MQS edited version as of 16.04.2012

Appendix 2

MINIMUM QUALITY STANDARDS

Introduction

Minimum Quality Standards (MQS) are defined as minimum requirements to mortgage loans that are eligible for refinancing by the Company, and are aimed to reduce risks associated with mortgage lending/mortgage loans and align the mortgage lending process with industry standards.

In the context of MQS, a mortgage loan is the loan provided to natural person(s) in order to acquire, refurbish or build a residential house/property, with that residential house being acquired, refurbished or built treated as security against such loan. The refinancingof mortgage loans already originated for the above-mentioned purposes is also considered a mortgage loan. Anyway, a loan amortization schedule shall be drawn up on an annuity basis (where installments each month are made equally and include repayment of the principal and the interest) or based on proportional repayment of the principal, without a concessionary loan repayment period.

MQS structure:MQS consist of the following parts:

  1. Loan application
  2. Documents required for origination of loan
  3. Loan assessment
  4. Property assessment
  5. Insurance
  6. Minimum requirements to loan and collateral contracts

Lenders shall have internal policies/procedures in place which describe in detail the processes[1] of origination and servicing of mortgage loans and action/procedure for minimization of risks associated with mortgage lending.

Lenders shall carry out monitoring of all mortgage loans refinanced by the Company (disbursement of the recent tranche if the loan is provided through tranches) within 12 months (a monitoring conclusion template is presented as Appendix 4 to MQS). In case of loans provided for refurbishment and building purposes, photo (video) support along with the monitoring conclusion shall be attached to the loan file.

  1. Loan application

The following minimum information shall be indicated in a loan application:

1. Identity of the borrower and co-borrower/s (if any) /
  • Full name, passport details, registration and actual residence address, marital status and number of family members of the borrower/co-borrower/s
  • Information on employment (position, employer’s name and address)
  • Information on income from assets, investments and other sources (if any)
  • Information on current liabilities (if any)

2. Information on the real estate to be pledged /
  • Address
  • Type of property (e.g. apartment, detached house, etc.)
  • What floor it is situated on (in case of apartment)
  • Total floor area
  • Price of acquisition (in case of acquiring a real estate)

3. Information on the proposed loan /
  • Type of the proposed mortgage loan (repayment on annuity, proportional repayment of principal), purpose, maturity, interest rate and sum of the loan
  • Size of down payment and source (if any)

When completing the loan application, the Lender shall provide the Borrower with information concerning interest rate, maturity period, applicable penalties and any costs, whether non-recurrent or regular, in connection with the origination of the loan.

  1. Documents required for origination of loan

This part contains the minimum checklist of documents that are required for origination of the loan. The Lender may add to the list any documents which it considers necessary based on its internal rules and policies.

Documents required
1.Data about the borrower[2]
Borrower’s identity /
  • Borrower’s passport, or another document to substitute the latter
  • Borrower’s social card (if there are any)
  • Marriage certificate (if there are any)
  • Birth certificates of children (if there are any)

Income details / If employed:
Income reference from the employer detailing the borrower’s position, work experience in the current company and monthly income details (gross or net income, in the case of net income, there must be a note in the reference about the latter respectively)
  • Previous employment details: employer, position held, work experience in each company (these datails are required in the cases when the current work experience is less than 12 months)[3]
  • Data about other income details (if there are any)
  • Income reference for spouse’s income (if applicable )
If self-employed:
  • Tax payer ID code/taxpayer number
  • Registration certificate, charter (if there are any)
  • Documents of the permission for the given/current activity; in the case that according to the legislation there must be a special permission for the given activity
  • Financial and tax reports/statements for past 1 year approved by the state revenue committee.
  • Statements/notes for income and expences for past 6 (if there are any).
  • Statement on self-employed people income assessment according to the self-employed income assessment methodology represented in the Annex 1of MQS (the analisys of the income is made by the creditor)[4].
If there are cases when the borrower/co-borrower is the founder (owner) and director (head of the executive ) of the given company,the income appraisal must be done according to the methodology represented in the Annex 1, otherwise if the borrower/co-borrower presents income reference, the mentioned amount must be ensured by one of the below mentioned versions:
  • through the analysis of tax statements approved by authorities, or
  • through the appropriate statement given by pension fund authority of RA.

Details on credit history /
  • Query about credit history from loan registry of Central bank of RA
  • Query about credit history from ACRA credit bureau
(if applicable)
  • If the Borrower has current loan it should be classified as standard loan according to the approved regulations of CBA, Ministry of Finance and loan register of CBA ,the borrower must not have any overdue loan amount at the moment
  • Proof about last 12 months during which the total overdue days of loan payments (be that a repaied or active loan) do not exceed 30 calendar days.[5]

2. Property documents /
  • Property right certificate of the real estate to be pledged
  • Common reference from the State Cadastre of RA verifying that there are no restrictions and the property is not pledged and , under arrest, etc.
  • Documents concerning the rights of ownership (e.g.donation,inheritance,purchase, etc.)
  • Real estate assessment report
  • Calculation list for the reconstruction (only for the cases of repair or reconstruction loan types) and permission for construction according to the defined cases by RA legislation.

3.Other documents required /
  • Agreement given by borrower/co-borrowersfor the loan registry query about credit history
  • Insurance certificates of the property to be pledged
  • Insurance for the accidental death of borrower and co-borrower (made according by income proportion)
  • Other documents if required.

When submitting a mortgage loan to the Company for refinancing, the loan file shall contain a minimum package of documents required by the Company, the checklist of which is provided as Appendix 5 to MQS.

  1. Loan assessment

This part presents ratios used for assessment of the applicant’s creditworthiness. Lenders shall have their own methodology which shall include the following ratios for calculating the borrower’s/ co-borrower’s ability to repay:

  1. The ratio of total debt repayments to net available income (TDI),

where:

Total debt repayments are equal to the sum of monthly repayments (principal + interest) of the loan to be disbursed, insurance premiums plus allother liabilities,

Net available incomes are equal to the sum of net monthly income of the borrower (co-borrower/s), after deduction of tax.

The maximum value of the ratio is 45%.

Where the mortgage loan is originated on a basis of equal repayments of the principal, the TDI ratio must be calculated based on the first (the biggest) monthly payment set in the amortization schedule

The preferred reference of income to be taken into consideration should be the primary income. Typically, it is the income which is based on the skills or professional experience of the borrower (co-borrower)[6].

All other sources of income should be treated as secondary income, which include (but are not limited to) rent income, interest income, remittances, bonuses, dividends and income from other employment with no direct link to the primary employment of the applicant, and etc. Secondary income also includes hidden incomes.

If the Lender takes into consideration secondary income for the calculation of TDI, it then must be included in the calculations for a maximum extent of 60% weight. Exception can apply to the following circumstances:

  • Income from rent can be included in the calculations with 100% if there is a duly signed lease contract in place, which had been concluded at least 12 months before the date on which the loan application was accepted.
  • Payments of bonus to the Borrower can be included in the borrower income calculations with 100% if such payments are made on a regular basis (at least quarterly), were paid within the last one year and were not determined by the employer’s operational results.
  • Dividends can be included in the calculation with 100% if they are regular and if such dividends were paid from any official profit.

The borrower shall, as far as it is possible, prove the secondary income with relevant documentation. It is up to the loan officer to determine the size of this kind of income. However, he shall describe his evaluation in the loan application in a manner that third parties will have no difficulty in understanding his analysis.

If, in calculating the TDI ratio, the Lender also takes into consideration the income of co-borrower/s, these parties shall also sign the loan contract. However, co-borrower/s will not necessarily have to be co-owners of the property pledged.

  1. Loan to value ratio (LTV),

where: the value of collateral is equal to the market value or acquisition value of collateral, which one is the least.

The maximum LTV ratio is 70%.

In case of acquisition loans, the minimum amount of down payment can reach 10% provided that there is another residential property pledged in addition to the property which is being acquired. In case of loans provided for building purposes, another residential property will also have to be pledged, in addition to the property which is being built. In such cases, the LTV ratio shall be calculated based on the sum of value of the two properties pledged.

In case of acquisition loans (where only the property being acquired is pledged), the amount of loan can reach a maximum of 85% of the value of collateral, provided that there is insurance against mortgage liability[7] in place to the amount exceeding 70% of the LTV ratio.

For instance, where purchase price of the residential property is AMD 20,000,000 and the appraised value is AMD 17,000,000, the maximum amount of the loan (if no additional security is in place) will be AMD 17,000,000*70%=AMD 11,900,000.However, the maximum amount of the loan can reach AMD 14,450,000(17,000,000*85%), if there is insurance against mortgage liability in place to the amount of AMD2,550,000(17,000,000*85%-17,000,000*70%).

  1. Property assessment

This part presents minimum requirements to the real estate being pledged (both as primary and additional collateral) and to the appraiser of real estate.

The property offered by the borrower as security for the mortgage loan shall meet the following requirements:

  1. The property shall be unencumbered, free of any liabilities.
  2. The ownership of the property being pledged shall be registered as required by the Republic of Armenia legislation.
  3. The property being pledged shall be assessed by an independent appraiser.
  4. The property being pledged shall be assessed in accordance with the Republic of Armenia real estate assessment standard.
  5. For the calculation of the LTV ratio, the Lender shall take into consideration the lower value in case there is difference between the appraised value and the purchase price.
  6. The property being pledged shall be insured to the amount of its market price. The insurance contract shall cover losses arising, at least, from the following events:
  • Fire or explosion
  • Quake
  • Accidental damage/destruction of heat, water supply or sewage system
  • Hail, flood or heavy rain
  • Storm or strong wind
  • Malicious action by the third party.

The appraiser of the property being pledged shall meet the following criteria:

  • The appraiser shall hold a license, be independent and act in accordance with requirements of the Republic of Armenia legislation
  • The appraiser shall have at least 2 qualified specialists
  • The appraiser shall have been active in the Armenian real estate market within six months before the assessment of the property in question.
  1. Insurance

The Lender shall require insurance policies for the property pledged. Any borrower and co-borrower/s shall also hold a personal accident insurance policy to be pledged in favor of the Lender. Where co-borrower/s is/are concerned, personal accident insurance should be exercised from the amount of the loan in proportion with the income of the borrower and co-borrower/s. The amount of the loan can reach a maximum of 85% of the value of collateral, provided that there is insurance against mortgage liability in place to the amount exceeding 70% of the LTV ratio. Insurance against mortgage liability must be in effect at least to the point when the borrower will have made a payment from the amount of loan to the amount exceeding 70% of the LTV ratio.

Insurance contracts can be concluded with insurance companies which meet the following criteria:

  • the insurance company shall have been established and hold required licenses under the Republic of Armenia legislative and regulatory requirements,
  • the insurance company shall have at least 2 years’ experience in underwriting risks in personal accident insurance and residential property market.

The property insurance shall be performed at least in compliance with the following requirements:

  • The insurance value shall be equal to the estimated market value of the property.In case of residential houses, the property shall be insured for the estimated market value only (total estimated market value of property – estimated market value of land parcel). Where, at the time of granting of the loan, the LTV ratio is below 20%, the property being pledged can be insured partially, i.e. not from the entire amount of the property. In such cases, the insurance value must be calculated based on the following principles: 1) the insurance value should not be less than the average price of an affordable apartment for a certain family (the methodology of an affordable apartment price calculation is presented as Appendix 3 to MQS), 2) the loan outstanding balance / the average affordable apartment price ratio should not exceed 70%, and 3) the insurance value should be equal to the price of an affordable apartment or the outstanding loan amount, whichever is the higher;
  • Where an insurance event occurs, the borrower should be given the right to direct any claim amount received from an insurance company to the re-instatement of losses (in case of partial damage to the pledged property) or make a purchase of a new apartment (in case of full demolition of the pledged property). As such, the new apartment purchased must serve a new security (collateral) against the loan;
  • The property should be insured for the whole duration of the mortgage loan;
  • The Lender shall be the beneficiary under the property insurance contract.

The personal accident insurance shall be performed at least in compliance with the following requirements:

  • Insurance against loss of life as a result of the accident
  • The insurance value should at least be equal to the loan amount;
  • Any paid claim should be paid to the Lender;
  • The insurance shall be in effect at least for the whole duration of the mortgage loan;
  • The Lender shall be the beneficiary under the insurance contract.
  1. Minimum requirements to loan and collateral contracts

The loan and collateral contracts shall be prepared in accordance with requirements of the Republic of Armenia legislation. Below are the minimum requisites and terms that must be included in loan and collateral contracts.

Content of the loan contract [8]

The loan contract shall include the following information and terms:

  1. Lender details (name, address),
  2. Borrower and co-borrower/s (if any) details (full name, permanent residence address),
  3. Loan amount, currency, interest rate, maturity period, the date on which it originated and repaid,
  4. Loan purpose,
  5. Amortization schedule of the borrower, including the date on which amortization started and how often repayments are made,
  6. Information of collateral,
  7. Cases of violation when the Lender has the right to sell the collateral,
  8. Determination of terms for premature repayment and penalties,
  9. Determination of terms for late repayment and other penalties,
  10. The Lender must be able to assign its rights under the loan contract to another party without having to get the borrower’s consent,
  11. The borrower agrees on that his data could be transferred or disclosed according to the banking legislation of Armenia.
Content of the collateral (mortgage) contract [9]

For acquisition of residential property, there should be a collateral contract signed by and between the seller, borrower (buyer-mortgagor) and Lender; for refurbishment or building of residential property, there should be a collateral contract signed by and between the Lender, borrower and mortgagor (where the borrower and mortgagor are different persons). The collateral content should at least contain the following information and terms:

  1. Mortgagee/Lender details (name, address),
  2. Mortgagor details (full name, permanent residence address),
  3. Seller details (full name, permanent residence address), if the loan is provided for acquisition of a residential property,
  4. Mortgage loan amount, interest rate and maturity period,
  5. Collateral description and/or information on property registration (where a land parcel is involved, this should contain description of that land parcel),
  6. Estimated property value as of the date of signing of the contract,
  7. Price and payment procedure,
  8. There could be no other rights over the pledged property without the mortgagee’s/Lender’s consent in writing,
  9. The collateral contract must allow the mortgagee/Lender to transfer under such contract its rights to a third party, without the mortgagor’s consent,
  10. Where the mortgagor breaches the term(s) of the loan and/or collateral contract, the mortgagee/Lender should have the right to market the collateral extrajudicially,
  11. The mortgagor, members of his family, tenants and other occupants of the property shall sign notarized waivers recognizing that their right to remain in the property ceases upon default by the mortgagor,
  12. The mortgagor and all other occupants shall vacate the property within 30 days upon notice by the mortgagee that states the mortgagee’s intention to sell the collateral,
  13. After seizure of the property, the mortgagee/Lender shall be permitted to sell the property in any manner allowed by the Republic of Armenia legislation in effect at the time of the sale,
  14. The mortgagor shall maintain the property in good condition,
  15. The borrower/mortgagor must insure the property as required by the mortgagee/Lender,
  16. The mortgagor must inform the mortgagee/Lender of any material changes, whether proposed or actual, to the property or its condition or changes to the usage of the property, and must seek the Lender’s/mortgagee’s consent to make such changes.

At the time of signing of the contract, the property being pledged must be free of any obligations and other restrictions.