Credit risk of individual crowdfunding projects
The description provided to investors of the method to assess the credit risk of individual crowdfunding projects within a portfolio as referred to in Article 6(2), point (a) of Regulation (EU) 2020/1503, shall contain all of the following elements:
(a)
the criteria and the key financial indicators used to establish the feasibility and sustainability of the business plans of the individual crowdfunding projects;
(b)
an analysis of the expected cash flows of the crowdfunding projects and an assessment of how certain those expected cash flows are over different time horizons;
(c)
an analysis of the characteristics, including the degree of competition, of the business sector in which the project owners operate;
(d)
an assessment of the project owners’ knowledge, experience, reputation and capacity to manage business activities in the project’s specific sector;
(e)
the procedures regarding the acceptance and recognition of collateral or guarantee and credit risk mitigation measures, where relevant;
(f)
the type of the repayment schedule for the loan and the frequency of instalments;
(g)
the procedures to assign each loan associated with a project to an appropriate risk category as defined by the risk management framework;
(h)
the source and type of data used for the purposes of points (a) to (g).
Credit risk at the investor’s portfolio level
1. The description provided to investors of the method to assess credit risk at the investor’s portfolio level as referred to in Article 6(2), point (b) of Regulation (EU) 2020/1503, shall contain an explanation of how, in the process of composing a portfolio, the following elements are taken into account:
(a)
the distribution of loans in accordance with their maturity within the same portfolio;
(b)
the interest rate for each loan of the same portfolio;
(c)
the share of loans in a single portfolio granted to the same project owner or to a group of connected project owners;
(d)
the share of loans in a single portfolio granted to project owners established or operating in the same jurisdiction or geographical area;
(e)
the share of loans in a single portfolio granted to project owners operating in the same business sector;
(f)
the share of loans assigned to the same risk category;
(g)
the method used to evaluate the correlation of risks within the same portfolio.
2. For the purposes of paragraph 1, point (c), a group of connected project owners shall mean any of the following:
(a)
two or more natural or legal persons who constitute a single risk because one of them, directly or indirectly, has control over the other or others;
(b)
two or more natural or legal persons are to be regarded as constituting a single risk because they are so interconnected that, if one of them were to experience financial problems, the other or all of the others would also be likely to encounter funding or repayment difficulties.
3. A crowdfunding service provider that advertises a specific target rate of return on investment for a portfolio shall disclose the procedure employed to select the individual loans to be included in the portfolio.
Credit risk of project owners
The description provided to investors of the method used to assess the credit risk of project owners as referred to in Article 6(2), point (c) of Regulation (EU) 2020/1503, shall contain all of the following elements:
(a)
the procedures for the credit approval and monitoring processes;
(b)
the procedures to determine the project owner’s credit scoring, where applicable;
(c)
the procedures for using external ratings for assessing a project owner’s creditworthiness;
(d)
the procedures regarding the acceptance and recognition of collateral or guarantee and credit risk mitigation measures, where relevant;
(e)
the procedures and data used to assess the financial history of the project owner and the procedures to be followed in the event that the project owner fails or refuses to provide the required information.
Use of models
1. For the purposes of Article 6(2), third subparagraph, of Regulation (EU) 2020/1503, crowdfunding service providers shall provide adequate information on the models included in the method used for the credit risk assessment of crowdfunding projects, for the assessment of the creditworthiness of project owners, for the credit approval and monitoring processes, and for the composition of portfolios, including all of the following:
(a)
the source of the data used as input for the models;
(b)
the framework employed to ensure the quality of the input data;
(c)
the existence of appropriate governance arrangements for the design and use of such models;
(d)
the framework to ensure that the quality of the model output is regularly assessed and validated, and where appropriate, reviewed.
2. When automated models are used as part of the method for the credit risk assessment of crowdfunding projects, in the creditworthiness assessment of project owners, in the credit approval and monitoring processes, or in the composition of portfolios, crowdfunding service providers shall disclose all of the following:
(a)
how the use of automated models is appropriate to the size, nature and complexity of the types of crowdfunding project selected for the investor’s portfolio;
(b)
the conditions for the application of automated decision-making in the credit-approval and monitoring processes, including identifying loans, segments and limits for which automated decision-making is allowed.
Information on stress testing and sensitivity analysis
Crowdfunding service providers that conduct stress test and sensitivity analysis exercises shall provide investors with information on all of the following:
(a)
at the level of the single loan and single project owner, any sensitivity analyses conducted to reflect potentially negative future market and idiosyncratic events that are relevant to the type and purpose of the loan;
(b)
at the level of the portfolio, the procedures and information systems for stress testing that are conducted to assess the resilience of the portfolio through the economic cycle and in different scenarios.
Source: EUR-Lex (Publications Office of the EU), © European Union, reuse permitted under Commission Decision 2011/833/EU.
