-sale contract (without filing it with the registry of legal acts),

2) Execution of loan contract, 3) Execution of mortgage contract with respect to the property that will come

borrower’s ownership in the future, 4) Filing the purchase-sale contract with the registry of legal acts.

14.2.3. While mortgaging property (title to which is with the borrower) purchased with borrowed funds, the following contracts are executed in the following sequence:

1) Purchase-sale contract (followed by title registration with the TIB),2) Loan contract, 3) Mortgage contract with respect to the property (title to which is with the

borrower) purchased with borrowed funds.

14.2.4. Notary certification of purchase-sale and property mortgage contracts is effected through a notary inscription on a respective document (contract). Such an inscription may be effected by both notaries public and notaries private.

A notary certification fee, costs of necessary statements from relevant registries, and the state duty are paid for by the borrower. Under the Decree of the Cabinet of Ministers of Ukraine on “State Duty”, the state duty for certification of property purchase-sale and mortgage contracts amounts to circa 1.01 percent of contractual

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consideration (1 percent for the purchase-sale contract and 0.1 percent of the value of the mortgage). The 1 percent is paid into the State Pension Fund and the 0.01% individual has a cap equivalent to the value of 100 non-taxable incomes or UAH 170 at this time.

Notary certification is rendered as effective upon payment of the state duty and the State Pension Fund contribution.

14.2.5. Documents containing erasures, written additions, cross-outs or other unofficial corrections, as well as signed in pencil are not accepted for notary certification. The text of the contract, subject to notary certification, must be clear and explicit; all relevant figures must be put in words at least once while names of legal entities must be full and accompanied by their addresses. Last, first and patronymic names of individuals and their addresses must be written in full.

Contracts containing more than one page must be bound, page-numbered and sealed.

14.2.6. Prior to notary certification, a notary must verify the identity of signatories to a contract. Identification of citizens of Ukraine is effected on the basis of a passport of the citizen of Ukraine and for children under 16 years of age – on the basis of a birth certificate. Identification of foreign nationals permanently residing in Ukraine is effected on the basis of a residence permit.

14.2.7. Prior to certification, a notary explains to the parties the purpose and meaning of the draft contract and verifies whether its contents are in line with their intentions and the legislative requirements.

14.2.8. The contract must be signed in the presence of the notary. For persons unable to sign due to physical disability, illness or other reason, other individuals may sign on their behalf but in their presence and the presence of the notary . In this case, the notary inscription must specify the reasons for this.

14.2.9. At least two copies of the contract are to be submitted for notary certification; one copy remains with the notary.

14.2.10.In case of transactions involving property in joint ownership of spouses, a written consent of a spouse (that is not indicated as an owner in title documents) must be obtained for such a transaction. Authenticity of a spouse’s signature in such a document must be certified by a notary. Consent may contain special conditions to be incorporated in the contract, e.g. price, identity of a buyer. The notary must verify that such conditions are complied with.

14.2.11.Transactions involving property encumbered by rights of under-aged or incapable persons are effected by their parents or custodians on behalf of under-aged or incapable persons upon consent from custody authorities.

14.2.12.Transactions involving property encumbered by rights of persons aged between 15 and 18 years old or persons with limited capability are effected by such persons upon written consent of their parents, foster parents, or custodians upon prior written consent from custody authorities. Authenticity of signatures of parents, foster parents or custodians is to be certified by a notary.

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14.2.13.If the borrower (borrower’s spouse) has under-aged or incapable persons, prior to entering into purchase-sale and mortgage contracts, the borrower (borrower’s spouse) must submit to the bank consent from custody authorities with respect to mortgage of the property to be purchased with the borrowed funds or confirmation of the registration of such family members in other (than the property to be purchased with the borrowed funds) property.

14.2.14.In order to confirm the legal capacity of a legal entity to enter into the transaction, the bank and the notary must be provided with originals or duly certified copies of the following documents:

1) Incorporation agreements with all registered amendments and additions;2) Confirmation of the non-existence of amendments and additions to incorporation agreements since the date of the most recent amendments and additions;3) Copy of certificate of state registration of a legal entity; 4) Document confirming powers of a representative of a legal entity:

a) For a director of a legal entity:

Minutes of a meeting that appointed the director of the legal entity, Resolution of appointment, Employment contract (if available)); Identity document (passport containing a photographic image and a

signature); and Decision of a management board on granting powers for executing a

property purchase or sale transaction provided such a transaction is permitted under itscharter.

b) For persons acting under a power of attorney:

Notarized power of attorney, signed by a director and sealed with the legal entity’s seal (must contain the date of execution and evidence of explicit powers); and

Identity document (passport containing a photographic image and a signature).

14.2.15.The notary should be provided with the following documents for certification of purchase-sale and mortgage contracts:

1) Original and copy of the loan contract and draft purchase-sale and mortgage contracts in electronic forms;

2) Original documents evidencing seller’s title to property; 3) Statement from the property title registry or TIB specifications confirmation 4) Statement from the Housing Servicing Company listing persons registered (both

permanently and temporarily) in the property to be sold; 5) Seller’s identification documents;6) Borrower and mortgagee (if a different person) identification documents;7) Identification documents of a representative of the mortgagor (bank);

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8) Documents confirming powers of representatives of legal entities in the transaction;9) Documents confirming legal capacity of legal entities participating in a transaction; and10) Consent from custody authorities for sale of the property housing under-aged and/or

incapable persons.

14.2.16.Following a notary certification, each party to the transaction receives a notary-certified original of the contract. In addition upon request from a party, a notary-certified copy of the contract may be provided to such a party for an additional fee.

14.3. State registration of property purchase-sale and mortgage contracts

14.3.1. The purchase-sale contract is subject to state registration with the Registry of Legal Acts (the notary makes a respective entry to the Registry upon notary certification of the contract) and the Registry of Property Titles and Liens (currently the Technical Inventory Bureau (“TIB”) performs this function).

14.3.2. Property listed in the mortgage contract must be entered into the Mortgage Registry (by the notary upon an application from a mortgagor following a certification of the mortgage contract) and the Unified Registry of Property Disposal Bans (by the notary upon certification of the mortgage contract). Upon request from a bank, the notary issues statements for such registries confirming entry of the mortgaged property onto such registries.

14.3.3. For state registration of the title to property arising from the purchase-sale contract, the documents listed below must be submitted to the TIB:

1) Application for state registration of title to property; 2) Identity documents of an applicant and a document confirming applicant’s

powers (if a purchase-sale contract is submitted for registration by a borrower’s authorized person);

3) Title document (original and a copy of the purchase-sale contract); and 4) Confirmation of payment of the state duty on title registration.

The documents listed above may be submitted to the authority performing registration of property titles directly by the borrower or his/her attorney subject to proper verification of the latter’s powers. If need be, the bank may act as the borrower’s attorney.

Notary certification of the state registration of property purchase-sale and mortgage transactions are effected under the bank’s supervision. In order to meet this requirement:

1) Notary certification of property purchase-sale and mortgage transactions is effected by a bank appointed notary;

2) The borrower and the mortgagee (if not the same as the borrower) are personally present at the notary certification of the property purchase-sale and mortgage contracts at the location and time defined by the bank and the notary;

3) Submission of documents for state registration of the purchase-sale contract with the TIB may be performed by the borrower’s attorney (upon consent of the bank) properly authorized to act on behalf of the borrower (on the basis of the

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notary-certified power of attorney for state registration of the purchase-sale contract).

For this purpose and upon request of the bank, the borrower:

Grants a notary-certified power of attorney in the name of the person (agreed upon with the bank) for taking actions associated with the state registration of title arising from the purchase-sale contract; and

Hands to the bank (authorized person agreed upon with the bank) the original of the purchase-sale contract.

Texts of the documents submitted for state registration of title must be written legibly, containing full names and address of legal entities. Last, first and patronymic names of individuals and their addresses must be written in full.

Documents containing erasures, written additions, cross-outs or other unofficial corrections, as well as documents produced in pencil, and documents with significant damage so as to prejudice the unambiguous interpretation of the document are not accepted for state registration of title.

14.4. Loan disbursement and servicing

14.4.1. Borrower’s current accounts.

When finalising the mortgage loan, the bank opens a current account in the name of the borrower exclusively for the purposes listed below: Disbursing the loan; Crediting a down-payment; Conversion of transactions under the purchase-sale contract; Settlement under the purchase-sale contracts; Fulfilling obligations under the loan contract, including repayment of principal,

interest and penalties; and For making insurance, tax (if applicable) and utility payments.

14.4.2. In order to service the loan, the borrower is likely to have signed a direct debit agreement as part of the loan contract. .

14.4.3. In order to be able to replenish the current account, the borrower must have the possibility to do so through any branch of the bank or its or its partner bank ATM’s, via Internet-banking, as well as through any other banking institution in Ukraine.

14.4.4. If at any time prior to full repayment of the mortgage loan the borrower submits to the bank a written account closing application or account debiting cessation instruction, the bank would treat such actions as a violation of the loan contract and take the necessary actions aimed at early repayment of the loan contract obligations.

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11.2.1

Documents

Transcript of 11.2.1