Credit Unions enter mortgage market with up to €400m; new lending expected to boost dividends for savers
The Solution Centre, an innovation hub owned by credit unions which supplies business supports, including product development to the Credit Union sector, has announced that is has paved the way for credit unions to enter the mortgage market. Having built an end-to-end mortgage support framework, including assessment and standardised administration processes, it’s thought there will be significant take-up amongst members of participating Credit Unions for its new offering. The new services is initially being made available to credit unions representing almost 1m credit union members.
Commenting on the launch, Kevin Johnson, CEO of the Credit Union representative body CUDA who manage the Solution Centre, said, “Given the demand, we have spent the last 10 months developing this mortgage framework, and see it as a significant milestone for the Credit Union movement. Through the Solution Centre we have been able to help many credit unions make the move into the mortgage market, and are moving ever closer to our goal of making Irish Credit Unions full service outlets for consumers’ financial needs. Unlike banks, Credit Unions aren’t required to deliver profits for shareholders so anything we offer is priced to meet the needs and demands of members, and credit unions are ideally placed to fill the gap in the market left by Building Societies.
While each Credit Union will make the final underwriting decision on a case by case basis, this scheme is unique in that they will have ongoing access to specialist mortgage and legal expertise to support their own internal resources.
In addition, increased long-term lending will improve the income levels and financial stability of participating credit unions, and may enable them to offer stronger dividend rates and even special offers for savers.”
Good for mortgage borrowers
According to the Solution Centre, Credit Unions are massively ‘under lent’ with hundreds of millions of Euro currently available to borrowers. The Centre believes that delivering greater competition and choice for consumers will put greater pressure on the existing lenders, and could finally force real competition into the market.
Credit Unions are subject to generic lending restrictions through regulation, which dictates that only 10% of their loan book can be for terms greater than 10 years, with the possibility of that being extended to 15%. Heretofore, there were very few credit unions with the capability to provide such loans which is why only 2% of the available €5bn has been lent out on terms over 10 years. This means that Credit Unions retain a balance of 8% or €400m to lend out, and that this could be a lot higher, in light of the significant improvement in Board and management capabilities required under 2012 Credit Union Act. It is now essential that these restrictive limits are increased in order to allow more people get their home loan from their credit union.
Participating credit unions are expected to lend for number of specific purposes;
- Tenant Purchase Schemes and Affordable Housing
Kevin explained, “There are a number of affordable housing schemes aimed to help lower-income households buy their own homes, and/or buy an existing previously rented council house. Others offer eligible first-time buyers the chance to buy newly constructed homes and apartments at prices significantly less than their market value. Credit Unions are happy to support these purchases, particularly as the loan-to-value ratios are typically relatively low and the existing tenants invariably have a proven payment record.‘
- Trading-up
The Solutions Centre say that families looking to move for more space or for a variety of other reasons will also be catered for.
- First Time Buyer
According to Kevin, “The recent changes to the Central Bank’s mortgage rules and the Government’s ‘help to buy’ scheme will boost the number of First Time Buyers looking to buy, and should encourage the Developers to build more new homes. Credit Unions are ready to play their part in helping people to own their own homes.”
Challenging Lending Limits
In accordance with existing regulatory rules, participating Credit Unions will initially utilise the existing 10 year lending limits surplus which should provide sufficient funds up until the end of 2017 at which time the Solution Centre expects the lending limits to be reviewed.
CUDA is currently 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.
Kevin advised, “We believe that Credit Unions shouldn’t be unreasonably prevented from delivering competition to drive down mortgage rates. The current credit union limits were put in place many years ago and are arbitrarily capped whereby they only allow Credit Unions to lend 10% of their loans on terms of 10 years or more. This is a measure which was introduced many years ago and is now out of date. The Central Bank has indicated its desire to see more competition in the mortgage market, as does the Programme for Government and we believe that changing these rules is the best way to achieve that goal.
Having put the systems and controls in place for credit unions to prudently enter this market, we are working with the Central Bank to remove this rule as there are plenty of other prudential regulatory controls in place to ensure the solvency of those credit unions that wish to increase their long-term lending.
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 for loyal savers. ”
Note to the Editor
The Solution Centre
A group of the country’s strongest credit unions established the Solutions Centre, a product developing house facilitated by CUDA, which supplies product development and business supports to the Credit Union sector, and has embarked on an ambitious business transformation programme for the sector, of which mortgages is just one milestone. The Solution Centre is inspired by the Solution Center in Canada, a country where credit unions have long since thrived by offering very competitive mortgages, consumer loans, business finance, current accounts and investment options, driving down the cost of finance and expanding other financial offerings for Canadians. The two organisations have a formal working arrangement in place.
The Solution Centre has previously, and very successfully, rolled out its first ‘solution’ during 2016 i.e. a digital marketing package that enables credit unions to engage and lend to members through Facebook. Many participating Credit Unions have already reported a spike in new lending with some up by 15%.
CUDA
CUDA, the Credit Union Development Association, was legally incorporated in 2003. In its early days, it acted as the representative voice for owner member Credit Unions, with legislators and regulators. The organisation has since evolved and in addition to providing a ‘voice’, has become increasingly engaged in providing support facilities in the areas of regulatory compliance, risk management, shared services and competency development.
CUDA is a Credit Union owned network that enables member Credit Unions to engage in beneficial activities which would not have proved possible to do as single stand-alone entities.
It manages the diverse interests of members to the mutual benefit of the network. In acting as a catalyst for the growth and development of Credit Unions, CUDA now makes many of its support services available to all Credit Unions.
Further note on Mortgages
The Minister for Finance’s Credit Union Advisory Committee [CUAC] concluded in June ’16 that we now have a strengthened framework in operation as complete and extensive as in the most sophisticated of credit union movements. Credit unions have now in place new governance arrangements as well as risk management and systems and controls arrangements which are consistent and reflective of a modern regulatory framework. Additionally, consideration of the level of provisions, liquidity and reserve ratios highlight that most credit unions now appear well positioned to withstand shocks to their balance sheet. In May ’15 the then Central Bank Governor, commenting on mortgage standard variable interest rates [SVR] stated “the SVR borrower’s main protection is competition: the fact that, by setting its SVR rate too high, any bank stands to lose business (whether new business or switchers) to competitors. Whereas this protection was effective pre-crisis, the level of competition currently is too low. Ensuring that official policy does not inadvertently deter competition and entry of banks to the market is thus vital for the long-term health of the economy.” Who better than credit unions, with their demonstrated financial and management capabilities, to provide this competition for a range of financial services, and provide the people and communities across Ireland with a real alternative, and one that research shows they want.