Credit unions have nothing to fear from debt scheme

On Monday, the Irish League of Credit Unions urged its 383 affiliates to boycott a pilot scheme by the Central Bank of Ireland designed to create a framework of solutions for those in arrears with personal borrowings from multiple lenders.

“A major flaw with this framework from the outset has been the absence of provision for mortgage write-off or write-down, which is an essential element of any plan to give meaningful relief to those in unsustainable debt situations,” the ILCU said.

The ILCU’s main beef is that there is no explicit mention in the framework document of the banks writing down or writing off some of their mortgage debts.

This is true but not wholly surprising. Imagine the reaction from customers if banks announced that they were prepared to write down or write off mortgage debts. They would be deluged by people insisting they don’t have the means to repay their home loans in full.

Write-off
The banks will never publicly admit to this but mortgage writedown/write-off will happen – for some people. There are simply too many mortgages in arrears (94,488 by 90 days or more at the end of December 2012) and it's just not realistic to expect that all of this debt will be repaid.

Home loan haircuts are implied in the Central Bank’s framework document in the final two solutions for customers. These involve “significant mortgage restructure options including split mortgage, negative equity trade down and other solutions” and, in worst-case scenarios, “PIA [personal insolvency], bankruptcy or repossession”.

It’s code for writedowns and write-offs but this language wasn’t enough to get the ILCU over the line.

It wasn’t an unexpected decision, at least not to the regulator, which decided last Friday to write to each of the credit unions individually in an effort to persuade them about the merits of the pilot.

It is planning a series of meetings around the country this month and a summit in its Dame Street headquarters of the 20 biggest credit unions to try and bypass the ILCU’s decision.

To recap, this is targeted at those who find themselves in arrears with their borrowings but who don’t technically qualify for the new personal insolvency arrangements or bankruptcy.

It will begin with a sample of 750 borrowers , start in June and run for three months.

It’s a voluntary scheme for those who have borrowings with multiple lenders. For example, a mortgage with one bank, a credit card with another, a car loan with a specialist lender, and a credit union loan.

Unless the information is volunteered by the borrower, the lenders are often in the dark about the amounts due to others and how repayments are being prioritised by individuals.

Under this framework, full disclosure of finances will be required of borrowers and they won’t be able to borrow additional credit for at least three years.

The prize for lenders is that the vast majority of people will have their loans restructured in a way that gives them the best chance to repay their debts while avoiding the pain and costs of insolvency or bankruptcy.

The banks account for about €10 billion of the €15 billion in unsecured personal lending across the country with the credit unions holding the balance.

Unsecured lenders
Unsecured lenders face being wiped out in insolvency or bankruptcy scenarios.

The Credit Union Development Association, which represents 12 credit unions who have about 250,000 members between them, is supporting the pilot.

The Credit Union Managers Association, an umbrella body for about 275 credit union managers, has so far made no comment but it participated in the talks and is thought to support the trial.

Dealing with our indebtedness is a key plank of our recovery. Preserving the capital of the banks and credit unions is also key to taxpayers who don’t want to have to fund any more bailouts.

The ILCU is a powerful lobby, representing 383 of the country’s 396 credit unions. Its views are strongly held and we can assume that the board isn’t acting in isolation from its affiliates.

Yet it’s hard to understand why it wasn’t willing to at least give the pilot scheme a crack. Nothing ventured, nothing gained and all that.