ESG and Credit: Serving the Underserved—An RMBS Perspective

This commentary discusses the potential social factors of lending to underserved borrowers in the financial industry and how these could affect DBRS Morningstar’s structured finance credit analysis in global RMBS.

Key highlights include:
-- An introduction to what underserved borrowers are and why they are underserved.
-- A look at different government programmes worldwide aimed at supporting lending to underserved borrowers in the residential property sector.
-- The size of the underserved borrower population.
-- Whether lending to underserved borrowers could be considered a social factor when it comes to assessing environmental, social, and governance (ESG) factors in the credit analysis.

“DBRS Morningstar views lending to underserved borrowers as often an inherently riskier practice. If all claimed lending to underserved borrowers was determined to be an ESG factor in itself then, for most RMBS transactions, this would be considered a credit-negative social factor” said Simon Murphy, Vice President of Operational Risk at DBRS Morningstar. “However, to consider lending to underserved borrowers an ESG factor in itself, certain other characteristics must be present, such as the 'Social Impact of Products and Services', according to DBRS Morningstar’s ESG criteria”.