1. (1)

   This chapter seeks to protect the interests of credit unions' members in respect of loans to members under section 11 of the Credit Unions Act 1979 or article 28 of the Credit Unions (Northern Ireland) Order 19852. Principle 4 requires credit unions to maintain adequate financial resources and CREDS 5 sets out the FSA's detailed capital adequacy requirements in respect of credit unions.

2. (2)

   This chapter is not relevant to loans between credit unions, except as indicated in CREDS 3.2.6 G (4).

The rules and guidance in this chapter are in addition to the provisions of (in relation to Great Britain credit unions)2section 11 of the Credit Unions Act 1979 and (in relation to Northern Ireland credit unions) article 28 of the Credit Unions (Northern Ireland) Order 19852 in relation to loans made by credit unions. Under these provisions

1. (1)

   a Great Britain credit union may make a loan only to:2

   2
   1. (a)

      a member of the credit union who is an individual; and

   2. (b)

      a corporate member of the credit union, if the credit union's rules provide that it may make loans to corporate members and making the loan would not result in the aggregate of the outstanding balances on loans made by the credit union to corporate members exceeding the percentage of the aggregate of the outstanding balances on all loans made by the credit union specified by or under section 11 of the Credit Unions Act 1979;

   3. (c)

      other credit unions;

2. (1A)

   a Northern Ireland credit union may make a loan only to:2

   1. (a)

      a member of the credit union who is an individual; and2

   2. (b)

      other credit unions;2

3. (2)

   a credit union may not make a loan to a member of the credit union holding only deferred shares.

"Corporate member" has the same meaning as in section 5A of the Credit Unions Act 1979.

A principal purpose of credit unions' business is the accumulation of members' savings to provide a fund out of which loans are provided for the benefit of the members. Credit unions may often in practice have less scope to minimise credit risk through the exercise of discretion than some other lenders. It is therefore important that a credit union has a carefully considered and effective lending policy statement.

CREDS 2.2.6 R requires a credit union to maintain a manual of its policies and procedures. This should include the policy and procedure for making loans.

The credit union's committee of management should review and approve its lending policy at least once a year, and more frequently if necessary (for example if there is an escalating arrears problem), especially in the light of significant changes in business.

The lending policy should consider the conditions for and amounts of loans to members, individual mandates, and the handling of loan applications.

1. (1)

   To prevent conflicts of interest, a credit union should have clear arrangements for dealing with loans to the persons specified in CREDS 7.2.7 R.

2. (2)

   In relation to staff, the prohibition in CREDS 7.2.7 R applies only to those who are officers or approved persons.

3. (3)

   "Connected" in CREDS 7.2.7 R includes any close business or personal relationship.

A credit union should have a documented arrears management policy, setting out the procedures and process for dealing with borrowers who fall into arrears. This should be reviewed regularly and promptly in the light of experience.

A credit union should have a clear, robust and effective approach to handling arrears and be able to satisfy the FSA on a continuing basis that it has adequate management and control systems in place to monitor arrears.

A credit union should ensure that loan assets are valued correctly in their accounts. A provisioning policy relating to problem loans and arrears cases should be clearly defined and documented covering the circumstances in which provisions are to be made.

1. (1)

   A credit union may make a loan to a member for a business purpose. However, this does not mean that a credit union may make a loan to a member who merely intends to transmit that loan to another body that will actually carry out the purpose.

2. (2)

   A credit union should not make loans to members who are acting together to achieve an aggregate loan that exceeds the limits in CREDS 7.3.

The effect of CREDS 5.3.10 R (1) is to prevent a version 1 credit union from lending more than £7,500 in excess of the attached shares held by that member unless it has a capital-to-total assets ratio of at least 5%.

The lending limit requirements set out above are maxima. A credit union should have adequate systems for recording and controlling all potential exposures. The capital requirements for version 1 credit unions and version 2 credit unions in respect of lending are set out in CREDS 5.3 and CREDS 5.4, including the FSA's requirements in respect of calculating risk-adjusted capital.

For the purposes of large exposures the maximum net liability of a credit union with assets of £500,000 and 8% capital would be £10,000, subject to CREDS 7.4.2 R and CREDS 7.3.6 R.

For a credit union with assets of £1million and 10% capital the maximum net liability would be £25,000.

Excessive exposure (large loans to an individual borrower and in aggregate) by a credit union can create a concentration of risk on the balance sheet and increase a credit union's vulnerability to bad debt. This can lead to a strain on capital and solvency. While this risk cannot be eliminated, it can be contained by limits and controlling the extent to which credit unions commit themselves to large exposures. Therefore the large exposure limits set the maximum sum that may be loaned to any one member as a percentage of reserves to prevent concentration. All credit unions should set and document their own large exposure policy limits to avoid concentration of risk.

It is the committee of management's responsibility to monitor large exposures. The large exposures limits policy should be reviewed on an annual basis (or more frequently where required).

In addition to the requirements of CREDS 7.5.2 R, a credit union should consider making the following specific provisions in its accounts for bad and doubtful debts:

1. (1)

   60% of the net liability to the credit union of borrowers where the amount is more than six months in arrears; and

2. (2)

   80% of the net liability to the credit union of borrowers where the amount is more than nine months in arrears.

In order to comply with the requirements of CREDS 7.5.1 R to CREDS 7.5.4 E a credit union should review its provisioning requirements frequently. The FSA recommends that this is done at least quarterly.

A credit union should make it its business to know its customers and, in conjunction with its auditor, make a judgment on the degree of risk of non-payment attached to loans that are in arrears. Provisioning should reflect that judgment.

Where a delinquent loan is rescheduled and the arrears capitalised, the loan should be regarded as remaining impaired until there is sufficient evidence that it is performing on the rescheduled terms. In the meantime, any provision made in relation to that loan should be maintained, not released.

1. (1)

   CREDS 7.5.2 R requires a credit union to maintain minimum levels of specific provision. However, a credit union that only maintains the minimum levels does not necessarily comply with CREDS 7.5.1 R. This will depend on the assessment and judgment referred to in CREDS 7.5.6 G.

2. (2)
   1. (a)

      Failure to maintain a general provision of the level indicated in CREDS 7.5.4 E creates a presumption that the credit union is not complying with CREDS 7.5.1 R, though that presumption can be rebutted by the credit union: for example, it may be able to demonstrate that the occurrence of impaired loans that are either below the threshold for specific provision (that is, they are less than three months in arrears) or are unidentified at the time, is very low.

   2. (b)

      If, on the other hand, a credit union does maintain the indicative level in CREDS 7.5.4 E, that does not necessarily mean that it complies with CREDS 7.5.1 R.

If a credit union needs to make higher provisions, beyond the levels in CREDS 7.5.2 R and CREDS 7.5.4 E, in order to meet CREDS 7.5.1 R, then it should do so.