Ireland’s credit unions must try to meet the needs of borrowers and savers by evolving
What’s uniquely interesting about credit unions is that the ‘problem’ is how to deal with, and build on, success. Credit Unions have approximately 3 million members, who continue to shrewdly save and have now amassed in excess of €12bn in savings. The challenge for credit unions is how to help their members who continue to build their ‘safety net’ through savings with a fair reward without putting these funds at risk – the latter of which is a shared objective with the regulator. Consistent with the objectives of the credit union, as enshrined in legislation, they also want to meet the borrowing needs of their members with a range of loans. This will ensure mutual benefit for savers and borrowers, by charging a fair rate to borrowers and paying a fair rate to savers.
Credit unions have embraced the enhanced governance framework, introduced in the Credit Union Act 2012 and subsequent regulations, at significant additional costs, but, as intended in the report by the Commission on Credit Unions, the quid pro quo of a more enabling tiered regulatory approach has not yet been delivered. It is worth noting that credit unions are more restricted now than prior to 2012 as a result of these new regulations – that’s not good for consumers, communities or their credit unions.
So what’s the way forward? There are several actions that can be taken to ensure the uniqueness of the credit union model is recognised by decision makers, while credit unions themselves can continue to evolve their capabilities;
- Establish a ‘Select Sub-Committee on Credit Unions’ from the Committee on Finance, Public Expenditure and Reform, and Taoiseach to play a key role in scrutinising the ongoing relevance of legislation, policy and related credit union matters;
- Introduce proportionate regulations, which will allow some credit unions to continue offering basic savings and loans only, while allowing other credit unions to develop and offer a greater range of services, provided they have what is necessary to manage the additional inherent risks.
- Amend the Credit Union Act ‘97 to allow credit unions lend directly to Housing Bodies for Social & Affordable Housing. This will let them meet their social objectives which will help counter balance any perceived loss of cohesion and identity as they get bigger;
- Reflect the importance of credit unions to the people of Ireland by having their regulator, the Registrar of Credit Unions, report directly to the Governor of the Central Bank of Ireland.
- Build on the successes of 2016, probably the biggest year of change in the credit union sector for decades, with considerable consolidation through mergers and the establishment of non-partisan collaboration groups such as the Solution Centre.
While CUDA will relentlessly continue to seek actions 1 to 4 above, action 5 means that credit unions offering a full range of financial services, from personal loans, mortgages, payments, investments, insurance and pensions, is now closer than ever before. We are seeing a rapidly increasing level of cooperation between credit unions, which initially focused on shared management service arrangements such as regulatory compliance and risk management, but has now expanded to significant projects supported with full risk analysis to enable a more expedient regulatory approval process facilitated through the formation of the Solution Centre, a hothouse unit developing specialist products, supports and solutions for credit unions and now has membership of credit unions who manage over one third of the assets of the sector.
Credit Unions who share the desire to develop their business model are collaborating through the Solution Centre and are starting to deliver a stronger and more forthright sector. This is good for consumers on so many levels – apart from ensuring fair interest rates and fees in the market, it allows people to be part of a highly-networked community focused on economic, social and environmental change.
It’s already working because initiatives are fully thought through; for example, in the case of the new mortgage support offering, a full assessment of all the steps in the process was completed and those credit unions utilising this resource will have ongoing access to specialist expertise. This should give confidence to regulators to extend the limits under which all credit unions currently operate.
Credit unions working together have the desire and the skill-set to develop and to become a real alternative to banks and other finance houses. Credit unions have approximately €4billion out in loans, which is less than 30% of their assets, ideally this should be closer to 70%. This means they have a staggering €6bn available to lend.
So, what does all this development mean for credit union members? Anyone who joins will get improved, better tailored financial services in terms of mortgages, personal lending and savings, while also participating in a unique relationship with their credit union. While members are often aware of how dependent they are on their credit union, it is actually an interdependent relationship. In practical terms, credit unions will improve their communications to ensure that members appreciate the co-dependent benefits of doing business with their credit union, and will not want or need to go elsewhere for their financial services.
Chief Executive Officer
Credit Union Development Association
“Credit Unions shouldn’t be unreasonably prevented from delivering competition to drive down mortgage rates”
The Credit Union Development Association (CUDA) intend to present its submission to the Central Bank of Ireland ahead of its review of its macro prudential mortgage measures, in which it will call for three simple but equitable changes to the current rules for new mortgages.
At the same time, CUDA is seeking to have the long-term credit union lending limits removed or substantially changed as it believes that they are unduly restricting competition in the mortgage market. The representative body says that Credit Unions are massively under lent with billions of Euro currently available. They contend that delivering greater competition to consumers could finally see standard variable rates (SVR) drop below 3%.
Presently, credit unions are generally only allowed to lend 10% of their loans, on terms of 10years or more. CUDA believes that this rule should be removed as there are plenty of other prudential regulatory controls in place to ensure the solvency of those credit unions that wish to lend more over the long-term.
Lending a greater proportion of funds over a longer period would also enable credit unions to offer enhanced long-term savings products with higher interest rates.
Mortgage rules review
CUDA is calling for a change in the Loan to Income (LTI) limit which currently stands at 3.5 times. The Credit Union representative body will ask the Central Bank of Ireland (CBI) to allow for a slight increase in the LTI – to allow people borrow up to 3.75 times their income. The Solution Centre, a CUDA managed innovation business unit, has researched the issues in anticipation of a new mortgage offering and believes that this relatively small change could significantly boost the number of couples on average income that qualify for a typical starter home particularly in Dublin where prices are so much higher.
A new starter house in Dublin typically costs €300,000 and most people reasonably assume that first time buyers will need a €38,000 deposit under the Loan to value (LTV) rules – 10% up to €220,000 and 20% on the balance. But even assuming a higher than average household income of €70,000, the current LTI of 3.5 will mean that they will need a much bigger deposit of €55,000 regardless of whether they qualify for the lower First Time Buyer exemption under the LTV rules. If the LTI is raised to just 3.75, this would reduce the deposit required to €37,500 which is still a sizeable deposit, however it is more comparable with the €38,000 LTV deposit requirement.
CUDA’s submission will also suggest that the categories of First Time Buyer (FTB) and Trader-up (TU) should be changed to reflect the financial environment in which we currently live. They contend that when these phrases were first coined, it was assumed that while applicants might have had savings, FTBs didn’t have any equity from a previous home while TU’s always did. So the rules were softened for FTBs to give them a better chance. Unfortunately, many families in their 30s, 40s and 50s are now in the TU category – looking to trade up to a bigger \ family friendly house, however, having bought just before the downturn, they don’t have any equity to carry from their current home. CUDA is advocating that buyers should instead be categorised by ‘Equity’ and ‘No Equity’.
CUDA also believes that the mortgage lending limits in Dublin and other large urban areas need to reflect that it is a wholly different market to the rest of the country, with much higher purchase prices and far higher rental prices.
According to Kevin Johnson, CEO of CUDA, “we know the demand is there, but many people cannot meet the new rules because of Loan to income (LTI) rule. While Loan to value (LTV) limits are spoken of far more in the media, we believe that a small modification to the LTI rule would have a bigger impact without causing an undue spike so as to avoid any significant pressure on house prices.
The loan caps have had the, perhaps unintended, but negative consequences of forcing more and more people to remain in rental accommodation in big cities particularly Dublin which is putting upward pressure on rental rates. The increase in rents has been a significant contributor to the homeless crisis as people on rent support or supplement are unable to compete with the private sector for increasingly reducing number of properties. CUDA believes that the current Central Bank rules are contributing to slowing the migration of people from rental to purchase, which is having a knock on impact on everyone else in the rental sector.”
Credit Union Mortgage lending limits – Competition
CUDA is also engaged in a campaign to have the outdated long-term lending limits reviewed and modernised to more accurately reflect consumer demands and the current financial environment.
According to Kevin, ‘We believe that Credit Unions shouldn’t be unreasonably prevented from delivering competition to drive down mortgage rates. The current credit union limits are arbitrarily capped at 10% of all lending, a crude measure introduced many years ago that is now out of date. The Central Bank has indicated its desire to see more completion in the mortgage market; we believe that this is the best way to achieve it.’
CUDA, the Credit Union Development Association, was legally incorporated in 2003. In its early days it was the representative voice, on behalf of its owner member credit unions, with legislators and regulators. It has since evolved and now, as well as providing a ‘voice’, it is increasingly providing support facilities in the areas of regulatory compliance, risk management, shared services and competency development.
The Solution Centre
A select group of the country’s strongest credit unions led by the CUDA established The Solutions Centre, a hothouse unit developing specialist products, supports and solutions. One of the first of these products will be supporting a mortgage offering which is expected to be available in July to participating credit unions representing approximately 25% of credit union members.