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CRED 10.1 Application and purpose

CRED 10.1.1 R

This chapter applies to all credit unions in relation to their lending to members under section 11 of the Credit Unions Act 1979.1

CRED 10.1.2 G
  1. (1)

    This chapter seeks to protect the interests of credit unions' members in respect of loans to members. Principle 4 requires credit unions to maintain adequate financial resources and Chapter 8 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 CRED 7.2.6 G(4). 1

CRED 10.2 General requirements concerning lending policy

CRED 10.2.1 R

A credit union must establish, maintain, and implement an up-to-date lending policy statement approved by the committee of management that is prudent and appropriate to the scale and nature of its business, having regard to the limits outlined in CRED 10.3 - CRED 10.4.

CRED 10.2.2 R

A version 2 credit union must provide the FSA with a copy of its lending policy statement as soon as is reasonably practicable after approval by the committee of management.

CRED 10.2.3 G

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.

CRED 10.2.4 G

CRED 4.3.7 R requires a credit union to maintain a manual of its policies and procedures. This should include the policy and procedure for making loans.

CRED 10.2.5 G

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.

CRED 10.2.6 G

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

CRED 10.2.6A R
  1. (1)

    1A credit union must not make a loan to:

    1. (a)

      one of its officers or approved persons on terms more favourable than those available to other members of the credit union unless:2

      1. (i)

        that person is a paid employee (other than a director) of the credit union; and2

      2. (ii)

        the registered rules of the credit union provide explicitly for the making of loans to paid employees on such terms;2

    2. (b)

      a relative of, or any person otherwise connected with, an officer, approved person or paid employee of the credit union on terms more favourable than those available to other members of the credit union.2

  2. (2)

    "Relative" has the same meaning as in section 31 of the Credit Unions Act 1979.

CRED 10.2.7 G
  1. (1)

    To prevent conflicts of interest, a credit union should have clear arrangements for dealing with loans to the persons specified in CRED 10.2.6A R.1

  2. (2)

    In relation to staff, the prohibition in CRED 10.2.6A R applies only to those who are officers or approved persons.1

  3. (3)

    "Connected" in CRED 10.2.6A R includes any close business or personal relationship.1

CRED 10.2.8 G

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.

CRED 10.2.9 G

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.

CRED 10.2.10 G

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.

CRED 10.2.11 G
  1. (1)

    1A credit union may only make loans to:

    1. (a)

      its members who are natural persons qualifying in accordance with section 1(2) of the Credit Unions Act 1979 (see CRED 13 Annex 2 G Table 1G 1);

    2. (b)

      other credit unions.

  2. (2)

    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. A credit union should not make loans to members who are acting together to achieve an aggregate loan that exceeds the limits in CRED 10.3.

CRED 10.3 Lending limits

CRED 10.3.1 R

Subject to CRED 10.3.6 R, a version 1 credit union must not lend for a period of more than five2 years where unsecured and ten2 years where secured.1

2 2
CRED 10.3.2 R

A version 1 credit union must not lend more than £15,0002 in excess of the borrowing member's shareholding, but this rule is subject to the additional requirement in CRED 8.3.12 R (1).2

2 2
CRED 10.3.2A G

2The effect of CRED 8.3.12 R (1) is to prevent a version 1 credit union from lending more than £7,500 in excess of the borrowing member's shareholding unless it has a capital to total assets ratio of at least 5%.

CRED 10.3.3 R

Subject to CRED 10.3.6 R, a version 2 credit union must not lend for a period of more than ten2 years where unsecured and 252 years where secured.1

2 2
CRED 10.3.3A G

2A credit union should not attempt to evade the limits in CRED 10.3.1 R and CRED 10.3.3 R by making loans in the expectation that they will not be fully repaid by the end of the period, but will be automatically extended or rescheduled.

CRED 10.3.4 R

The maximum amount that a version 2 credit union may lend is £15,0002 in excess of the borrowing member's shareholding or 1.5% of total shares in the credit union in excess of the borrowing member's shareholding, whichever is the greater.

CRED 10.3.4A G

2For the purpose of calculating the maximum loan in CRED 10.3.4 R, the credit union may use the amount of total shares as shown in the most recent annual return to have been sent to the FSA under SUP 16.7.62 R or SUP 16.12.5 R3 (see CRED 14.10.7 G) if that is the latest reliable figure available.

CRED 10.3.5 G

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 CRED 8.3CRED 8.4, including the FSA's requirements in respect of calculating risk-adjusted capital.

CRED 10.3.6 R

1A credit union with permission for entering into a regulated mortgage contract must not enter into such a contract for a term of more than 25 years.

CRED 10.4 Large exposures

CRED 10.4.1 R

For the purposes of this section, a large exposure is defined as an individual net liability to the credit union which meets both of the following criteria:

  1. (1)

    it is at least £7,5001;

  2. (2)

    it is at least 10% of the value of the credit union's total capital.

CRED 10.4.2 R

An individual large exposure must not exceed 25% of the credit union's capital. In no circumstances may the aggregate total of all large exposures exceed 500% of the credit union's capital.

CRED 10.4.3 R

The aggregate total of all large exposures must not exceed 300% of capital without a credit union pre-notifying the FSA.

CRED 10.4.4 G

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 CRED 10.4.2 R and CRED 10.3.4 R.

CRED 10.4.5 G

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

CRED 10.4.6 G

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 policy should be reviewed on an annual basis (or more frequently where required).

CRED 10.5 Provisioning

CRED 10.5.1 R

A credit union must1 make adequate provision for bad and doubtful debt.

CRED 10.5.2 R
  1. (1)

    A credit union must3 make specific provision in its accounts for bad and doubtful debts of at least the amounts set out below:

    1. (a)

      35% of the net liability to the credit union of borrowers where the amount is more than three months in arrears; and

    2. (b)

      100% of the net liability to the credit union of borrowers where the amount is more than 12 months in arrears.

  2. (2)

    The net liability of a borrower is the amount of his loan and interest outstanding, less his shareholding. 1

CRED 10.5.3 E
  1. (1)

    A credit union should maintain a general provision for bad and doubtful debts of at least 2% of the net liability to the credit union of borrowers not covered by the specific provisions in CRED 10.5.2 R.1

  2. (2)

    Contravention of CRED 10.5.3 E (1) may be relied on as tending to establish contravention of CRED 10.5.1 R.

CRED 10.5.4 G

In order to comply with the requirements of CRED 10.5.1 R - CRED 10.5.3 E it follows that it will be necessary for a credit union to review its provisioning requirements frequently. The FSA recommends that this is done at least quarterly.1

CRED 10.5.5 G

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

CRED 10.5.5A G

2Where 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.

CRED 10.5.6 G
  1. (1)

    1CRED 10.5.2 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 CRED 10.5.1 R. This will depend on the assessment and judgement referred to in CRED 10.5.5 G.

  2. (2)
    1. (a)

      Failure to maintain a general provision of the level indicated in CRED 10.5.3 E creates a presumption that the credit union is not complying with CRED 10.5.1 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 CRED 10.5.3 E, that does not necessarily mean that it complies with CRED 10.5.1 R.

CRED 10.5.7 G

1If a credit union needs to make higher provisions, beyond the levels in CRED 10.5.2 R and CRED 10.5.3 E, in order to meet CRED 10.5.1 R, then it should do so.