7.1 Valuation at the point of origination

When a credit facility is secured by an immovable or movable property collateral, institutions should ensure that the valuation of the collateral is carried out accurately at the point of origination. Institutions should set out internal policies and procedures for valuation of collateral. These policies and procedures should specify the valuation approaches to be used by a valuer and the use of advanced statistical models for each type of collateral. Institutions should ensure that these approaches are prudent and proportionate to the type and potential values of the collateral and in relation to the credit agreements, and are in line with the credit risk policies and procedures and conditions set out in Section 7.4.

Institutions should ensure that the property collateral is valued in accordance with applicable international, European and national standards, such as the International Valuation Standards Council, the European Group of Valuers’ Associations European Valuation Standards and the Royal Institution of Chartered Surveyors standards.

When applicable, institutions should take into account ESG factors affecting the value of the collateral, for example the energy efficiency of buildings.

7.1.1 Immovable property collateral

At the point of origination, institutions should ensure that the value of all immovable property collateral for loans to consumers and micro, small, medium-sized and large enterprises is assessed by an internal or external valuer using full visit with internal and external assessment of the property.

As a derogation from paragraph 209, for the purposes of a valuation of residential real estate in well-developed and mature property markets, the value may be assessed by means of a desktop valuation, carried out by an internal or external valuer and supported by advanced statistical models. The valuer remains responsible for the valuation, while the advanced statistical models should be used as supporting tools, meeting the conditions set out in Section 7.4, and including a confidence measure to indicate the robustness of the value proposal and other relevant property-specific information. In this case, the value proposal should be assessed, reviewed and approved by the internal or external valuer, who should understand all inputs and assumptions considered in the model. If the confidence measure in the supporting advanced statistical model indicates low robustness, and/or other property-specific information gives rise to uncertainty about the value proposal, the valuer should choose a valuation method other than desktop valuation.

When institutions use external valuers, they should establish a panel (a list) of accepted external valuers. The composition of the panel of valuers should ensure that valuers have relevant expertise in relevant segments of the property sector.

Institutions should ensure that the valuers provide an impartial, clear, transparent and objective valuation, and each valuation should have a final report providing the necessary information on the valuation process and property. The valuation report should clearly state who ordered the valuation and that the valuation has been requested for the purposes of loan application, renewal or contractual adjustments, or in the case of structural changes. Valuation should be carried out (internal valuation) or ordered (external valuation) by the institution or a collateral agent (in the case of syndicated loans), unless it is subject to a request from the borrower.

At the end of the valuation process, institutions should ensure that they have obtained, for each property collateral, a clear and transparent valuation report documenting all elements and parameters that determine the value of the collateral, including all the information necessary and sufficient for easy understanding of these elements and parameters, in particular:

• a. the reference value of the collateral;
• b. the approaches, methodology and key parameters and assumptions that have been used to assess the value;
• c. a description of the collateral, including its current use or multiple uses if applicable, and the property type and quality, including age and state of preservation;
• d. a description of the location of the collateral, the local market conditions and the liquidity;
• e. the legal and actual attributes of the collateral;
• f. any known circumstances that may affect the value in the short term, including drawing attention to and commenting on any issues affecting the degree of certainty or uncertainty.

Institutions should critically review the valuation they receive, from the valuer, in particular focusing on aspects such as comprehensibility (whether the approaches and assumptions are clear and transparent), the prudence of assumptions (e.g. as regards cash flow and discount rates), and the clear and reasonable identification of comparable properties used as a value benchmark.

7.1.2 Movable property collateral

At the point of origination, institutions should ensure that the value of all movable property collateral is assessed through an appropriate and prudent approach that is proportionate to the nature, type and complexity of the collateral, by an internal or external valuer, appropriate advanced statistical models meeting the conditions set out in Section 7.4 or other standard methods, such as indexation, taking into account the market value as referred to in Article 229(3) of Regulation (EU) No 575/2013.

When applicable, institutions should set out, in their policies and procedures, approaches for the purposes of this valuation, and specify internal thresholds and limits that require an individual valuation of movable property collateral at the point of origination to be performed by a valuer.

When institutions use external valuers, they should establish a panel (selection) of accepted external valuers, covering specific property that is being used as collateral, that is relevant to the lending activities of the institution as well as the location of these activities. This panel of experts should be used for the valuation of large and complex movable property collateral, such as vessels, aircraft and plant machinery.

For movable property collateral that is subject to an individual valuation by a valuer, institutions should ensure that they have obtained a clear and transparent valuation report documenting all elements and parameters that determine the value of collateral, as outlined in paragraph 213.

For movable property subject to a valuation by statistical models, institutions should ensure that they have obtained a clear and transparent model outcome, specifying the value of the collateral. Institutions should understand the methodologies, key parameters, assumptions and limitations of the models used.

Institutions should have adequate IT processes, systems and capabilities in place and sufficient and accurate data for the purposes of any statistical model-based valuation.