Consultation on amendments to the lending framework for credit unions

• Proposals support diversification in credit union loan portfolios, while effectively managing duration and concentration risk.
• Proposed introduction of new loan category concentration limits to replace existing lending maturity limits.
• For stronger credit unions who demonstrate financial resilience and core prudential foundations, increased home mortgage and commercial lending capacity is proposed.

The Central Bank has published CP125 - Consultation on Potential Changes to the Lending Framework for Credit Unions along with a Regulatory Impact Analysis. The consultation seeks feedback from credit unions and other interested parties. The proposals emerged from a review of the framework undertaken during 2018.

The proposals are grounded in the Central Bank’s statutory mandate, which is to ensure the protection by each credit union of the funds of its members and maintenance of the financial stability and well-being of credit unions generally. Where credit unions wish to undertake increased house and commercial lending, it is important that they understand the risks involved.

The new proposals have been informed by engagement with industry stakeholders and an examination of the current regulatory framework and recent lending trends. As part of this review, we issued a questionnaire to all credit unions in April 2018 to gather information on current and forecasted lending and savings activity. The review has also taken into account broader balance sheet impacts- these include the changing maturity profile of credit union lending and investments, and related funding considerations.

The proposed amendments to the credit union lending framework include:

• Removal of the existing lending maturity limits which cap the percentage of credit union lending which may be outstanding for periods of greater than 5 and 10 years;
• Introduction of concentration limits, on a tiered basis, for home mortgage and commercial loans expressed as a percentage of total assets; and
• Clarification of the scope and parameters for commercial lending, to reflect credit union focus on local owner managed business lending.

The consultation is open until 9 January 2019.

In announcing the new proposals, Registrar of Credit Unions Patrick Casey, said:

“Today’s proposals follow a comprehensive review of the lending framework for credit unions. This forms part of our commitment to ensuring a responsive regulatory framework. The proposals support diversification in credit union loan portfolios. Revisions would allow those credit unions with sufficient financial strength, competence and capability, to undertake additional home mortgage and commercial lending. For long term lending, we emphasise the need for the boards of credit unions to ensure that they understand the risks involved, including financial, regulatory and consumer impacts. They must also understand how long term lending fits within their credit union’s lending strategy, risk framework and capabilities.

We welcome submissions from all interested parties and, in particular, we are keen to receive views from credit unions and other industry stakeholders.”

Notes to the Editor:

• The Credit Union Act 1997 (Regulatory Requirements) Regulations 2016 (as amended) contain the current lending regulations for credit unions.
• The Central Bank has identified robust governance, risk management and operational frameworks as core prudential foundations for credit unions.
• In December 2017, the Central Bank published ‘Longer Term Lending-Guidance for Credit Unions (PDF 807.66KB)’. This guidance highlights the main risks credit union boards and management should consider in understanding and managing Long Term Lending, and in particular mortgages, given that this type of lending can be more complex than traditional credit union unsecured lending.