Terms of Loans 1997 Legislation
The 1997 legislation capped loans at the greater of £30,000 or 1.5% of the total assets of the credit union. The limits may be adjusted by ministerial order.Loans may be made to members only. They may be secured or unsecured. Security may be by way of a guarantee, pledge of shares, deposits, insurance policy, or real property security.
Terms and conditions on which loans are provided are set out in the rules. They are theoretically made for provident and productive purposes in accordance with the original principle of the credit union. This concept has become somewhat antiquated.
A loan may be made to a person under 18 only with an indemnity from a parent or guardian.
Loans may not be granted if liability to the credit union as a borrower, guarantor, etc., exceeds the above cap.
A credit union shall not make a loan to a member—
- for a period exceeding five years if, were the loan to be made, the total amount outstanding in respect of all loans made by the credit union for periods exceeding five years would then exceed 20 per cent. of the total amount outstanding at that time in respect of all loans made by the credit union; or
- for a period exceeding ten years if, were the loan to be made, the total amount outstanding in respect of all loans made by the credit union for periods exceeding ten years would then exceed ten per cent. of the total amount outstanding at that time in respect of all loans made by the credit union;
The term of the loan is measured from the date of the first installment.
Loans to persons who cease to qualify as members by reason of not being within the common bond are not to exceed certain limits.
Limited loans for enterprise on a community or local basis are sanctioned by the 1997 legislation. A resolution of the majority of members is required to establish a special fund for lending for social, cultural and charitable purposes including community development.
Loan applications must be in writing, setting out the purpose and security proposed. There are provisions applicable to the interest rate set out below.
Loans must be considered by a designated officer or a credit committee. The union will generally have a policy on loans.
There is a right of appeal against the refusal of credit under the 1997 Act to a supervisory committee. Supervisory committee members must not be members of the credit committee.
Interest on a loan is not to exceed 1% per month on the amount outstanding on a declining balance basis inclusive of all charges on the loans. Loans of the same class are to have the same interest rate at the same period. The interest rates applicable to classes of loans granted at particular times are to be the same for all those classes.
Interest charged above the statutory rate is irrecoverable and if charged, may be recovered by a member as a debt due. It is an offence to charge higher than the permitted amount of interest.
A promissory note may be signed on the issue of the loan.
Debts due by members are recoverable as simple contract debts in the appropriate court. The general provisions for recovery of liquidated sums apply. The relevant court depends on the amount claimed.
A credit union will usually have a lien and may set off on shares and deposits. It may generally set off them against loans due in the event of a default.
Credit unions may provide insurance protection. Other types of protection insurance may be offered by the society. Loan protection insurance covers loans due in the event of death so that shares and deposits are kept intact for dependents and successors.
Life assurance may be provided on behalf of members with third-party insurers. Health and other members’ insurances may be arranged at favorable rates with insurers.
2010 Act Changes
Credit unions may provide loans to members at rates of interest and periods of repayment as they determine reasonable. The same rate of interest must be applied to loans within a class.
The loan may be made for a proper and productive purpose with security on terms provided by the credit union rules. Loans may be made to persons minors with on the basis of an indemnity provided by parents or guardians or third parties.
There is a limitation on the type of loan that may be made to a single member’s liquidity requirements arising in relation to certain types of loans. The 2010 legislation allows the terms of loans to be extended in the context of forbearance and rescheduling consequent upon the economic crisis.
After 2010, a credit union may permit 30 percent of its loans to be used for loans to members which last a period exceeding 5 years and a further 10 percent for periods exceeding 10 years. A loan is not permitted if the member’s liability will exceed €39,000 or 1.5 percent of the total assets, whichever is greater.
Loan applications must be in writing and state the purpose and security. A guarantee by a member or a pledger of shares may be accepted as security.
The rules of the credit union determine the approval mechanism. It may require approval by the Board of Directors, credit committee or credit officer. Where a loan is rejected, there is a right of appeal to an appellate body which should consist of officers independent of the original decision.
2012 Act Changes
A new provision allows credit unions to extend loans to members for purposes they consider appropriate, with security. The primary consideration is the borrower’s/member’s ability to repay.
Credit unions, in managing and controlling lending, must ensure that lending does not expose members’ savings to undue risks, considering the nature, scale, complexity, and risk profile of the credit union.
Procedural provisions are established regarding loan applications. Applications must be in writing and state the purpose for which they are sought. An officer may not guarantee a loan unless it is for the officer’s spouse, civil partner, child, or parents.
The credit union may determine, subject to its rules, the amount of a loan that may be granted to non-qualifying members.
The Central Bank is empowered to make regulations regarding credit union lending, including
- classes of lending a credit union may engage in,
- limits on loan amounts or classes of loans,
- limits on large exposures,
- concentration limits for any member or class of members, or
- other appropriate limits as deemed fit by the Central Bank.
The Central Bank is also granted authority to make regulations concerning lending practices, reporting loans to the Central Bank, and enhancing a credit union’s capital.
Credit unions must take steps to ensure compliance with the obligations and requirements imposed by regulations. A guarantee or pledge of shares as security may be accepted in addition to other forms of security.
- Central Bank issues regulations to allow credit unions undertake increased longer term lending, including home mortgage and business lending
- Further additional capacity to be extended to larger, stronger credit unions who meet certain requirements
- Changes will take effect from January 2020
In October 2018 the Central Bank launched CP125 – Consultation on Potential Changes to the Lending Framework for Credit Unions to seek feedback on proposed changes to the lending framework for credit unions. The Central Bank is publishing the responses received to that consultation alongside a Feedback Statement.
Following a review and public consultation, the Central Bank issues new lending measures for credit unions that will come into effect in January 2020. Changes will include the 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. Maturity limits will be replaced by new concentration limits, on a tiered basis, for home mortgage and business loans, expressed as a percentage of total assets.
These changes provide those credit unions with the financial strength, the competence and the capability, the flexibility to undertake increased longer term lending, including home mortgage and business lending.
There are three tiers under the changes as follows:
- A combined concentration limit for house and business loans of 7.5 per cent of total assets for all credit unions.
- A 10 per cent limit, conditional on a credit union satisfying asset size (at least €50 million) and regulatory reserves qualifying criteria and notifying the Central Bank in advance.
- A 15 per cent limit for credit unions with total assets of at least €100 million, subject to Central Bank approval.