Financial Institutions Act
1.1. Chapter 2, subchapter IV: Covered Bonds
1.1.1. Section 2-25 Scope of application
This subchapter governs mortgage credit institutions’ right to raise loans by issuing covered bonds. The term “covered bonds” denotes standardised bearer bonds conferring a preferential claim over a mortgage credit institution’s cover pool.
1.1.2. Section 2-26 Protected term
The term “covered bonds” may only be applied to bonds coming under the rules of this subchapter.
1.1.3. Section 2-27 Business restrictions and obligation to notify upon start-up
A mortgage credit institution may raise loans by issuing covered bonds where the mortgage credit institution’s mission as laid down in its articles of association is:
a) to grant or acquire residential mortgages, commercial mortgages, loans secured on other registered assets or public sector loans, and
b) to finance its lending business primarily by issuing covered bonds.The mortgage credit institution shall notify Kredittilsynet not later than 30 days prior to the first time it issues covered bonds.
Where consideration for a mortgage credit institution’s financial strength so indicates, SFA may instruct the mortgage credit institution not to issue covered bonds.
SFA may consent to mortgage credit institutions engaging – in a transitional period and in parallel with other activity – in activity that consists in raising loans through the issuance of covered bonds. The said activities shall in such case be kept separate from one another. SFA may impose conditions to ensure such separation. SFA’s consent may be given for a period of up to one year with the possibility of extension for one further year.
1.1.4. Section 2-28 Requirements on the composition of the cover pool
The cover pool may only consist of the following assets:
a) loans secured on residential property, on a document of proprietary lease of a housing unit or on a certificate showing that the lessee owns a share in the housing cooperative that owns the housing structure of which the unit forms part (residential mortgages),
b) loans secured on other real estate (commercial mortgages),
c) loans secured on other registered assets,
d) loans to municipalities and loans guaranteed by the State, a municipality or corresponding public body in other states (public sector loans),
e) assets in the form of derivative contracts which meet further requirements set in regulations,
f) assets which constitute substitute assets under the provisions of the fourth paragraph.
Upon incorporation in the cover pool, loans as mentioned in the first paragraph a) to c) shall not exceed a specified percentage of the value of the mortgaged property (loan-to-value ratio). The King may issue regulations on loan-to-value ratios for different types of assets.
Loans as mentioned in the first paragraph a) to c) must be secured on a capital asset located within the EEA or the OECD area. Public sector loans must have been granted to or guaranteed by a public body as mentioned in the first paragraph d) within the EEA or the OECD area.
Only particularly liquid and secure assets may be employed as substitute assets. Substitute assets may constitute up to 20 per cent of the cover pool at any and all times. Where special conditions are present, SFA may authorise this proportion to constitute up to 30 per cent for a limited period. The King may in regulations lay down supplementary provisions regarding requirements on assets eligible for inclusion in the cover pool, including restrictions on the composition of the cover pool.
1.1.5. Section 2-29 Calculation of the value of underlying assets
Upon inclusion of loans as mentioned in section 2-28 first paragraph a) to c) in the cover pool, a prudent value shall be established for the asset furnished as security for each loan. Prudent market value may not exceed the market value resulting from a cautious assessment.
Prudent value shall be fixed by individual assessment of the registered asset concerned. Valuations shall be conducted by a competent and independent person in accordance with recognised principles. A valuation shall be documented and shall indicate who has conducted it, when it was conducted and the assumptions on which it was based. Valuation of residential properties may never the less be based on general price levels provided this is deemed prudent based on market conditions.The mortgage credit institution shall establish systems for subsequent monitoring of asset values.
The mortgage credit institution shall also monitor market trends and factors bearing on the value of the individual registered assets. Should market conditions or factors pertaining to the individual asset indicate that a significant value impairment has taken place, the mortgage credit institution shall ensure that a new prudent value is established in accordance with the first and second paragraph.
The King may in regulations establish further rules on valuation and on requirements with regard to the mortgage credit institution’s systems. The King may in regulations also establish rules governing changes to loan-to-value ratios resulting from a subsequent fall in the value of assets as mentioned in section 2-28 first paragraph a) to c).
1.1.6. Section 2-30 Pledging and execution
Assets included in the cover pool may not be pledged or be subject to execution, attachment or other enforcement proceedings in favour of particular creditors of the mortgage credit institution. Nor may a right of set-off, right of retention or the like be declared in an asset included in the cover pool. The King may in regulations issue special rules and make exceptions from the rule of this paragraph in the case of assets as mentioned in section 2-28 first paragraph e).
1.1.7. Section 2-31 Asset coverage requirement
The value of the cover pool shall at all times exceed the value of covered bonds with a preferential claim over the pool. Account shall be taken of the mortgage credit institution’s derivative contracts as mentioned in section 2-28 first paragraph e) when values are calculated. The King may in regulations lay down further requirements in regard to how such values shall be calculated. The King may in regulations lay down rules in regard to mortgage credit institutions which fail to meet the asset coverage requirement set out in the first sentence.
In an assessment of whether the requirement of the first paragraph is met, loans to the same borrower and loans secured on the same collateral cannot be included in the cover assets at more than 5 per cent of the total cover pool. The King may issue regulations providing for the inclusion of loans over and above the limit of 5 per cent where additional collateral exists, and rules governing such additional collateral.
1.1.8. Section 2-32 Liquidity requirements
The mortgage credit institution shall ensure that the payment flows from the cover pool enable the mortgage credit institution to honour its payment obligations towards holders of covered bonds and counterparties to derivative contracts as mentioned in section 2-28 first paragraph e) at any and all times. The mortgage credit institution may enter into interest rate and foreign exchange contracts in order to meet this requirement.
The mortgage credit institution shall establish a liquidity reserve to be included in the cover pool as substitute assets. The King may in regulations lay down further rules on liquidity reserves, including rules on permitted divergence between future receipts and payments and permitted divergence between the redemption conditions for covered bonds and for assets included in the cover pool assigned to such bonds. The King may in regulations lay down rules on permitted interest rate and foreign currency risk and on the right to enter into interest rate and foreign currency contracts.
1.1.9. Section 2-33 Register requirement
The mortgage credit institution shall keep a register of the covered bonds it issues, and of the cover assets assigned thereto, including derivative contracts as mentioned in section 2-28 first paragraph e). The register shall at all times contain information on the value of the bonds and the cover pool.
The King may issue regulations setting further requirements as to the register’s contents, design and accessibility, as well as rules on maintaining the register.
1.1.10. Section 2-34 Independent inspector
An independent inspector shall be appointed for a mortgage credit institution before it issues covered bonds. The inspector shall be appointed by SFA.
SFA may at any time withdraw the appointment and appoint a new inspector.
The inspector shall oversee that the register is correctly maintained and shall regularly review compliance with the requirements of sections 2-31 and 2-33. The inspector shall regularly inform SFA of his observations and assessments.
The mortgage credit institution shall be obliged to provide the inspector with all relevant information about its business. The inspector shall have full access to the credit mortgage institution’s register and may request further information from the institution. The inspector shall also be entitled to conduct investigations at the premises of the institution.
The inspector shall be entitled to reasonable remuneration from the mortgage credit institution for his or her work. The King may issue regulations setting further rules on the appointment and remuneration of inspectors, and on inspectors’ tasks, rights and duties.
1.1.11. Section 2-35 Preferential claim over the cover pool, joint debt recovery etc
In the event of bankruptcy, negotiation of debt under the Bankruptcy Act, winding up of the mortgage credit institution or public administration, holders of covered bonds and counterparties to derivative contracts as mentioned in section 2-28 first paragraph e) shall have an exclusive, equal and proportional preferential claim over the cover pool assigned to them. Such preferential claim over the cover pool shall rank ahead of priority as mentioned in the Act relating to Creditors’ Rights to Satisfaction of Claims (Satisfaction of Claims Act, No. 59 of 8 June 1984) sections 9-2 to 9-4. In regard to bankruptcy, the provisions of the Mortgages and Pledges Act section 6-4 on a statutory security interest for the bankruptcy estate shall apply correspondingly to the estate’s claim over the cover pool. The estate’s statutory security interest in each individual cover pool shall in such cases comprise a maximum of 700 times the court fee.
The preferential claim shall also apply to funds which are subsequently remitted in accordance with terms of contract applying to assets included in the cover pool. Such funds shall be registered on a continual basis under the rules of section 2-33.
In the event of bankruptcy, negotiation of debt under the Bankruptcy Act, winding up of the mortgage credit institution or public administration, holders of covered bonds and counterparties to derivative contracts as mentioned in section 2-28 first paragraph e) shall be entitled to timely payment from assets encompassed by their preferential claim for the duration of the bankruptcy or administration proceedings, provided the cover pool is essentially in compliance with the statutory requirements. Should it not be possible to make contractual payments using funds from the cover pool, and an imminent change in the liquidity situation is unlikely, the bankruptcy estate shall set a date on which payments shall be halted. The bankruptcy estate shall inform holders of preferential claims of the halt to payments at the earliest opportunity.
Should the cover pool deliver more than is needed to meet the claims of the bondholders or derivative counterparties, the surplus shall be added to the gross estate.
The King may in regulations lay down further rules on the implementation of bankruptcy proceedings, public administration, negotiation of debt or winding up of mortgage credit institutions coming under this chapter, including rules to restrict the opportunity of the bankruptcy estate, debt restructure committee, administration board or liquidation board to dispose over loans and other assets included in the cover pool when this can be done without impairing other creditors’ ability to enforce a claim. Such regulations may depart from the rules of legislation governing bankruptcy, public administration of financial institutions, negotiation of debt and execution.