Credit unions could be allowed to push up the cost of loans

The Minister for Finance Paschal Donohoe is set to press ahead with plans to allow credit unions to hike up the cost of the loans they offer their customers, in spite of opposition from some Government ministers.

Credit unions are currently limited to charging customers an interest rate of 1 per cent a month on their personal loan, thus ensuring access to loans at a reasonable rate for customers of credit unions.

However, the Credit Union Advisory Committee (CUAC) has recommended to Government that this should be increased to 2 per cent a month, amid fears that retaining the ceiling at such a low limit reduces competition and could discriminate against high-risk borrowers.

As reported by The Irish Times, Mr Donohoe brought the proposal to allow credit unions increase their maximum interest rate limit to Cabinet last week, where some ministers expressed concern.

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Ministers concerned over plan to expand lending by credit unions

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Minister for Social Protection Regina Doherty and Minister for Business Heather Humphreys were said to be anxious about the move, as was Finian McGrath, the Minister of State with responsibility for disability issues. Sources suggested there was concern about changes to the traditional ethos of credit unions.

However, Mr Donohoe brought the memo on credit unions to his ministerial colleagues for information purposes only. One well placed sourced said on Monday that he does not need their assent to prepare the required legislative change, adding that Mr Donohoe was going ahead with the move despite the concerns of some of his colleagues.

In a statement, Mr Donohoe said he was committed to amending legislation that would allow an increase in the interest rate cap that applies to the sector and he has asked officials in the department to begin preparations to make the amendments required to facilitate this increase.

Mr Donohoe said that if the proposals were realised, the sector would “materially expand the services being provided to credit union members”.

“The Government recognises the important role played by credit unions as co-operative, not-for-profit financial services providers and as such I am strongly supportive of a strengthened and growing Credit Union movement. I would encourage credit unions to continue to develop their business models, while looking to further provide for both their members and their common bonds, and further fulfil their important role in society,” he said.

Raising the ceiling would require legislative change to Section 38 1(a) of the Credit Union Act, and would allow for the maximum rate to be changed going forward by statutory instrument.

The announcement came following the publication of the final report of the department’s implementation group, which was formed in 2016 to progress recommendations made by CUAC.

Lending limits

The report also sets out some short-term priorities for reviewing credit union's lending limits and concentration limits. This is something the Central Bank of Ireland is currently considering, having launched a public consultation on the topic some months ago.

Pending the outcome of this review, CUAC proposed that credit unions should look to continue to increase their loan book, particularly in the five to 10 year category, “which would expand both the maturity of the loan book and increase capacity for >10 year lending”.

It also wants the regulator to explain to credit unions why they might be turned down for increased limits. Currently, 20 credit unions have approval for increased lending limits, with a further six applications in progress. It also wants credit unions to build on initiatives to date, such as the Home Loans CUSO shared service for mortgage lending processing.

Credit unions also want consideration to be given to changing the current common bond arrangements, in particular removing the anomaly which prohibits credit unions from introducing business to each other but allows them to introduce business to other financial institutions.

Kevin Johnson, chief executive of the Credit Union Development Association, said he hoped the registrar of credit unions would "now embrace the proposals contained in the report and, in particular, will implement the proposals that will see those credit unions with the skills and financial strength needed, permitted to provide more credit".

Patrick Casey, the Registrar of Credit Unions at the Central Bank welcomed CUAC’s proposals.

“In delivering on our strategic priorities during 2018, significant progress has already been made by the Central Bank in key areas such as the review of the credit union lending framework, enhanced communications and engagement, and in applying a proportionate approach to supervision and the development of new regulations.

“We remain committed to working with credit unions and sector stakeholders to ensure a responsive regulatory framework which facilitates prudent development of the sector.”

The profile of credit unions has changed dramatically in recent years, against a background of mergers and closures. The report shows that there 264 active credit unions as of March 2018, down from 343 in September 2015.

At the same time, there has been sizeable growth in the number of larger credit unions, with those with more than €100 million in assets growing from 37 in 2015 to 53 by March 2018, controlling 55 per cent of sector assets, up from 41 per cent in 2015.

Assets have grown from € 14.5 billion in March 2015 to € 17.2 billion at March 31st 2018, an increase of 19 per cent, while both loans and savings have advanced by 15 per cent.