Key Post Ask your Credit Union to set your shares against your loan balance

[Brendan Burgess]

There is very long thread on this topic and it goes off on a few tangents.

This thread is only about how to set your shares against your loan balance.

Credit Union Loan	€12,000	interest rate 9%
Credit Union Shares	€4,000	interest rate 0%
Net borrowing	€8,000	true rate: 13.5%
Interest	€1,080

If you set your shares against your loan...

	original	reduction	new
Credit Union Loan	€12,000	-€4,000	€8,000
Credit Union Shares	€4,000	-€4,000	nil
Net borrowing	€8,000	no change	€8,000
Interest	€1,080	-€360	€720

Saving: €360



This thread is not about

• withdrawing cash when you have a loan
• insurance
• any other issue

I want this thread to help people to reduce the cost of their loans to credit unions. Any posts which are off topic will be deleted. You are welcome to start off new threads on these other topics.

[Brendan Burgess]

How do I go about asking my credit union to do this?

You must apply in writing. You should leave €10 in shares to retain your membership of the credit union.

Draft letter to the Credit Union

Dear Sirs

I am really struggling to keep up the repayments on my loans/my mortgage and I am falling behind in my day to day bills. I note that I am paying y% interest on my loan while only receiving x% interest on my share account. It would be a great help to me if you could set my shares against the loan which would significantly reduce the interest charged and my repayments. This will also make it less likely that I will fall into arrears on my loan.

I hereby give consent and request that you set off all my shares and accrued interest in excess of €10 against my loan.

You are permitted to do so under Section 32 (5) of the Credit Union Act, 1997 as detailed below:

32.(5) Where a member of a credit union is indebted to the credit union and consents in writing to the credit union acting under this subsection, the credit union may, by way of set-off against the indebtedness, withdraw any of the member's shares or deposits; and such a withdrawal may be made notwithstanding anything in subsections (2) and (3).

[Brendan Burgess]

There are three main categories of reply you may get:

1) Certainly. It is in your best interests as it reduces your outgoings. We are a member focussed credit union and we will act in your best financial interest.

2) We will allow you only to set €1,300 only which will result in the following figures as it is the policy of the credit union that you must retain shares equal to 25% of the value of the loan. (They might actually claim that the Credit Union Act forbids them from reducing the shares to below 25% - it doesn't)

	original	reduction	new
Credit Union Loan	€12,000	-€1,300	€10,700
Credit Union Shares	€4,000	-€1,300	€2,700	2,700 is 25% of 10,700
Net borrowing	€8,000	nil	€8,000	true rate: 12%
Interest	€1,080	-€117	€963

3) No, it is not our policy to allow members to set their shares against their loan under any circumstances. Tough.

Or as user Sapling was simply told "This request is declined"

In some cases the Manager has the authority to approve such a set-off without reference to the board.
In some cases the board has to approve the set-off.

[Brendan Burgess]

Some credit unions base their refusal on saying that the Credit Union Act does not allow them to reduce the shares below 25% of the loan balance.

This is not correct. They are reading the Credit Union Act incorrectly.

32.—
(5) Where a member of a credit union is indebted to the credit union and consents in writing to the credit union acting under this subsection, the credit union may, by way of set-off against the indebtedness, withdraw any of the member's shares or deposits; and such a withdrawal may be made notwithstanding anything in subsections (2) and (3).

This section is very clear. A Credit Union may set off any (or all) of the member's shares or deposits against the loan outstanding.

The Credit Union is not obliged to allow such a set-off, but they should not quote the Credit Union Act as preventing them from doing so.

Section 32 (3) of the Credit Union Act does forbid a borrower from making an actual withdrawal of cash from the Credit Union if such a withdrawal would bring the shares below 25% of the loan.

Credit Union Loan	€12,000	interest rate 9%
Credit Union Shares	€4,000	interest rate 0%
Net borrowing	€8,000
Interest	€1,080

The Credit Union could actually allow this borrower to withdraw actual cash of €1,000 which would reduce the shares to €3,000 (25% of €12,000). This would increase the net indebetness of the borrower to €9,000 (€12,000 - €3,000).

This thread is not about withdrawing cash. It's about setting the shares against the loan, but the overall net loan remains the same, so the Credit Union's exposure does not increase.

[Brendan Burgess]

Why do some Credit Unions refuse to allow this? Aren't they supposed to be member owned and acting in the best interests of their members?

Slim explains the reluctance of some credit unions to do this in this post.

The ILCU have preached against this in the past as it could be seen as manipulating the figures to reduce Res. 49 provision against bad & doubtful debts. In addition, much of CU loan management depends on knowledge of the member and it is felt that reducing the members' savings would lead to reduced ties to the CU, i.e. a member with a loan of €6,000 and shares of €10(min. share holding) would be less likely to repay the loan than if he owed €12,000 and had shares of €6,000. This goes to the traditional cornerstone of CU lending, i.e knowing the member. Such a request has been very rare in our CU. There is a figure called the loan/savings ratio which gets some attention when the Regulator inspects. In the case above the ration goes from 2:1 to 600:1 which is considered very imprudent.

...
It's just that events and real world economics have changed and overtaken the legislation and practices to a large extent. Credit unions are still governed, mainly, by very conservative and sometimes old fashioned people.

Most credit unions do allow this. But some are incredibly stuck in their ways.

Tvman offers his explanation in this post

I would imagine the reason the reason credit unions are very reluctant to allow this is twofold:
1) it gives them a very large source of very stable and free funding (deposits/shares that they don't have to pay interest/dividends on)
2) it gives them significant extra interest income by increasing their true rate of interest far beyond the advertised rate. In the example above (and taking the quoted 10%, 0% rates for loans & dividends resp.) the true interest rate being paid on the loan is €1000/6000 = 16.7%.

No wonder they're reluctant to allow offset but if they did they would probably surely ease cash-flow pressure on their members (at a cost to their solvency though?)

Some will argue that the Regulator requires bigger provisions in such cases
This is not correct. The provisions are made on the net borrowings.

[Brendan Burgess]

Are there any downsides to setting my shares against my outstanding loan?
The Credit Union might not like it and so may be reluctant to give you a loan again.

My Credit Union point blank refuses to set the shares against my outstanding loan. What can I do?
Don't just accept it.

• Write to the board and ask them to change the policy.
• Lobby the individual board members directly
• Contact other members of the Credit Union and ask them to support your campaign for change
• Put down a motion at the next AGM.
• Get out the rules of the Credit Union and see can you call a SGM on the issue to change the policy.
• Write to the Credit Union Regulator and ask him to tell the CUs to change their policy

[ClubMan]

Brendan - this might also be pertinent...

my friend's CU didn't quote the CU Act but did quote the original loan agreement which included a clause pledging all shares/deposits as security against the loan. As such their line was that the shares were security. Even though the loan balance had decreased so that the shares were more than 25% of the outstanding balance they were still very reluctant to allow any offsetting (or withdrawal) of shares in excess of 25% of the outstanding loan balance. They reluctantly said that they MIGHT allow some of the excess to be withdrawn but it was still a board decision.

[Pinchy]

Brendan, as per your request

Name of Credit Union : A south county Dublin CU
Amount of loan : €3300
amount of shares : €2900
Initial response from cu: Helpful, co-operative, released shares (€) to me
What you did about it : No reason for further contact
Final outcome: Released 65% of my shares ( I requested that amount)

A friendly firm letter to the committee seemed to do the trick.

Pincy

[ClubMan]

Here's my friend's situation:

• Name of Credit Union : Civil Service CU
• Amount of loan : Original amount €11,450 - outstanding amount €10,133 (x 25% = €2,533)
• amount of shares : €2,920
• Initial response from cu: long letter quoting rule 32 of the CU Act, (local or general?) CU policy on shares/loans/withdrawals/offsets, and the loan agreement but the gist of which was that they might deign to allow €520 of shares to be offset against the loan subject to a board decision.
• What you did about it : haven't followed up on it yet
• Final outcome: N/A

	before		after
loan	10133	-520	9613
shares	2920	-520	2400
	29%		25%

[CU Manager]

full reply to follow

[CUJimmy]

I imagine this reluctance to transfer shares to loans goes back to the belief that all members should save to enable all members to borrow. It was one of the guiding principles of Credit unions who are trying to balance the need to bring in sufficient income to pay dividends to thier savers. It can be a difficult balance but credit unions can only advise members that the transfer of shares has an impact on thier life savings insurance cover and may affect the amount they can borrow in the future. This is what my credit union does and if the member still wants to transfer shares then there is no problem.