Credit union role in mortgages merits tight monitoring

Word that the Irish League of Credit Unions is at an “early stage” in considering the feasibility of its members offering mortgages has provoked much interest.

News flash: credit unions already can offer mortgages, subject to conditions laid down by the Central Bank of Ireland. I know of one credit union that is currently considering writing eight home loans under a scheme with a local authority.

There is no bar on credit unions writing mortgages. The regulator insists that not more than 10 per cent of a credit union’s total book can be for loans of 10 years or more in duration, although this can be extended to 15 per cent in some cases.

So credit unions can lend in the form of mortgages once it falls within the maturity limits set down by the Central Bank.

In November, the regulator began a consultation process on new regulations for the sector.

These make provision for house loans “secured by property for the purpose of enabling the member to: a. have a house constructed on the property as their principal residence; b. improve or renovate a house on the property that is already used as their principal residence; c. buy a house that is already constructed on the property for use as their principal residence; or d. refinance a loan previously provided for one of the purposes specified earlier.”

Under the draft regulations, credit unions must hold the first legal charge secured on the property for any house loans made following commencement of the new rules. The consultation period runs until February 27th.

Some time ago, the ILCU set up a working party to consider the matter and engaged Margaret Sweeney, former chief executive of the now defunct PostBank in Ireland, to produce a report.

Her findings will be considered by the board of the ILCU at a meeting on Saturday.

Twin models

It seems that two models are under consideration. One involves a central fund, managed by the ILCU or an offshoot of the league. The other involves some form of central administration to assist the individual credit unions in making credit-risk assessments, due diligence and such matters.

Neither proposition would be straightforward for a couple of reasons.

The ILCU is a representative body, not a regulated entity so it can’t do any lending itself.

Seeking authorisation won’t be easy.

The Central Bank is determined that another property bubble won’t blow up and any group wishing to enter the lending market here will be required to jump through several hoops.

Second, the ILCU’s members don’t always pull in the same direction, to put it mildly.

A couple of years ago, the Central Bank established a pilot scheme to bring together all lenders to deal with secured and unsecured debt for people in substantial arrears with their personal debts.

After lengthy negotiations, about 20 credit unions agreed to take part while the rest told the regulator to take a hike. The pilot fizzled out.

If they can’t agree to co-operate on a well-meaning project run by the regulator, then what hope is there of credit unions acting in unison when it comes to offering mortgages?

Little consensus

This lack of consensus was one of the reasons why the

Credit Union Development Association

was formed in 2003, in “recognition of the real need for positive credit union leadership and development and as a response to a more competitive and increasingly complex business environment”.

The association has 10 member credit unions with a combined asset base of more than €1.5 billion, and about 250,000 members.

All of that ignores the obvious shortcomings of the credit union movement, which began life here in 1958 when schoolteacher Nora Herlihy and others established the first one in Donore Avenue in Dublin.

Volunteers have been the cornerstone of credit unions over the past 57 years, which has been both a strength and a weakness for the movement.

This personal touch and lack of red tape meant many people could access affordable credit to purchase a car or holiday, or carry out some renovations at home.

Credit risk

The downside is that the movement lacked a certain professionalism in managing credit risk and a lot of bad lending decisions were made in the boom years.

According to Ed Farrell, the ILCU's acting chief executive, its 400 members in the Republic have some €4 billion ready to lend to their members. This is largely because just more than half of them are subject to some form of lending restriction by the Central Bank.

Given this situation, it seems implausible that the regulator would allow large-exposure mortgage lending by credit unions any time soon. And rightly so.