Our Ref.: B1/15C
30 October 2009
The Chief Executive
All Authorized Institutions
Dear Sir/Madam,
As mentioned in my letter of 23 October 2009 on prudential measures for residential mortgage loans (RML), the HKMA has recently completed a round of thematic examinations on asset quality of selected authorized institutions (AIs), covering in particular, their residential mortgage lending business. This letter sets out the best practices on residential mortgage lending we observed in the thematic examinations. AIs are required to review and assess their lending practices, and where necessary, take immediate measures to bring them into line with the best practices described in this letter.
Computation of debt servicing ratio (DSR)
While AIs were generally in compliance with the HKMA's guidance on a DSR ceiling of no higher than 50%-60% (with the upper end of this range confined to high income earners only)1, different methods were adopted in computing the DSR, resulting in some cases where the DSR was understated. To ensure prudent computation of the DSR, AIs should adopt the following practices:
Income proof
Rental income claimed by the borrower should be supported by a properly executed tenancy agreement, rental receipt or relevant property tax return. Where this is not available, AIs should have procedures to assess whether the rental amount claimed by the borrower is reasonable by making reference to independent sources, such as rental valuation made by the Rating and Valuation Department or independent commercial websites providing such information. Where rental income proof is not available, AIs should consider whether the rental amount claimed by the borrower is acceptable and whether it is necessary to apply a discount higher than 20% as mentioned earlier to cater for the uncertainty of the rental income.
For borrowers who, by the nature of their occupations (e.g. freelancers, self-employed or sole proprietors), cannot provide objective income proof, AIs should establish clear policies on the types of income proof surrogate or proof of wealth that will be accepted, and document the methods and assumptions adopted in assessing / estimating the borrower's repayment ability.
Property valuation
We have identified the following best practices in respect of property valuation in our thematic examinations:
AIs should endeavour to apply the best practices highlighted in this circular as soon as practicable, if these are not being done already. The HKMA will monitor AIs' progress in this regard through off-site review, which will be followed by another round of onsite examinations in the near future to ascertain AIs' compliance with the requirements set out in this letter and the earlier circular of 23 October 2009.
Yours faithfully,
Y. K. Choi
1The HKMA circular of 28 February 2005 on residential mortgage loans