A series of reports into the credit union sector, and a period of restructuring, consolidation and closures has seen the number of active credit unions fall from 396 in 2013 to 264 in 2018. The sector and its traditional business model, has experienced significant change due to weakening return on assets. This is due to rising cost bases, falling investment yields and increased competition in core areas of its traditional markets such as personal loans and motor loans from retail banks’ digital offerings, PCP finance providers and FinTech and crowdfunding firms.
The Central Bank of Ireland (CBI) launched a consultation in November 2018 concerning proposed changes to the lending framework for credit unions. The measures are intended by the CBI to allow greater scope for longer term lending by credit unions subject to a commensurate prudent lending framework taking account their risk management and operational capabilities. The CBI is responsible for the regulation and supervision of credit unions under the Credit Union Act 1997. It ensures that credit unions have sufficient financial resources, sustainable business models, effective risk management and control procedures.
Currently the Credit Union Act 1997 (Regulatory Requirements) Regulations 2016 set categories of permitted lending (including maturity limits for different loans), concentration and large exposure limits for credit union lending. The CBI is now consulting on changes to the lending framework in the 2016 Regulations which may involve amongst other changes:
- the removal of maturity limits based on percentage of loans outstanding
- the introduction of tiered concentration limits for house and commercial lending.
In response to an earlier questionnaire undertaken by the CBI at the request of the Credit Union Advisory Committee (CUAC) Implementation Group, the majority of credit unions supported a change of lending maturity limits to strengthen business model growth, sustainability, viability and more prudent portfolio mix. Particular concern was raised that the current lending maturity limits (by being expressed as a percentage of total loans) limited credit union capacity to increase long term lending as it was tied to growing short term lending at the same time (demand for which has fallen and consequently adversely restricts longer term lending capacity of some credit unions).
The proposals consist of:
- the removal of the existing 5 and 10 year lending maturity limits (i.e. 30% and 10% of gross loans respectively or with CBI approval higher limits of 40% and 15%).
- the introduction of a maximum 10 year loan maturity for unsecured loans (i.e. other than a loan secured by a legal charge on property pledge of shares or assignment of deposit). The overall 25 year maximum term of any credit union loan will be retained and apply in respect of secured loans.
- the introduction of a combined concentration limit for ‘House’ and ‘Commercial Loan’ categories of 7.5% of total assets. This will be subject to a further sub-limit of 5% of total assets in either category. A tiered concentration limit of 15% of total assets may be permitted for credit unions with total assets in excess of €100m which have appropriate scale, resources and capabilities. There shall be an express prohibition of “buy to let” loans for residential or commercial property.
- the re-naming and re-defining the commercial loans loan category as “small business loans”.
- the introduction of a large exposure limit (i.e. any exposure to a borrower or group of borrowers connected with a borrower of 2.5% or greater of the regulatory reserves of the credit union).
- Asset and Liability Management Requirements – The existing liquidity framework (20% of savings to be held in liquid assets) will be retained for commercial and house lending up to the proposed new concentration limit of 7.5% of total assets. However Credit Unions that seek to make additional longer term lending will be required to maintain advanced Asset and Liability Management frameworks, liquidity contingency plans and additional monitoring and reporting obligations to the CBI as a condition of any such permission.
- Risk, Reporting and Consumer Protection Requirements
a. Risk – Credit unions seeking to undertake additional house and commercial lending will be required to demonstrate strong governance and risk management and maintain appropriate revenue and cost models for the increased financial risk of longer term lending.
Board reporting requirements on performance of house loans similar to existing requirements on commercial loans will apply to the additional credit risk arising from geographic or sectoral concentration as a consequence of credit unions’ common bond principles, and additional funding or liquidity risk posed by a credit unions narrow funding model (members share accounts and deposits which are repayable on demand).
b. Consumer Protection – It is intended that Minimum Competency Regulations 2017 and Minimum Competency Code 2017 will be applied to credit union core lending and term deposit businesses. Separately a review of the scope of application of the Consumer Protection Code to credit unions is to be undertaken in 2019.
c. Reporting – Any credit union which advances mortgages in excess of €50 million in a reporting period is already required to make a detailed return to the CBI. Additionally, credit unions making house loans will be required to report bi-annually to the CBI on all house loan data in order for the CBI to monitor compliance with ‘loan to value’ and ‘loan to income’ limits introduced by the CBI in 2015.
However, availability of the higher concentration limits will be subject to demonstrating the necessary scale, available resources and competence required for undertaking longer term lending activities. As noted by Patrick Casey, Registrar of Credit Unions at the CUDA annual conference “As credit union business models evolve towards more complex products such as mortgages, credit unions automatically become subject to a broader range of mandatory European and domestic regulation. This is the price of participation” . Implementation of the changes to the lending framework are expected to be in enacted by Q3 2019.