Bulletin — April 2010
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Due diligence is one of the requirements of the CSBF Program. Its compliance is assessed not only when a lender submits a claim but can be the subject of an on-site examination. It became part of the CSBF Program in 1999 in answer to the December 1997 Report of Auditor General of Canada. The report pointed out that while "…the credit risk is managed by the lending institutions", it is expected that lenders "…will ensure that loans comply with the eligibility requirements and conditions of the Program, and that they will make lending decisions with the same degree of due care and diligence as they do with their [conventional] loans".
The purpose of this Bulletin is to clarify the interpretation the due diligence section 8 of the CSBF Regulations:
8. In making and administering a loan, the lender must apply the same procedures as those that would be applied in respect of a conventional loan in the same amount, including, before making the loan,
- obtaining credit references or conducting a credit check on the borrower and any persons who are legally or financially responsible for the borrower; and
- completing an assessment of the repayment ability of the borrower, taking into account all other financial obligations of the borrower.
The following helps to explain this due diligence requirement:
- Section 8 requires the lender to apply the same due diligence requirements as would be applied in respect of a conventional loan for the same amount. In addition, the lender must also perform the tasks outlined in section 8 (a) and (b) which extend the meaning of due diligence to matters that lenders may not normally do for conventional loans of the same amount.
- A lender can obtain either credit references or conduct credit checks on the borrower and on the persons who are responsible for the borrower. For example, for a newly incorporated borrower, it may be of no use to do a credit check or credit reference since the borrower has no credit history. In such a case, the lender should conduct credit checks or obtain credit references on principal(s) of the corporate borrower. However, if the corporate borrower has been in existence for some time, a credit check can be done on such a borrower. If there is any doubt, the section is expansive enough to allow a lender to do credit checks or obtain credit references on the principals of the borrower.
- The language used in section 8(b) requires a lender to do a risk assessment on the CSBF loan even if the determination of such an assessment is not part of the lender's normal procedures. The CSBF Program is entitled to ensure that such a risk assessment was completed prior to making the loan. Section 8(b) requires a lender to complete an assessment of the borrower's ability to repay the loan and as such, the Program would be able to request the results of the assessment when processing a claim for loss. This does not imply that the lender's decision in approving the loan will be questioned.
- The CSBF Program's due diligence requirements apply not only in the loan approval process, but also in the administration of the loan. Due diligence would be relevant in the release and substitution of assets taken as security. Also, for example when a loan goes into default, lenders are expected to apply the same procedures as in their conventional loans in the collection, realization and legal proceedings of the defaulted loan in addition to complying with CSBF Program requirements.
Please refer to our Guidelines at page A-23 for further information on due diligence.
We welcome your comments and feedback on any points raised in this Bulletin. Please feel free to contact us.
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