commercial lending credit policy - royal commission...the commercial lending credit policy (this...

Commercial Lending Credit Policy

Bank of Queensland

Edition 1, November 2011

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COMMERCIAL LENDING CREDIT POLICY

© Bank of Queensland Limited, all rights reserved 2

Feedback and Suggestions

Group Risk encourages all Lenders to provide feedback about this Policy and we welcome suggestions about how we may improve it. Therefore, we have put a formal process in place to ensure we capture and review all such feedback.

Please direct all feedback to your Regional or State Manager and discuss it with them. They are responsible for following the formal process. This will ensure your feedback is tabled for review at the Credit Policy Committee Meeting.

Policy Updates Group Risk will release Policy Updates on a six monthly cycle and will communicate these updates to all Lenders and their Managers.

When this Policy is updated, a new Edition will be released, replacing the prior Edition.

This Edition commences from 28/11/11

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Contents

1 Introduction ................................................................................................................ 6 1.1 About this Policy............................................................................................................ 6

1.1.1 Definition......................................................................................................................... 6 1.1.2 Scope ............................................................................................................................. 6 1.1.3 Purpose .......................................................................................................................... 6 1.1.4 Related Policy................................................................................................................. 6 1.1.5 Policy Exceptions............................................................................................................ 6

2 Origination.................................................................................................................. 7 2.1 Loan Interviews ............................................................................................................. 7

2.1.1 Conducting Loan Interviews ........................................................................................... 7 2.1.2 Administration and Record Keeping ............................................................................... 7

2.2 Borrower and Purpose .................................................................................................. 7 2.2.1 Acceptable Borrowers..................................................................................................... 7 2.2.2 Borrowing Purposes ....................................................................................................... 8 2.2.3 Business Purpose Declaration........................................................................................ 8

2.3 Customer Grouping ....................................................................................................... 9 2.4 Facility Structuring....................................................................................................... 10

2.4.1 Commercial Lending Products...................................................................................... 10 2.4.2 Term and Repayment Structure ................................................................................... 10

2.5 Financial Information ................................................................................................... 12 2.5.1 Minimum Financial Requirements for all Applications................................................... 12 2.5.2 Primary Sources of Information .................................................................................... 12 2.5.3 Secondary Sources of Information................................................................................ 12 2.5.4 Other Supporting Information Required ........................................................................ 13

2.6 Acceptable Security..................................................................................................... 14 2.6.1 Non-Standard Residential Property .............................................................................. 14 2.6.2 Rural and Rural-Residential Property ........................................................................... 15 2.6.3 Commercial Property .................................................................................................... 15 2.6.4 Specialised Property..................................................................................................... 15 2.6.5 Leasehold Property....................................................................................................... 16

2.7 Insurance Requirements ............................................................................................. 17 2.7.1 When is Insurance Required ........................................................................................ 17 2.7.2 Strata Corporation Insurance Requirements (Body Corporate) .................................... 17 2.7.3 Insurance over Non-Real Estate Assets ....................................................................... 17

3 Evaluation................................................................................................................. 18 3.1 Validating Credit History.............................................................................................. 18 3.2 Validating Financial Information .................................................................................. 19 3.3 Validating Account Conduct ........................................................................................ 20

3.3.1 Valid Account Statements............................................................................................. 20 3.3.2 Validating Account Conduct.......................................................................................... 20

3.4 Validating Financial Commitments.............................................................................. 21 3.4.1 Taxation........................................................................................................................ 21 3.4.2 Statement of Position.................................................................................................... 21

3.5 Other Validation Requirements ................................................................................... 22 3.5.1 ASIC Searches ............................................................................................................. 22 3.5.2 Business Name Searches ............................................................................................ 22 3.5.3 Real Estate Searches ................................................................................................... 22 3.5.4 Trust Deed Verification ................................................................................................. 22

3.6 Valuations.................................................................................................................... 23 3.6.1 Valuation of Real Estate Securities............................................................................... 23 3.6.2 Reviewing Valuation Reports........................................................................................ 24 3.6.3 Revaluation of Existing Security – Maximum Age of Valuations................................... 25 3.6.4 Reassignment of Valuations ......................................................................................... 26

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3.6.5 Valuation of Non-Real Estate Securities....................................................................... 26 3.6.6 Revaluation of Non-Real Estate Securities................................................................... 26

3.7 Loan to Valuation Ratio ............................................................................................... 27 3.7.1 Residential property - All States and Territories of Australia......................................... 27 3.7.2 High Density Apartments .............................................................................................. 29 3.7.3 Serviced Apartments .................................................................................................... 29 3.7.4 Non-Standard Residential Property .............................................................................. 29 3.7.5 Non-Residential Property.............................................................................................. 30 3.7.6 Non-Real Estate Assets................................................................................................ 30

3.8 Repayment Capacity ................................................................................................... 31 3.8.1 Two Unrelated Ways Out.............................................................................................. 31 3.8.2 Assessing Repayment Capacity ................................................................................... 31 3.8.3 Calculating Income ....................................................................................................... 31 3.8.4 Calculating Total Commitments.................................................................................... 32

3.9 Loan Conditions .......................................................................................................... 33 3.9.1 Conditioning Lending Approvala................................................................................... 33 3.9.2 Fulfilment of Lending Approval Conditions ................................................................... 33

4 Loan Quality Rating ................................................................................................. 34 4.1 Business Quality Rating Scale .................................................................................... 34 4.2 Security Strength Rating Scale ................................................................................... 35 4.3 LQR Requirements...................................................................................................... 36

4.3.1 What to Rate................................................................................................................. 36 4.3.2 When to Complete a LQR............................................................................................. 36 4.3.3 LQR for New Customers............................................................................................... 37 4.3.4 Risk Grade Trigger Events – Existing Customers......................................................... 37

5 Guarantees ............................................................................................................... 38 5.1 Definition ..................................................................................................................... 38 5.2 Purpose of a Guarantee.............................................................................................. 38 5.3 When is a Guarantee Required................................................................................... 38

5.3.1 Borrower is an Individual or Group of Individuals ......................................................... 38 5.3.2 Borrower is A Company................................................................................................ 38 5.3.3 Borrower is a Trust ....................................................................................................... 39

5.4 Requirements when Taking Guarantees..................................................................... 40 5.4.1 Guarantees from Individuals......................................................................................... 40 5.4.2 Guarantees from Companies........................................................................................ 40 5.4.3 Guarantees from Trusts................................................................................................ 40

5.5 Commercial Benefit to be Demonstrated .................................................................... 41 5.6 Advice to Guarantors................................................................................................... 41

5.6.1 BOQ Staff must not give Advice ................................................................................... 41 5.7 Independent Legal Advice........................................................................................... 42

5.7.1 When Advice is Required ............................................................................................. 42 5.8 Disclosure Requirements – Individual Guarantors...................................................... 43

5.8.1 Disclosure required by the COBP................................................................................. 43 5.8.2 Exceptions to Disclosure Requirements ....................................................................... 43 5.8.3 One Day Notice Period ................................................................................................. 43

5.9 Lending Variations secured by Existing Guarantees .................................................. 44 5.10 Release of Guarantors ................................................................................................ 45

5.10.1 Withdrawal from a Guarantee..................................................................................... 45 5.10.2 Release of a Guarantor .............................................................................................. 45

6 Customer Reviews................................................................................................... 46 6.1 Scheduled Reviews..................................................................................................... 46

6.1.1 Annual Reviews............................................................................................................ 46 6.1.2 Setting Review Dates ................................................................................................... 46 6.1.3 Deferring Reviews ........................................................................................................ 46

6.2 Review Formats for Scheduled Reviews .................................................................... 47

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6.2.1 Behavioural Reviews .................................................................................................... 47 6.2.2 Short Form Review....................................................................................................... 47 6.2.3 Full Review ................................................................................................................... 47 6.2.4 Exceptions to Annual Review ....................................................................................... 47 6.2.5 Review Matrix ............................................................................................................... 48

6.3 Reviews prompted by Risk Grade Trigger Events ...................................................... 48 6.3.1 Excesses and Arrears................................................................................................... 48 6.3.2 Other Trigger Events .................................................................................................... 48

7 Glossary of Terms ................................................................................................... 49

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1 Introduction

1.1 About this Policy

1.1.1

1.1.2

1.1.3

1.1.4

1.1.5

Definition

The Commercial Lending Credit Policy (this Policy) is the platform upon which BOQ’s Credit Risk principles are based. It supports our strategies and performance objectives, by defining our lending requirements and standards.

Scope

This policy applies to BOQs lending activities relating to commercial lending. In addition to this core Commercial Lending Credit Policy, there are specific policies in relation to lending to select business segments and industries (for example, property finance, debtor finance, franchising). Where applicable the specific Sector Policy will take precedence.

Purpose

The purpose of this Policy is to:

• Clearly state the Credit Policy applicable to Commercial Lending

• Provide a basis for continued development and enhancement of credit policy

• Provide an easily referenced source of information, and

• Establish a uniform framework and language to standardise BOQ’s approach to credit risk management

Related Policy

Delegated Approval Authority Policy (DAA Policy) must be referenced in conjunction with the core Commercial Lending Credit Policy as the DAA Policy may place additional restrictions on the ability of the Relationship Manager to approve an application. Where an aspect of a commercial lending application is outside the Relationship Manager’s DAA, the application must be submitted to Credit Risk Assessment for approval.

Policy Exceptions

Where a Relationship Manager is seeking an exception under this Policy the lending application and all supporting documentation must be submitted to Credit Risk Assessment for consideration. The exception sought and risk mitigants for that exception must be clearly stated in the credit submission.

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2 Origination

2.1 Loan Interviews

2.1.1

2.1.2

Conducting Loan Interviews

All Relationship Managers must:

• Conduct face to face loan interviews with all new borrowers and new guarantors • Ensure all borrowers and guarantors meet BOQ’s customer identification requirements at the

loan interview • Complete a ‘Know Your Customer – Needs Analysis – Lending’ and ensure that only the

products that meet the customer’s needs and objectives are offered. A copy must be held on the loan file

• Obtain all documents and certifications required for validation purposes under this policy

Administration and Record Keeping

All Relationship Managers must: • Obtain customer identification from all new and existing customers and guarantors; • Retain all documents provided or signed by the borrowers and guarantors on file, including a

completed and signed Business lending Application form; • Retain originals on file when updates are provided, and mark-up the originals with a notation:

”This application form has been superseded by application form dated dd/mm/yy”; • Ensure the customer lending file is maintained in terms of BOQ requirements – refer BOQ

Procedures>Lending Procedures>Lending Files for detailed instructions.

2.2 Borrower and Purpose

2.2.1 Acceptable Borrowers

Acceptable borrowers include:

• any sole trader • joint debtors, where all debtors will receive a direct benefit under the facility • a partnership (limited or otherwise) • a company • an individual or company as trustee for a trust • incorporated and unincorporated associations • a co-operative association • a Strata Corporation (Body Corporate) • local government and statutory authorities • a state or federal government

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Prospective borrowers must also meet the following criteria:

• be aged 18 years or over (all natural persons) • be Australian residents (all natural persons) or incorporated in Australia (companies, co-

operatives and associations) • not be declared Bankrupt (all natural persons) or Insolvent (companies, co-operatives and

associations) • not have a Superannuation Fund as a unitholder

2.2.2 Borrowing Purposes

BOQ will provide funding for any worthwhile, lawful, business-related purpose which does not pose any reputational risk to the organisation.

For all credit applications, the Relationship Manager must:

• Investigate and determine the purpose of the lending sought; • Record the purpose in the credit application;

The purpose of the funding must be considered unregulated in terms of National Consumer Credit Protection Act (NCCP) requirements.

Where a loan is provided to:

• an individual or Strata Corporation; and • is to be provided wholly or predominantly:

• for personal, domestic or household purposes; or • to purchase, renovate or improve residential investment property or to refinance such credit;

it is deemed to be regulated and must be assessed and documented in terms of BOQ Home Loan Policy.

Where there is any doubt as to the purpose of the loan, it must be treated as regulated and assessed via the BOQ Home Loan Policy.

2.2.3 Business Purpose Declaration

The Relationship Manager is required to ensure that all individuals and Strata Corporations execute a Business Purpose Declaration where the lending applied for is wholly or predominantly for:

• business purposes; or • investment purposes other than investment in a residential property.

Where a Business Purpose Declaration is made, the provisions of the NCCP will not apply.

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2.3 Customer Grouping

Borrowing entities are considered related and must be grouped together when one or more of the following characteristics are evident:

• Cross guarantees or cross-collateralised security is proposed or is already held; • There is common ownership or management control of corporate

entities/partnerships/trusts; • The repayment capacity of one entity is partly or wholly reliant on another entity.

Customers must be grouped to determine Total Aggregate Exposure (TAE) and Total Business Related Exposure (TBRE) based on loan limits (including redraw) for:

• Risk Rating purposes; • Credit Assessment purposes, including determining whether a decision is within the

Relationship Manager’s Delegated Approval Authority (DAA).

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2.4 Facility Structuring

Commercial Loans may be fixed or variable rate, short or long term facilities suitable for business borrowings such as working capital needs, business purchase, business expansion, construction of new premises or major plant and equipment upgrades.

2.4.1 Commercial Lending Products

Refer to the relevant product policies in the Product and Services Information Manual PSIM for details on the:

• Minimum and maximum loan amounts; • Allowable loan/facility terms; and • Other product-specific requirements

Equipment Finance - Refer to separate Equipment Finance Credit Policy.

2.4.2 Term and Repayment Structure

The term and amortisation program of any loan is to correspond with:

Source of repayment - Where a facility is established to fund specific stock (eg. increases over the Christmas trading period) the loan should be cleared by the end of the period in which the expected sales are converted to cash. For a facility to fund a major asset, the repayment is likely to be structured over a number of years, based on the earning capacity of the new asset as well as other existing sources of income.

Asset life - Where the financed asset is used as security (as in equipment finance) and has a limited useful life, the expected life span should be the maximum term of the facility.

Business capacity - To ensure that the customer does not pay more interest than is necessary over the life of the facility, the term must be linked to business capacity. The term should be the shortest that the business can comfortably service

Lease term – Where a customer operates a business from leased premises and the servicing of the lending is fully reliant on the income from that business, the maximum term of any loan should be in line with the expiry of the current lease term. Note that options to renew the lease can be allowed for when establishing the loan term.

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In structuring loan repayments, the following maximum periods apply:

REPAYMENT STRUCTURE MAXIMUM TERM CONDITIONS

Principal and Interest

In terms of relevant product policy requirements

Maximum terms for full amortisation include any previously approved term of ‘interest only’ requirements

Interest Only 5 years Where interest only facilities are provided, Relationship Managers must obtain and consider borrower's plans for principal repayment at completion of interest only period and be satisfied there is a way out within an acceptable timeframe

Balloon Payments n/a Where a facility is approved with a balloon payment, the payment is not to exceed 30% of the original loan amount

Additional constraints applying to lending for Property Development purposes which fall outside the Property Industry Sector Policy:

• Where the loan purpose relates to Construction or Land/site Acquisition: maximum loan term 2 years

• Where the purpose relates to Land Subdivision, the maximum loan term is 6 months

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2.5 Financial Information

2.5.1 Minimum Financial Requirements for all Applications

BOQ requires the following financial information in order to evaluate an application:

• A primary source of financial information for all borrowing entities; and • A primary source of financial information for all guarantors; and • A signed and dated Statement of Position for all Borrowers and Guarantors who are

individuals; and • A detailed list of the Borrowers’ and Guarantors’ existing financial commitments with Banks

and other Financial Institutions; and • Confirmation of the customers’ tax position, including GST (refer section 3.4.1) .

2.5.2

2.5.3

Primary Sources of Information

Primary Sources of financial information are limited to: • An audited or unaudited Annual Financial Report and taxation returns;

• A ‘Final’ Profit and Loss Statement and Balance Sheet (prepared by an independent accountant)

and taxation returns;

• For Sole Traders and Partnerships where a ‘Final’ Profit and Loss Statement and Balance Sheet are not usually prepared, a Business Taxation Return prepared by an independent accountant;

• Personal Taxation Returns for individuals who are parties to the proposed lending including individual guarantors.

Secondary Sources of Information

Additional financial information which may be required to support the evaluation of a commercial lending proposal include: • ‘Draft’ Profit and Loss Statement and Balance Sheet prepared by an independent Accountant

• ‘Interim’ (part year) Profit and Loss Statement and Balance Sheet to the end of the most recent

quarter prepared by an independent Accountant – (may be mandatory in terms of section 3.2)

• Management accounts (full year or to the end of the most recent quarter) prepared by the borrower – (may be mandatory in terms of section 3.2)

• Forward projections and cash flow forecasts together with the assumptions behind the forecasts

• Current schedules of Debtors and Creditors

• Details of current Work in Progress • Copies of rental / lease agreements Credit Risk Assessment may advise when any or all of the above information is required.

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2.5.4 Other Supporting Information Required

• A signed and dated Business Lending Application form;

• Signed and dated Privacy Act Consent from all individual borrowers and guarantors

• Copies of valid account statements covering the last 6 calendar months or last 180 days for all

existing loan and trading accounts for the borrowing entity and any guarantors. Where the

borrower is an existing BOQ customer, print statements from MyClient. If statements cannot be

provided for Equipment Finance facilities, evidence of repayments must be substantiated from the

account from which the repayments are drawn.

• Where a Trust is involved as a borrower or as a guarantor - a Trust Deed (or certified copy) that is

signed, dated and stamped together with copies of all Deeds of Variation to the Trust Deed (e.g.

appointments of new trustees).

• A copy of the written Partnership Agreement only if the Relationship Manager has been advised

by a partner that the liability of the partnership is limited under the Agreement

• A copy of the Company Constitution or Memorandum and Articles of Association only if the Bank

has actual or implied knowledge about limitation of powers of the company.

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2.6 Acceptable Security

Commercial Lending can be secured by taking a charge over real estate and/or other assets owned by the borrower and/or guarantors. Acceptable security types for BOQ Commercial lending include:

• First Registered Mortgage over leasehold or freehold real estate property described or zoned as:

o Residential property; o Commercial property; or o Vacant residential, commercial or rural residential land

provided that the property can be effectively mortgaged using BOQ’s usual security documents. Refer to security definitions below for further detail of security types;

• Guarantees – supported by other security or unsupported; • First Fixed and Floating Charge over all business assets from all company borrowers where Total

Business Related Exposure is $100,000 or more; • Charge over a term deposit; • Unconditional Bank Guarantee without an expiry date from another Australian Authorised Deposit-

taking Institution (ADI). Where a security type other than those listed above is proposed, guidance must be sought from Credit Risk Assessment and Group Legal where appropriate.

2.6.1 Non-Standard Residential Property

Applications supported by Non-Standard residential security properties must be referred to Credit Risk Assessment for consideration. Non-Standard residential properties are properties with a restricted market appeal, due to size:

• Dwellings with less than 50 square metres of living space (including balconies); • Strata-title hotel, motel or resort rooms that cannot be occupied on a permanent basis; • Student Accommodation; • Aged Care units.

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2.6.2

2.6.3

2.6.4

Rural and Rural-Residential Property

Real estate for residential purposes where the land size is greater than 2.2 hectares. Rural-residential – land size of over 2.2 hectares but less than 10 hectares Rural – land size of between 10 hectares up to 40 hectares To be acceptable security these properties must:

• Have roads and services (ie. power, water) connected;

• Not be income-producing;

• Primary purpose of the property is for use as a residence by the owner or tenant;

• Have a ready sales market for property as “residential” with evidence obtained within the

property valuation

If all the above criteria are not met, the application must be submitted to Credit Risk Assessment for consideration.

Commercial Property

Commercial Property is defined as: • Retail premises - for example shops, shopping centres;

• Offices including professional suites; or

• Industrial premises - for example warehouses, garages, industrial sheds.

Specialised Property

Property where the improvements are for a unique purpose not readily able to be converted to an alternative use such as:

• abattoirs • caravan parks • child care centres • schools • hotels • licensed clubs • sporting clubs • motels • resorts • hospitals • hostels / backpackers • nursing homes / aged care facilities • retirement villages • churches

All applications supported by specialised security must be referred to Credit Risk Assessment for consideration.

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2.6.5 Leasehold Property

Leases of State Government land are granted for various purposes including business, grazing, tourism, residential development and pastoral activities. As each lease will contain restrictions on land use, tenure and may prohibit the ability to mortgage the land, the Relationship Manager must be satisfied that the leasehold land is suitable as security. All applications supported by a mortgage over leasehold property of any type must be referred to Credit Risk Assessment for consideration.

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2.7 Insurance Requirements

2.7.1 When is Insurance Required

If the borrower is offering property as security for commercial lending, we require the borrower to take out an Insurance Policy to cover any buildings and other insurable improvements. The insurance cover must be for at least the replacement value of the building and improvements as shown in the property valuation. A copy of the Certificate of Currency or Insurance Policy document showing BOQ as an Interested Party must be on file prior to lending being drawn.

2.7.2 Strata Corporation Insurance Requirements (Body Corporate)

If Strata Titled property is taken as security and the loan purpose is to refinance an existing loan either with BOQ or another financial institution, no evidence of insurance is required. If Strata Titled property is taken as security and loan purpose is to purchase the property, then evidence of current insurance is required by either:

• A Certificate of Currency; or • The Purchase Contract that clearly states:

o Insurer Name; o Insurance Policy Number; o Insured Amount; and o Future Insurance Expiry Date

2.7.3 Insurance over Non-Real Estate Assets

A copy of the customer’s insurance relating to any non-real estate assets over which BOQ has a charge is not required to be held on file unless specified in an Industry/Sector Credit Policy or where deemed to be necessary by Credit Risk Assessment.

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3 Evaluation

3.1 Validating Credit History

Credit checks must be conducted with Veda Advantage on all borrowing entities and guarantors for every commercial lending application prior to a credit decision being made.

Exception: Where a Credit Report is held on file and is no more than 30 days old as at the date of the application/assessment.

If the Credit Report shows The Relationship Manager must Cross Reference • Obtain a Credit Report on the Cross

Reference • Reconcile against the application from

the Borrower and investigate any discrepancies

Possible Match Obtain a credit report on the possible match and investigate the reasons for it

New File Investigate the reasons Enquiry with another financier for a similar amount to this application within the last 12 months

Investigate whether this was the same application and if so, the reasons for the borrower approaching more than one lender

Current Directorships other than those disclosed in the lending application

• Obtain a company search • Investigate if the applicants/guarantors

are involved in other businesses • Investigate the current trading

status/financial position of that business

•

Adverse information including Payment Defaults, Court Judgements, Writs, Summonses and Bankruptcy

Request a full explanation from the borrower/guarantor on whose credit report the adverse information appears. If the Relationship Manager still wishes to support the credit application, the submission must be referred to Credit Risk Assessment for consideration

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3.2 Validating Financial Information

The following tables set out the requirements for validating all acceptable primary sources of financial information:

Primary Source of Financial Information Minimum Requirements Maximum Age

PAYG Borrowers and Guarantors

• Personal Tax Returns

• 2 consecutive financial years

• Prepared by an independent Accountant or Tax Agent

Most recent being no more than 18 months old as at the date of the application

Sole Proprietors and Partnerships where a ‘Final’ Profit & Loss Statement and Balance Sheet are not prepared

• Personal Tax Returns (Sole Proprietors and individual partners)

• Partnership Tax Returns

• 2 consecutive financial years

• Prepared by an independent Accountant or Tax Agent


All Other Borrowers and Guarantors

• Audited or unaudited Annual Report and tax returns or

• Final Profit & Loss Statement and Balance Sheet and tax returns

• 2 consecutive financial years evidencing 2 full years of trading *

• In a form which includes all relevant notes to the accounts

• Prepared by an Independent Accountant

*Additional Requirement

Where the date of the application is more than 6 months after the date of the most recent financial statements provided, interim financials or management accounts are required (as defined in section 2.5.3)


Any application not supported by primary source/s of information or supported by primary source/s of income that cannot be validated under this policy, or where interim financial data has been used to demonstrate servicing must be referred to Credit Risk Assessment for consideration.

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3.3 Validating Account Conduct

3.3.1 Valid Account Statements

Account statements (i.e. paper and online statements) may be used for a variety of validation purposes, including validation of account conduct and validation of financial commitments. Account statements are acceptable if they satisfy all the following requirements: • Must span the 6 consecutive months prior to the date of the current application; • Display the logo of the bank or other financial institution; • Display the Borrowers full name and account number; and • Individual transactions are itemised and there is a running account balance;

Where Account Statements are only available for part of the 6 month period, internet transaction listings can be provided for the remaining time provided the account number is shown on the listing and it matches the statement.

If statements cannot be provided for Equipment Finance facilities, evidence of repayments must be substantiated from the account from which the repayments are drawn.

3.3.2 Validating Account Conduct

Relationship Managers must review the borrower’s Bank Statements to ensure that they do not contain any evidence of: • More than one late payment (30 days or more overdue)

• If the approved limit or scheduled balance was exceeded

• Any dishonours

• Any missed payments

• Any refinances

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3.4 Validating Financial Commitments

The full list of financial commitments provided by the borrower (included in the Business Lending Application Form, page 3) should be validated by comparison with:

• Primary and secondary sources of financial information (for example, Statement of

Position, Balance Sheet)

• Bank Statements provided

• Credit Reports from Veda Advantage

Relationship Managers must investigate and account for any inconsistencies to ensure that the accurate financial commitments are used in the servicing calculation for the current lending application.

3.4.1 Taxation

Written confirmation that taxation obligations are up to date for all trading entities who are borrowers or guarantors in the group must be held prior to a lending decision being made.

Confirmation can be obtained by either:

• Written confirmation from the borrower’s/guarantor’s Accountant; or • A copy of the business Income Tax Lodgement Status Portal and the Integrated Client

Account Portal.

3.4.1.1 Taxation Arrears

Where an entity has taxation arrears as evidenced by the ATO Portals and/or the Accountant’s letter, the Relationship Manager must:

• Ascertain if a formal repayment arrangement has been entered into with the ATO and obtain a copy of the Payment Arrangement from the customer to confirm the details;

• Obtain evidence that repayments to date have been made in terms of arrangements; • Include the arrears amount in the lending application as a financial commitment and include

the repayments when calculating servicing; and • Outline why the tax arrears have occurred.

Where any entity in the customer group has taxation arrears, including where a formal repayment arrangement has been agreed with the ATO, the lending application must be referred to Credit Risk Assessment for consideration.

3.4.2 Statement of Position

All Statements of Position from individual borrowers and guarantors must be signed and dated within 6 months of the date of the lending application.

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3.5 Other Validation Requirements

3.5.1

3.5.2

3.5.3

3.5.4

ASIC Searches

An Australian Securities and Investments Commission (ASIC) search is required in all instances where the borrower or guarantor is a company to confirm director and shareholder details and to identify any current fixed or fixed and floating charges registered over the company assets.

Any inconsistencies between the search results, the application or schedule are to be investigated and documented.

Business Name Searches

A search must be undertaken to confirm the entity in which a Business Name has been registered.

Real Estate Searches

The Lender must conduct a property/title search when: • New mortgages are to be taken, or • Additional lending is applied for against an existing registered mortgage.

If the purchase contract, title search or advice from the solicitor indicates that additional searches are required to verify acceptability of security offered, the Lender must obtain these searches. For example, if a property is located in a Mine Subsidence District, the Lender must obtain additional searches or confirmations (either directly or from the Customer's solicitor) confirming that the property is suitable as security.

Trust Deed Verification

Where Total Aggregate Exposure to the Trust (as a borrower and/or guarantor) is $1.0m or more, BOQ’s Legal Department are required to review the Trust Deed and prepare a trust advising. The review will determine whether:

• the trust has the power to borrow • the trust has the power to give guarantees and indemnities (for guarantors) • the trust has the power to provide security • the trust has been validly constituted

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3.6 Valuations

Valuations of property offered or held as security for Commercial Lending must be obtained when the security is first taken and periodically while the lending is in place. Valuations are used to: • establish the fair value of the security property to calculate LVR at the time of initial lending approval; and • calculate the Security Strength Rating (SSR) to apply to a customer both at the time of

approval and periodically during the term of the lending.

3.6.1 Valuation of Real Estate Securities

3.6.1.1 Ordering Valuations

When a property valuation is required, it must be ordered from one of BOQ’s panel valuers using the VMS system. Valuers are required to address all valuation reports to BOQ, and must state in every report that it is for mortgagee purposes. Valuations must be completed on an ‘existing use’ basis. Valuations for non-residential properties must be ordered from one of the valuers on the Commercial panel. Where the Relationship Manager is unable to instruct a panel valuer due to the property being in a location not serviced by a panel valuer, then approval to order a valuation from a non-panel valuer must be sought from Credit Risk Assessment prior to the valuation being ordered. Copies of the valuation firm’s:

• full PI insurance schedule; and • API Membership Certificates for all valuers within the firm;

must be submitted with the proposal for consideration by Credit Risk Assessment. Where a valuation is requested from a non-panel valuer it must be ordered manually using the appropriate template Letter of Instruction, attaching the relevant Valuation Standard and any other required documentation to enable the valuation to be undertaken.

Upon receipt, the valuation must be submitted to Credit Risk Assessment for acceptance.

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3.6.1.2 Valuation Standards

The BOQ valuation standards set out the valuation reporting requirements for each of the following property types:

• Commercial Property

• Industrial Property

• Industrial/Commercial/Retail/Hotel Developments Projects

• Medium/High Density Residential Developments Projects

• Residential Property

• Residential Subdivision Projects

• Retail Property

3.6.2 Reviewing Valuation Reports

All valuation reports must be appraised by the Relationship Manager to ensure that BOQ’s valuation standards and instructions have been complied with.

Each valuation report must be checked to ensure:

• The valuer has complied with the instructions; and • Any unsatisfactory features identified, or qualifications or disclaimers made have

been correctly noted, and their effect on the valuation has been assessed and recorded.

All valuation reports must be on file prior to approval.

3.6.2.1 Confirmation of the Valuation Report

Following appraisal of each valuation report, the Relationship Manager must sign and date the report to confirm that the detailed information contained in the report has been read and appropriate action taken.

3.6.2.2 Risk Ratings, Unsatisfactory Features and Qualifications

Where a residential property valuation report contains four or more ‘3’ risk ratings in terms of API standards, or any ‘4’ or ‘5’ risk ratings the Lending Manager must seek further comment from the valuer and refer the matter to Credit Risk Assessment.

Valuation reports for non-residential property must be read by the Relationship Manager and compared to the Valuation Standard applicable to the property type.

Where the valuer has made any qualifications in the report or highlighted any unsatisfactory features of a property, the Relationship Manager needs to consider whether the property being offered as security is acceptable in terms of BOQ policy.

All residential property valuations with unsatisfactory risk ratings as outlined above and all non-residential property valuations with qualifications or unsatisfactory features must be referred to Credit Risk Assessment for acceptance if the Relationship Manager considers the property to be suitable as security. The Relationship Manager must provide commentary mitigating the risks or qualifications identified by the valuer.

BOQ.0001.0037.0961

http://thesource/uploadedFiles/Policy_and_Procedure/BOQ_Policies/Credit_Policy/Commercial_Lending_Policy/Evaluation/10_BoQ_Valuer_Com_Prop.pdf

http://thesource/uploadedFiles/Policy_and_Procedure/BOQ_Policies/Credit_Policy/Commercial_Lending_Policy/Evaluation/11_BoQ_Valuer_Ind_Prop.pdf

http://thesource/uploadedFiles/Policy_and_Procedure/BOQ_Policies/Credit_Policy/Commercial_Lending_Policy/Evaluation/12_BoQ_Valuer_IndCommRetHot_Dev.pdf

http://thesource/uploadedFiles/Policy_and_Procedure/BOQ_Policies/Credit_Policy/Commercial_Lending_Policy/Evaluation/13_BoQ_Valuer_Med&High_Den_Res.pdf

http://thesource/uploadedFiles/Policy_and_Procedure/BoQ_Policies/Credit_Policy/General_Policy/Evaluation/General/BoQ%20Valuer%20-%20Residential.doc

http://thesource/uploadedFiles/Policy_and_Procedure/BoQ_Policies/Credit_Policy/General_Policy/Evaluation/General/BoQ%20Valuer%20-%20Res%20Land%20Sub.doc

http://thesource/uploadedFiles/Policy_and_Procedure/BoQ_Policies/Credit_Policy/General_Policy/Evaluation/General/BoQ%20Valuer%20-%20Retail.doc



3.6.2.3 Environmental Risk and Flood

Where a valuer has identified any environmental risks associated with a security property or where a property has been historically affected by flooding, the application must be referred to Credit Risk Assessment for consideration. In deciding whether to approve the lending application and/or accept the proposed security, Credit Risk Assessment may consider:

• The availability of additional or alternative security; • Where the property is the business premises, if the customer has business continuity

insurance or similar to assist with interruption to cash flows in the event of a flood; • If the property owner is able to obtain flood insurance

3.6.2.4 Variations from Purchase Price

Where there is a variation between the purchase price of a property and the valuation, the lower value of the two must be used to calculate the LVR.

Where the valuation is less than the purchase price, refer to procedure ‘Valuation varies from Purchase Price’ for details of action to be taken.

3.6.3 Revaluation of Existing Security – Maximum Age of Valuations

The age of the valuation relating to each existing security property needs to be considered at each of the following assessment activities:

• Increased lending;

• Renegotiation or restructure of existing lending; and

• Annual Customer Reviews

New valuations must be obtained for each security property in a customer group based on the TAE and timeframes below: TAE of $10m or more 2 years TAE of less than $10m 3 years The Relationship Manager or Credit Risk Assessment may deem a revaluation necessary sooner than the maximum timeframes in the above table. In deciding whether a revaluation of security is appropriate, consider if:

• There is adverse movement or known deterioration in the value of the property or in the general market;

• There are any other aspects impacting upon the value of the property (such as local redevelopment or rezoning);

• Occupancy levels have changed since the original valuation was made; • There is any doubt about the current market value of the property.

BOQ.0001.0037.0962



3.6.4 Reassignment of Valuations

Where BOQ has not given the original instructions to the valuer, the valuation must be reassigned to BOQ before it can be relied upon.

Reassignment of valuations can only be considered where:

• they have been completed by one of BOQ’s panel valuers; and • the time frame stated by the valuer in the report disclaimer has not elapsed. (This time

frame may be expressed as either 90 days or 3 months.)

Reassigned valuations must be submitted to Credit Risk Assessment for consideration.

The valuer must either re-address the valuation to BOQ, or provide a formal letter of reassignment including confirmation that the valuation has been undertaken in terms of the BOQ Valuation Standards.

Reassigned valuations must be thoroughly read to ensure that the report meets with the Bank’s valuation requirements as set out in the Valuation Standard relevant to the property type.

Where any deficiency is found, this must be addressed with the valuer prior to submitting to Risk Assessment for acceptance.

Any advice regarding the acceptance of a reassigned valuation should not be provided to a customer, until the formal acceptance is received from Credit Risk Assessment.

3.6.5

3.6.6

Valuation of Non-Real Estate Securities

Term Deposits – Where a charge is held over a Term Deposit as security, the face value of the Term Deposit is to be adopted as the valuation. Bank Guarantee from another Authorised Deposit-taking Institution (ADI) – Where a Bank Guarantee from another Australian Financial Institution is held as security, the face value on the guarantee is to be adopted as the valuation.

Revaluation of Non-Real Estate Securities

Term Deposits: No revaluation required – valuation remains the principal amount of the deposit

Bank Guarantee from another Authorised Deposit-taking Institution (ADI): No revaluation required – valuation remains the face value on the guarantee.

BOQ.0001.0037.0963



3.7 Loan to Valuation Ratio

3.7.1 Residential property - All States and Territories of Australia

Exclusive of land held for property construction and development Purposes Loan to Valuation Ratios can be applied to security items provided the valuation is ‘current’ in terms of ‘Maximum Age of Valuations’ section 3.6.3 of Commercial Lending Credit Policy.

Security Property Location/Type

Additional Criteria Property Value Max LVR

Up to $2,000,000

80% • Excludes vacant land, units & town houses

> $2,000,000

70%

Up to $1,500,000

80%

> $1,500,000 - $2,000,000

70%

Metropolitan – Capital Cities

• Vacant Land, Units and Townhouses

• Excludes non-standard residential properties

>$2,000,000 60%

Up to $ 1,500,000 80% Major regional centres

• Security must be fully developed with roads and services

• Category 1 as noted in the Genworth Security Location Guide

• Excludes vacant land, units and townhouses

• Excludes property on islands

• Excludes Rural and Rural-residential properties

> $1,500,000

70%

BOQ.0001.0037.0964



Security Property Location/Type


Up to $1,500,000 80%

>$1,500,000 70%

Major Regional Centres continued

• Vacant land, units & town houses

• Security must be fully developed with roads and services

• Category 1 as noted in the Genworth Security Location Guide

• Excludes property on islands


• Excludes Rural and Rural-residential properties

Up to $750,000

80% Minor Regional

• Includes vacant land max size 2.2 hectares

• Units and townhouses

• Primary property purpose is for use as a residence

• Category 2 & 3 as noted in the Genworth Security Location Guide

• Excludes Property on Islands


• Excludes Rural-Residential and Rural properties

≥ $750,000 70%

Up to $750,000

80%

>$750,000 - $2,000,000

70%

Formal valuation required

>$2,000,000 60%

Rural-residential and Rural

Category 1, 2 & 3 as noted in the Genworth Security Location Guide.

BOQ.0001.0037.0965



3.7.2 High Density Apartments

Security Property Type


80% Owner occupied

Unit is located in a building with: • 35 units or more

Excludes non-standard residential properties

Formal Valuation required to confirm property value

70% Investment lending

High Density Apartments Unit is located within defined ‘high density postcodes’, as defined in the Genworth Security Location Guide Unit is located in a building with:

• fewer than 35 units Excludes non-standard residential properties

Formal Valuation required to confirm property value

80%

3.7.3 Serviced Apartments

Security Property

Type Additional Criteria Property Value Max LVR

Serviced Apartments Formal Valuation required

Security valuation amount must exclude furniture Excludes non-standard residential properties

Formal Valuation required

65%

3.7.4 Non-Standard Residential Property

Security Property

Type Additional Criteria Property Value Max LVR

Non-Standard Residential property

Formal Valuation required to confirm

property value

60%

BOQ.0001.0037.0966



3.7.5 Non-Residential Property

Security Property Type Additional Criteria Property Value Max LVR Commercial Property - Freehold

Excludes hotels, motels, childcare centres and caravan parks Excludes Specialised Security property Excludes Englobo land and other land associated with property development

Panel Valuation required

70%

Hotels, Motels, Caravan Parks, Childcare Centres

Where the valuation covers both the Freehold land and buildings and going concern business


60%

Specialised Security Property (land and buildings only) as per section 2.6.4

Excludes going concerns noted above


50%

Leasehold Title Property (ie. land, real estate)

Excludes the value of businesses operated from leased premises Excludes Englobo land and other land associated with property development


60%

3.7.6 Non-Real Estate Assets

Security Type Additional Criteria Property Value Max LVR Term Deposits Face Value of Deposit 100% Unconditional Bank Guarantees and Irrevocable Letters of Credit

Issued by a Licensed Australian Bank (Authorised Deposit-taking Institution)

Face Value of Guarantee

100%

BOQ.0001.0037.0967



3.8 Repayment Capacity

3.8.1

3.8.2

3.8.3

Two Unrelated Ways Out

Relationship Managers must ensure the following two unrelated ways out of the lending facility are evident at each credit assessment:

• Demonstrated surplus income; and • Realisation of the security.

Realisation of the security must only ever be considered as a fall back position for events not apparent at the time of approval.

Assessing Repayment Capacity

All commercial lending applications originated by the branch network must have repayment capacity, assessed by completion of the Serviceability Worksheet document (see ‘Forms and Templates’). A copy of the document must be retained on file. This spreadsheet contains a net surplus income model which relates the total commitments of the borrower to the net income available to service those commitments. When determining serviceability for all commercial lending whether from BOQ or another lending, the Relationship Manager must undertake reasonable enquiries with the customer on their financial situation including any reasonably foreseeable significant change and their requirements and objectives in relation to the loan. Details of these enquiries must be recorded on the Know Your Customer – Needs Analysis Lending form or via additional file notes made of conversations with the customer.

Calculating Income

3.8.3.1 Borrowing Entity Income

Only the borrowing entity’s income and the income from other entities who have provided a guarantee should be entered into the Serviceability Worksheet. Income from the final, accountant-prepared financials for a minimum of the most recent 2 (where possible/provided 3) financial years should be input. Refer to sections 2.5 and 3.2 for acceptable/valid financial information.

3.8.3.2 Interim Financials

Where interim financials are provided in terms of requirements in section 3.2, the results must be annualised and compared with the previous 2 full year’s financials. Variances of more than 15% of the Adjusted Profitability figure must be investigated and explained in the credit application. Applications where negative variances of more than 15% exist between the interim financials and the last full year financials must be submitted to Credit Risk Assessment for considerations.

3.8.3.3 Guarantor Entity Income

Where a guarantor’s income is being used to support the borrowing entity’s capacity to service, that income should be included in the Serviceability Worksheet. Refer to section 3.2 for acceptable/valid financial information.

BOQ.0001.0037.0968



Where the profit of the borrowing entity is partially or fully distributed either as:

• Trust profits distributed to beneficiaries or unitholders; or • Company profits distributed as dividends to shareholders;

The profit can only be included for servicing purposes if a guarantee is held from the beneficiary/unitholder/shareholder who received the distribution.

3.8.4 Calculating Total Commitments

3.8.4.1 Interest Only Loans/Facilities

Consumer Facilities For servicing purposes, all consumer lines of credit and interest only loans (whether from BOQ or another financial institution) are to be amortised over the lesser of:

• Any remaining Principal and Interest term or; • 30 years

Commercial Facilities For servicing purposes, all commercial interest only loans and lines of credit from BOQ or other financial institutions are to be amortised over the lesser of:

• Any remaining Principal and Interest term; or • 15 years

3.8.4.2 All Other Loans

Relationship Managers must treat all other loans (whether from BOQ or another financial institution) as follows:

• Actual contracted repayments of Equipment Finance, Personal Loans, Hire Purchases, and Leases or other fixed contract loans;

• Credit Card monthly commitments should be calculated at 3% per month of the card limit;

• Use the remaining approved loan term and add a 2% interest rate buffer above the actual interest rate when calculating the commitments for all consumer and commercial loans;

• Charge cards without limits – obtain a copy of the last 3 months statements and take the highest monthly spend during that period to determine the limit to enter;

• Margin Lending facilities – use the outstanding balance at the time of application, treat as interest only and add a 2% buffer to the interest rate advised by the customer;

• New Debtor Finance facility – treat the proposed limit as an interest only facility adding a buffer of 2% to the DF benchmark customer rate;

• Existing Debtor Finance facilities – obtain the average monthly sales of the past 12 months from Debtor Finance Operations and add 10%. Multiply by 2.5 to arrive at a ‘limit’. Treat this as an interest only loan for servicing purposes adding a 2% buffer to the customer’s actual rate.

3.8.4.3 Taxation Arrears

Where tax arrears exist, the amount of the debt and repayment arrangements must be validated in terms of section 3.4.1.1 and the outstanding arrears and agreed repayments included in the Serviceability Worksheet.

3.8.4.4 Guarantor’s Commitments

Where a guarantor’s income is included in the Serviceability Worksheet, their financial and other commitments must also be included.

BOQ.0001.0037.0969



3.9 Loan Conditions

3.9.1 Conditioning Lending Approvals

In exercising DAA (ie. approving a commercial lending application), the Relationship Manager must assess whether any risks associated with the transaction require mitigation via the provision of additional information or data either before drawdown (conditions precedent) or during the life of the loan (conditions subsequent). Where conditions need to be documented in the ’Letter of Offer’, the wording of the condition must be sourced from the Covenants Library published on The Source. The standard wordings of the conditions in the Covenants Library have been approved for use by Legal. If the Relationship Manager considers any additional conditions or conditions with different wording are appropriate, the lending application must be referred to Credit Risk Assessment for approval and confirmation by Legal may be required.

3.9.2 Fulfilment of Lending Approval Conditions

It is the Relationship Manager’s responsibility to ensure that any conditions precedent are fulfilled before the lending is drawn down, including all internal conditions precedent imposed by Credit Risk Assessment. If a condition precedent has not been fulfilled in terms of the credit approval, the Relationship Manager must refer the matter back to Credit Risk Assessment prior to lending being drawn. Where there are conditions subsequent attached to a lending approval, the Relationship Manager must:

• Diarise to action the condition (for example, obtain financials from the customer quarterly and calculate interest times cover);

• Ensure the condition is addressed and report to Credit Risk Assessment if the condition cannot be fulfilled or if a monitoring covenant is not met;

• Make a formal request to Credit Risk Assessment to remove the condition if it is considered to be no longer appropriate to the lending.

BOQ.0001.0037.0970



4 Loan Quality Rating

The Bank’s loan grading or classification system is known as the Loan Quality Rating System (LQR). It provides a consistent method of assessing and reporting the overall risk structure of the loan portfolio. The LQR applies to borrowers with commercial lending facilities as a measurement of two risks:

• Probability of Default – A measure of the likelihood that the customer group will default in scheduled debt reductions. This is expressed as the Business Quality Rating (BQR) – a 10 point numeric scale

• Loss Given Default – A measure of the amount of loss which would be incurred by BOQ in

the event that the customer defaults on scheduled debt reductions. This is expressed as the Security Strength Rating (SSR) – 9 point alphabetical scale.

This scoring system results in each borrower being assigned an alpha-numeric rating such as 3B or 5A.

4.1 Business Quality Rating Scale

Business Quality Rating

Rating

Classification Probability of Default

1 Highest credit quality. Repayment is virtually unquestioned. Typically Government or Semi-Government authorities

None

2 Very strong credit quality. Borrowers with very strong track record. Very little risk of default. Typically rated corporations (i.e. Publicly listed)

None

3 Strong credit quality. Borrowers with strong track record. Very little risk of default

None

4 Sound credit quality. No repayment difficulties experienced or foreseen

Possible

5 Satisfactory credit quality. If any issues exist it is very likely that management can address them

Possible

6 Marginal credit quality. Minimal protection against downturns or problems

Likely

7 Poor credit quality. Signs of weakness apparent. Unless situation is addressed it could worsen.

Likely

8 Substandard credit quality. Significant deterioration in creditworthiness of the customer. Significant account management/workout time required to protect the Bank.

Certain

9 Severe deterioration and/or failure to respond to workout. Realisation of security to recover debt has begun or is being seriously considered. Specific provision may be made for Security Strength Ratings of D to I. Interest may be suspended.

Certain

10 Loss. Write-off, although some recovery not precluded Certain

BOQ.0001.0037.0971



4.2 Security Strength Rating Scale

The risk of loss is represented by a nine point alphabetic scale (A-I), known as the Security Strength Rating (SSR)

Security Strength Rating Rating Classification Probability of Loss in the

event of Default A Government, Government Guarantee,

Cash, Bank Guarantee None

B >=140% of shaded security support to amount of loan

Minimal

C >=100% <140% of shaded security support to amount of loan

Minimal

D >=95% < 100% of shaded security support to amount of loan

Likely

E >=85% < 95% of shaded security support to amount of loan

Likely

F >=75% < 85% of shaded security support to amount of loan

Likely

G >=50% < 75% of shaded security support to amount of loan

Certain

H >=25% < 50% of shaded security support to amount of loan

Certain

I >=0% < 25% of shaded security support to amount of loan

Certain

SSR is calculated as follows:

((Security Valuation amount x LVR) / Total Loan Amount) x 100 = SSR

For example:

a) Security Valuation $7,000,000 b) LVR percentage 70 c) Loan Amount $5,000,000 Security Strength Rating = ((a x b)/c) x 100 =98% ='D'

Refer to procedure titled ‘How to complete a Loan Quality Rating (LQR) Worksheet’ for detailed instructions on how to complete a rating

BOQ.0001.0037.0972



4.3 LQR Requirements

4.3.1 What to Rate

A rating must be applied to each borrower/debtor who has one or more commercial facilities and where the TBRE of the customer group is greater than $100,000. TBRE is to be calculated based on the approved limits (including any available redraw)

Note: A customer could have both secured and unsecured facilities, or facilities that have different, unlinked security arrangements, which would therefore carry a different security rating (A-I)

4.3.2 When to Complete a LQR

The Relationship Manager is responsible for the rating of all new borrowers, as well as the ongoing management and classification of existing customer groups in their control.

The Loan Quality Rating (LQR) Worksheet (Templates) must be used to determine a BQR and SSR for each borrower.

The LQR worksheet (template) requires input of at least two (2) years of final, accountant-prepared financial statements to provide a rating.

The financial statements used for risk rating purposes must not be:

• management or interim financials • vendor financials ie. where the borrower was not the owner/operator of the business • financials where the legal structure has changed (eg. A sole proprietor who has

changed to a company/trust structure, or a partnership where the partners have changed)

Relationship Managers must ensure that each of their customer groups is correctly rated at all times using their knowledge of the customer’s current circumstances to confirm that the rating determined is appropriate.

If the Relationship Manager is unsure that the LQR Worksheet has assigned an appropriate rating, advice should be sought from Credit Risk Assessment.

It is the responsibility of the Relationship Manager to ensure the LQR that is recorded in CRS remains current. Any re-rating which results in a change to an existing LQR, must be updated in CRS at the time of undertaking the rating.

BOQ.0001.0037.0973



4.3.3 LQR for New Customers

Where the applicant is a start-up business, or finance is for the purchase of a business where two (2) years of financial statements are unable to be obtained, a rating will be unable to be assigned. A rating score of '6' should be entered into CRS, in lieu of a system generated LQR.

A security strength rating will need to be manually calculated and input into CRS, for example SSR of D is calculated (i.e. security held in >= 95% but < 100% of shaded security support to amount of loan) a 'LQR' of 6D must be input into CRS.

4.3.4 Risk Grade Trigger Events – Existing Customers

When one of the following specific triggers occurs, a new LQR worksheet must be completed by the Relationship Manager:

• a customer/annual review (where a review is required in terms of section 6); • a directive from Credit Risk Assessment or Credit Risk Review in response to a

material adverse change; • any known or suspected deterioration/change in the customer's financial position. This

includes where an existing customer provides financial statements but no credit assessment or review is being completed, the Relationship Manager needs to examine reports to determine if there has been any change or deterioration in the customer’s financial position;

• any known change in the customer’s business operations – including but not limited to management, suppliers, customers, trading capability;

• an additional funding proposal where proposed TBRE exceeds $100,000; • any post-settlement request for lending or security variation.

Where a customer group is downgraded to LQR 7, it must be placed on the Special Mention List and a report submitted to Credit Risk Hindsighting.

Where a customer group is downgraded to LQR 8 or worse, the file must be immediately transferred to Commercial and Property Solutions Group.

BOQ.0001.0037.0974



5 Guarantees

5.1 Definition

A ‘Guarantee and Indemnity’ (Guarantee) is a form of security taken from a Guarantor who pledges to be responsible for the debt or obligations of another. The Guarantor can be one or more individuals, or one or more companies.

5.2 Purpose of a Guarantee

A Guarantee provides BOQ with access to the Guarantor’s assets and/or their income in the event the Borrower defaults under their loan agreement with the Bank. In effect, each Guarantor agrees to ‘step into the shoes’ of the Borrower if the Borrower cannot repay the facilities secured by the guarantee.

5.3 When is a Guarantee Required

5.3.1

5.3.2

Borrower is an Individual or Group of Individuals

Where the borrower is an individual, joint borrowers or partnership of individuals, a guarantee is required where:

• supporting security is proposed to be taken; and • the owner/s of that security are not also borrowers.

All applications must be submitted to Credit Risk Assessment for approval.

Borrower is A Company

Where the borrower is a company entity, BOQ’s guarantee requirements are as follows: • Companies – Guarantees must be taken from all Directors and Shareholders. • Company is a wholly owned subsidiary of another company – a guarantee must be

taken from the parent company • Supporting security is proposed to be taken and the owner of that property is not the

borrowing entity. In the event that a Director or Shareholder refuses to provide a guarantee, or the guarantor is a ‘third party’ (ie. is not a director or shareholder), the application must be referred to Credit Risk Assessment for approval.

BOQ.0001.0037.0975



5.3.3 Borrower is a Trust

Where the borrowing entity includes a Trust, guarantees are required from all the: • Adult persons and corporations who are beneficiaries of a Discretionary/Family

Trust; • Individual and corporate unit holders of a Unit Trust; • The Directors of any Corporate Trustee; • Appointer (if such entity exists);

A Guarantee from an Appointer is only acceptable if the Appointer:

• is not the Trustee; and • has not executed an irrevocable undertaking not to remove, appoint or direct the

Trustee without the prior consent of BOQ.

In addition, where supporting security is proposed to be taken and the owner of that property is not the borrowing entity a guarantee must be taken to link the security. Where the guarantor is a third party (ie. is not a trust beneficiary, unit holder or appointer), the application must be referred to Credit Risk Assessment for consideration. If a trust beneficiary, unit holder or trust appointer refuses to provide a guarantee, the application must be referred to Credit Risk Assessment for consideration.

5.3.3.1 Caution with Unit Trusts

BOQ does not lend to a Unit Trust where a Superannuation Fund is a Unit Holder.

BOQ.0001.0037.0976



5.4 Requirements when Taking Guarantees

5.4.1

5.4.2

5.4.3

Guarantees from Individuals

All guarantees taken from an individual or a number of individuals must be limited to a specific dollar amount being the total debt which is to be secured by the guarantee. The Code of Banking Practice prohibits taking of unlimited Guarantees from individuals.

Guarantees from Companies

A guarantee given by a Company can be either limited or unlimited in amount. If limited, the guarantee needs to be limited to no less than the total debt secured by the guarantee.

Guarantees from Trusts

Where a guarantee is required, it must be taken from the Trustee in its capacity as trustee for the Trust. NOTE: Clause 47.4 of the ‘Commercial Lending General Conditions’ states the guarantee will be taken from the Trustee in its own capacity and as trustee for the Trust. Where the Trustee is one or more individuals, the same requirements covered under Section 5.4.1 ‘Guarantees taken from Individuals’ apply, including the need for the Guarantee to be limited to the total amount of the debt.

BOQ.0001.0037.0977



5.5 Commercial Benefit to be Demonstrated

A ‘commercial benefit’ is defined as profiting from the expected outcome of the borrowing transaction. This may be monetarily or in some other way maximising or advancing the operation or position of the guarantor. If there is no commercial benefit to the individual, trust or company guarantor in providing a guarantee, the guarantee may prove legally unenforceable in the event that the borrower defaults. The Lender must determine that there is a benefit to the guarantor and record relevant details of what benefit will be derived in the lending application. Any lending application where a guarantee is proposed to be taken and it is not apparent that the guarantor will derive a clear commercial benefit must be referred to Credit Risk Assessment for approval.

5.6 Advice to Guarantors

5.6.1 BOQ Staff must not give Advice

Lenders must not give advice about Guarantees to any potential Guarantors under any circumstances, except to advise them to obtain independent legal advice. The Guarantee document (see ‘Forms and Templates’) gives notice that there are financial risks involved and the Guarantor:

• should seek independent legal and financial advice on the effect of the Guarantee; • can refuse to enter into the Guarantee; • have the right to limit the liability (by a limited Guarantee); and • can request information about the loan facilities.

BOQ.0001.0037.0978



5.7 Independent Legal Advice

5.7.1 When Advice is Required

5.7.1.1 Individuals in Certain Categories

If a Guarantor is an individual who falls into any of the following categories, BOQ requires the Guarantor to obtain independent legal advice: • Not fluent in English; • A spouse or de facto partner (even if they are not cohabiting) of the Borrower; • Under 21 or over 65 years of age; • Is offering the family home as security for the guarantee ; • Has a visual or aural disability; • Plays no active role in the activities of the business; or • Appears to be subject to undue influence to execute the Guarantee (from any party). If a Guarantor falling into one of these categories refuses to obtain independent legal advice, the Relationship Manager must refer the application to Credit Risk Assessment for consideration.

Where Total Business Related Exposure to the Customer Group exceeds $200,000 and the individual guarantor does not fall into one of the categories in section 5.7.1.1, the Relationship Manager must recommend that the guarantor obtain independent legal advice. If a Guarantor chooses not to obtain Legal Advice, the Relationship Manager must refer the application to Credit Risk Assessment for consideration and make a File Note in the customer file. Where the Total Business Related Exposure for the customer group is $200,000 or less and the guarantor is an individual who does not fall into one of the categories in section 5.7.1.1, the Relationship Manager must recommend that the guarantor obtain independent legal advice. If the guarantor chooses not to obtain advice, a File Note must be made in the customer file. One Day Notice Period: Where a Guarantor has refused our recommendation to seek independent legal advice, the one day notice period must still be observed before the guarantee is signed – refer to section 5.8.3.

5.7.1.2 Evidence of Advice

If a Guarantor is required or recommended to obtain independent legal advice under this policy, they must provide a ‘Solicitor’s Certificate’ as evidence they have obtained advice. The Relationship Manager must make a copy of the original and retain it on file.

BOQ.0001.0037.0979



5.8 Disclosure Requirements – Individual Guarantors

5.8.1

5.8.2

5.8.3

Disclosure required by the COBP

Lenders must provide each proposed individual Guarantor with disclosure information as required by the Code of Banking Practice (COBP). It is mandatory that BOQ holds evidence that we provided the disclosure information to the Guarantor/s prior to accepting their Guarantees.

To facilitate compliance with the COBP, Lenders must complete the Guarantee Checklist/Worksheet (See ‘Lending-Application to approval>Consumer’) for each Guarantee and to retain it on the loan file.

This disclosure information will be required for every new limited Guarantee. This includes:

• where Guarantors have previously provided a Guarantee (limited or possibly, unlimited as was formerly allowed)

• the facility amount of the loan provided is to be formally increased, or • a new limited Guarantee is to be taken as support

Even if BOQ has previously disclosed the required information, we must provide it again – using the Guarantee Checklist/Worksheet.

Exceptions to Disclosure Requirements

The only policy exceptions BOQ will accept to the disclosure requirements are: • Sole Director companies who provide Guarantees - Lenders must obtain a completed

form ‘COBP – Opt Out Authority for Directors’ (see ‘Lending-Documentation to settlement>General’);

• Directors who choose not to receive the disclosure documentation. The Lenders must obtain a completed form ‘COBP – Opt Out Authority for Directors’ (see ‘Lending-Documentation to settlement>General’);

• Commercial asset finance facilities, including leasing facilities where the goods financed are the only security held. The security required may include Guarantees from the Directors. or

• If the Borrower is not covered by the provisions of the COBP. That is, if the Borrower is either a non-manufacturing business with more than 20 full time (or equivalent) employees or a manufacturing business with more than 100 full time (or equivalent employees). The Lender must validate this and retain evidence on the loan file.

One Day Notice Period

BOQ must give a Guarantor until the next day to consider the Guarantee document and disclosure material before signing the Guarantee. The only exceptions to this requirement are: • if the Guarantor obtains Independent Legal Advice regarding the Guarantee and

disclosure material, or • the Guarantor is a Company Director who chooses not to receive the benefit of time to

consider the Guarantee and disclosure material. Lenders must obtain a completed ‘COBP - Opt Out Authority for Directors’ (See ‘Lending-Application to approval>Consumer’) and retain it on file.

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5.9 Lending Variations secured by Existing Guarantees

Whenever the term, amount, conditions or any other details of a guaranteed exposure are changed, written consent must be obtained from all guarantors.

The Guarantor's written consents are to include:

• acceptance of the provisions of the new loan • acceptance of the extension or variation of the existing facility • confirmation of the Guarantor's continuing liability in respect of the new loan/extended or

varied facility under the existing Guarantee

The Guarantor must be provided with a copy of the loan variation. The Guarantor’s written acceptance of the extension of the Guarantee must be obtained prior to the facility amendments being implemented.

As with the provision of the initial Guarantee, BOQ must recommend that the Guarantor seek Independent Legal Advice before signing any Guarantee variation document.

A limited Guarantee does not cover amounts where the borrower has exceeded their borrowing limit. In order for any excess amount to be secured, a Deed of Consent acknowledging the borrowers' temporary excess would need to be executed by all guarantors..

NOTE: New Guarantees do not need to be taken when an Emergency Limit is approved, however the Guarantors must sign the Emergency Limit Application Request acknowledging they are aware of the request.

As with the provision of the initial Guarantee, BOQ must recommend that the Guarantor seek Independent Legal Advice before signing any Guarantee variation document.

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5.10 Release of Guarantors

5.10.1 Withdrawal from a Guarantee

A Guarantor is able to withdraw from the Guarantee:

• at any time prior to the credit being provided; or • after the credit has already been provided, the Guarantor discovers the credit contract

differs in a material respect from the proposed credit contract provided to them before the Guarantee was signed

In both situations, the withdrawal request must in writing.

Credit Risk Assessment must be advised whenever a guarantor seeks to withdraw from their guarantee before lending is drawn.

Withdrawal as a result of the credit contract differing in a material aspect from the credit contract provided to the Guarantor is an entitlement under the Code of Banking Practice. While Credit Risk Assessment approval is not required, the Relationship Manager must advise Credit Risk Assessment of the security variation. The advice to Credit Risk Assessment should include an assessment of the new security position and if applicable, the repayment position without the guarantee. .

5.10.2 Release of a Guarantor

The release of any Guarantor while loan facilities remain in place for any reason other than the circumstances outlined in 5.10.1, requires Credit Risk Assessment approval. Written consent to release the Guarantor must be obtained from all Co-Guarantors and Borrowers.

When the loan is paid out, approval to release the Guarantors from their obligations under the guarantee within six (6) months from the date of clearance must also be obtained from Risk Assessment.

Note: The Trustee in Bankruptcy of a borrower's estate (or liquidator, if the Borrower is a company) may claim that the Bank has received an undue preference over other creditors if the Borrower’s liability has been cleared or partially cleared within six (6) months immediately before the commencement of bankruptcy or winding up proceedings. Consequently Guarantees will normally be retired after six (6) months if the Bank is satisfied that bankruptcy or winding up proceedings have not been commenced by or against the Borrower

Where the Guarantor insists on being released from the Guarantee before the expiry of the six (6) month period, approval for this must be granted by Credit Risk Assessment.

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6 Customer Reviews

A review of a customer group’s commercial lending must be undertaken periodically to analyse the performance of the entity/entities and the conduct of their accounts and confirm that the group has the continued ability to meet its obligations to BOQ.

6.1 Scheduled Reviews

6.1.1

6.1.2

6.1.3

Annual Reviews

A review must be undertaken for all customer groups with commercial lending annually. More frequent reviews may be scheduled as deemed necessary by Credit Risk Assessment.

Setting Review Dates

All commercial/business lending facilities requiring scheduled reviews must have a review date loaded into CRS. Where accounts are part of a Customer Group, all accounts should have the same review date recorded.

Deferring Reviews

Each customer review should be completed by the scheduled review date. Relationship Managers may defer the review for a maximum of 45 days beyond the scheduled review date in the following circumstances:

• Deferral of a review for this customer has not been actioned within the past 12 months; and

• Extenuating circumstances exist –(for example, the customer has already advised that their financials will not be available for another 2 weeks);

Deferral must be actioned prior to the scheduled review date and a file note must be recorded of the reason for the deferral. If the review is not completed within the 45 day extended period, the Relationship Manager has no authority to approve a further extension. An internal memo must be submitted to Credit Risk Assessment outlining the circumstance for the review not having been undertaken. Credit Risk Assessment may instruct that the review be conducted based on information to hand or may agree on a revised date of completion. NOTE: The review date recorded in CRS must remain unchanged until the formal / final review has been completed.

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6.2 Review Formats for Scheduled Reviews

The format of the scheduled review is determined by the TBRE, the existing LQR and the arrears history of the Customer Group.

6.2.1

6.2.2

6.2.3

6.2.4

Behavioural Reviews

All of the following criteria must be met for a Behavioural Review to be completed: • No known Risk Grade Trigger Events (other than the scheduled review being due) in

terms of section 4.3.4; • No Credit Approval conditions requiring financial covenant monitoring or periodic

review (for example quarterly reviews to monitor business performance); • TBRE over $100,000 up to and including $500,000; • Existing BQR of all commercial facilities 1 – 6; • Existing SSR of all commercial facilities is A,B,C or D; • Property Valuations are all current in terms of section 3.6.3; • No excesses or arrears have been recorded on any commercial account in the

Customer Group in the past 12 months, including accounts with no limits.

Short Form Review

All the following criteria must be met for a review to be completed using the Short Form process:

• TBRE up to $2m where the Behavioural Review criteria are not met; • Financials on file are current in terms of section 3.2; • Proposed BQR of all commercial facilities is 1 – 6; • Proposed SSR of all commercial facilities is A, B, C or D; • Property valuations are current in terms of Section 3.6.3.

NOTE: New LQR Worksheet and a Serviceability Spreadsheet must be completed as part of this review.

Full Review

Where all criteria for the Short Form Review are not met or the TBRE of the Customer Group is $2m or more, a Long Form Credit Submission must be completed and submitted to Credit Risk Assessment for consideration.

Exceptions to Annual Review

An annual review is not required if: • The Total Business Related Exposure (TBRE) for a Customer Group is $100,000 or

less; or • The only account/s reporting for review is one or more Business Term Loan (BTL)

where all of the following criteria are met: o Total BTL Account Limits (including any redraw facility) is $500,000 or less;

and o The loan repayment arrangements for all BTL’s in the group are Principal and

Interest reductions; and o There are no other commercial facilities in the Customer Group

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6.2.5 Review Matrix

Key Criteria Behavioural Review Short Form Review Full Review

TBRE for the customer Group $500,000 or less Up to $2m

$2m and over or where all criteria for Short

Form Review are not met

Existing BQR with no known Risk Grade

Trigger Events 1 - 6

Existing SSR A, B, C or D No credit approval

conditions for monitoring/periodic

Review

Yes

No arrears/excesses on any commercial

account Yes

Current Financials Held Yes

Proposed BQR 1 – 6 All Proposed SSR A, B, C or D All Valuations are

Current Yes Yes

6.3 Reviews prompted by Risk Grade Trigger Events

6.3.1

6.3.2

Excesses and Arrears

Where a customer group has the following characteristics:

• TBRE $500,000 or more; and

• Any commercial account within the group has 30+ days continuous excesses or commercial loan has 30+ days repayment arrears.

The Relationship Manager must complete a review in terms of the Problem Account Management Policy and submit to the Credit Risk Assessment (Major Client Group and Property Finance) or Credit Risk Hindsighting (all other areas) for consideration.

Other Trigger Events

Where any Risk Grade Trigger Event set out in section 4.3.4 has occurred, in addition to completing a new LQR Worksheet for the Customer Group, the Relationship Manager may be directed by Credit Risk Hindsighting, Credit Risk Management or Credit Risk Review to complete a customer review in either the Short Form Review or Full Review Format as set out in section 5.2.

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7 Glossary of Terms

Customer Group - Entities grouped together for credit assessment and ongoing management purposes where one or more of the following characteristics are evident:

• Cross guarantees or cross-collateralised security is proposed or is already held; • There is common ownership or management control of corporate entities/partnerships/trusts; • Capacity to service of one entity is partly or wholly reliant on another entity

Refer section 2.3 Refer clause 10 of APRA Guidance Note 220.1 Common Ownership Individuals or companies are directors, shareholders, unitholders, trustees or partners of more than one entity. Where the common ownership is more than 50% between 2 entities, those entities must be grouped together as per section 2.3. Management Control Where an individual is the key decision-maker of a legal entity, whether they are an owner or an employee, they are deemed to have management control in terms of section 2.3. Probability of Default – A measure of the likelihood that a customer group will default in scheduled debt reductions. Refer section 4 Loss Given Default - A measure of the amount of loss which would be incurred in the event that the customer defaults on scheduled debt reductions. Refer section 4 Default – An account is deemed to be in default when it is more than 90 continuous days in excess or arrears. An ‘excess’ in this context means an account in debit above an approved overdraft limit or remains overdrawn after a limit has expired, or an account which is overdrawn with no limit. ‘Arrears’ means scheduled loan repayments. This includes partial payments and loans which have passed maturity date and not been repaid. Refer section 4 Relationship Manager - Owner Manager or Business Banking Manager who is responsible for managing the relationship with the customer Total Business Related Exposure – Total of all business/commercial lending limits and loans for all entities in a customer group (including any available redraw). Total Aggregate Exposure – Total of all consumer and business limits and loans for all entities in a customer group (including any available redraw). Delegated Approval Authority – Authority delegated by the Head of Credit Risk Assessment to an individual manager enabling that person to approve commercial lending applications (Lending DAA) within specific parameters. An Operational DAA is also delegated enabling approval of specific ongoing customer management activities for both consumer and business lending. Refer to Delegated Approval Authority (DAA) Policy for details.

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Collateral Item held as security for example, mortgage or fixed and floating charge. Cross Collateralised Security Where a borrowing entity has more than one facility, all the security items secure all the borrowing facilities. Where there is more that one entity in the customer group, that all entities guarantee each other and all security items (linked by the guarantees) secure all the borrowing facilities. Environmental Risk The potential for a customer’s viability or BOQ’s security being threatened due to a past or present failure to comply with environmental laws or standards. Examples include but are not limited to: the presence of asbestos in a building; land contaminated by chemicals; a service station site with the potential for petrol or diesel to have leaked from the underground tanks. Valuers will comment on any identified risks in their Valuation Report. It is operational risk if BOQ, as a voluntary or involuntary owner of a polluted property, incurs the same liability. It can also harm the Bank’s reputation if we are criticised as a result of environmental damage for which we are rightly or wrongly blamed. Flood A security property is to be considered as flood affected for the purposes of the Commercial Credit Policy where a valuation contains comments that a property has been impacted by flooding, regardless of whether it is described as riverine flooding, inundation or another term is used.

-ooOoo-

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BOQ Group Risk

259 Queen Street Brisbane QLD 4000

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