Irish Regulator targets lending practices and compliance culture

The news that the Irish regulator has moved to issue regulatory guidelines on credit union lending comes as no surprise. What's really surprising is the content of its regulatory guidelines which are indicative of the scale and scope of problems inherent within the way things are done by credit unions. This content and the Regulators recent published speach on credit union issues demonstrates the dearth of credit union compliance and effective governance at this time.

http://www.ifsra.ie/frame_main.asp?pg=%2Findustry%2Fin%5Fcar%5Fintr%2Easp&nv=%2Findustry%2Fin%5Fnav%2Easp

Taking these together they make worrying reading indeed particularly as in reponse credit unions will have to invest heavily in effecting the changes necessary of they are to come up to speed with modern lending and credit risk practices required of regulated financial firms.

For example the guidelines address repayment capacity lending which is something one might have expected to be the norm for credit unions. It is not. Also required is accessing credit rating or credit worthiness information via a credit bureau. Yet only about 20 of 434 credit unions are currently members of a credit bureau. Commercial or business lending requires specialist skills that almost all credit unions do not have and if they do they may have but one person capable of assessing the risks inherent within business lending.

The guidelines also address the thorny issue of bad debts amongst other things and critically requires a credt unions IT systems to be fit for use when it comes to reporting on loan delinquencies which many of them are not. Similarly manipluation of provisions , another hot topic is addressed.

"The substantial inflow of liquidity to credit unions together with certain ill conceived strategies within the movement have increased the pressure for credit unions to move into the mainstream lending market, in competition with the banks. This has sometimes been done without due regard to the borrower’s ability to repay, in the absence of any credible credit check or without the taking of viable security. Credit unions should now critically re-examine their credit policies in the light of the changing external environment. " RCU Speach to National Supervisors Forum 2007

Whether credit union boards and their managers realise it, responding to the guidelines represents a significant and large scale change to the way in which business is done. Such change will require careful planned execution if credit unions are to adopt the guidelines and achieve compliance status. For the vast majority, if not all credit unions, this will require skills they do not currently possess. It is not a simple matter of addressing lending policy but is a roadmap for core business process change that will take time and resources to accomplish. Unfortunatley change is not something that credit unions do well ....