Key Post How to set your Credit Union shares against your loan

Discussion in 'Credit Union issues' started by Brendan Burgess, May 12, 2011.

  1. Brendan Burgess

    Brendan Burgess Founder

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    I have now checked with two other Credit Unions, i.e. a total of 3, and they have all told me that, when a customer asks to set their shares off against a loan, they do so.

    They all recommended leaving around €200 so that the customer would retain their insurance.
     
  2. Slim

    Slim Frequent Poster

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    I have checked with our manager on this. There is a definite reluctance to employ this means of reducing arrears or indebtedness in a cU. 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. Slim
     
  3. Brendan Burgess

    Brendan Burgess Founder

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    Hi Slim

    The exposure of the Credit Union does not change if a borrower sets his shares against his loan. A borrower with a loan of €10,000 and a share account of €4,000 owes the credit union €6,000 - the same as a borrower with a loan account of €6,000 and no shares.

    But if I transfer €4,000 from a share account paying no dividend and use it to reduce a loan on which I am being charged 12% interest, then I will save €500 a year. This must improve my chances of repaying the loan.
     
  4. Bronte

    Bronte Frequent Poster

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    This was always the way with credit unions but we are in unprecedented times. This particular debtor has demonstrated that he will pay back if given a chance and the credit union should help the debtor who has made an amazing effort to pay back all his debts. The effort of this debtor is not on this thread for those who are interested as the thread was split.
     
  5. Slim

    Slim Frequent Poster

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    Yes, but the manager thought that the guy with €6k in savings is less likely to walk away as he would try and clear his loan to get at his savings.
    Slim
     
  6. kaplan

    kaplan Frequent Poster

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    Slim - you are probably right but the manager is wrong.

    There is nothing preventing a credit union allowing its customers use their savings to reduce loan balances provided of course they remain a member. In any event credit unions are required to provide for loans net of attached shares which means they consider savings as realisable security should a loan go bad.

    Not allowing transfers to happen increases the cost of repayment as loan interest is charged on the full loan whereas savings attract in the case of 100 credit unions no dividend and with 200 more less than 1%.

    This may have been a valid argument "back in the day" when credit unions charged 12% and paid 6% and treated shares as withdrawable capital.

    But charging 10% and paying 0% means that saver/borrowers are being screwed. Just another one of the anti-consumer practices credit unions engage in.
     
  7. dahamsta

    dahamsta Guest

    For the record, I've previously offset CU shares against loan repayments when I had trouble repaying the loan, at the suggestion of the manager; and last year I cleared my entire loan from shares. The CU had no issue with this. (Different circumstances in both cases, but I thought it might be useful for reference.)
     
  8. Pinchy

    Pinchy Frequent Poster

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    Interesting stuff - I am due to meet CU tomorrow to discuss options.

    I will be looking to request a transfer of existing shares out of the CU - I have a good loan history and have one outstanding (paid regularly). It will be interesting to see how my CU will proceed with my request.
     
  9. Brendan Burgess

    Brendan Burgess Founder

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    You will not be allowed to "transfer them out". You can insist that they set the shares against the loan.

    brendan
     
  10. Slim

    Slim Frequent Poster

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    You may be allowed to reduce your shares to 25% of the loan outstanding, at the discretion of the Board. Slim
     
  11. MANTO

    MANTO Frequent Poster

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    +1 - Any CU allowing the full offset of savings against a loan leaving 0 capital / no security, seriously need to look at their policies and practices.
     
  12. tvman

    tvman Frequent Poster

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    As as been said several times above, allowing a member to deposit their shares to their loan account has no effect on the net exposure of the credit union.
    e.g.
    I owe the CU €10K and have shares of €4K. The credit union has a net, unsecured, exposure of €6K to me.

    If I set my shares against my loan I reduce my loan to €6K and the credit union has a net, unsecured, exposure of €6K to me.

    i.e. identical exposures/risk before and after offset.

    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?)
     
  13. Brendan Burgess

    Brendan Burgess Founder

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    No. They just need to read and implement the Credit Union Act.

    Brendan
     
  14. Pinchy

    Pinchy Frequent Poster

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    Good debate on this one guys. I have been in a submitted request which will be reviewed and I will have a decision wothin 2 weeks. As mentioned previously by people; there is no reason you cannot do a withdral of share where you have an outsnading loan as long as you have board approval and there is a residual share deposit of at least 25% of your loan balance. It is totally seperate to the 'setting off loan balance' discussion.

    I have my shares with this CU for many year so they may be more accepting - I will update when I have a response.
     
  15. Pinchy

    Pinchy Frequent Poster

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    Hi All,
    Just coming back on this subject. I reveived my response from my credit union today regarding withdrawing funds whilst maintaining a share to loan value at 1:4. The request has been approved by the board with no conditions.
    Again, this is not to be confused with the 'setting off' process where you transfer shares against your loan with the permission of the credit committee, but from speaking to them, this could be an option that they are open to also.

    I believe I was in quite a good position to make this withdrawl as I had the same amount in shares as I had remaining on the loan when I made the request.
    The legislation surrounding the credit unions is quite consumer focused and does seem to uphold the interests of the credit union members.
     
  16. Slim

    Slim Frequent Poster

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    Honestly, credit unions are not that calculating. 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. S
     
  17. ClubMan

    ClubMan Frequent Poster

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    I suggested to somebody that they ask their CU (Civil Service CU) about offsetting their €3K in shares against their outstanding CU loan of €10K. Two weeks on and after two follow up/reminder emails they have been told that neither the general staff nor the CU manager can approve this and it needs to go to the board of directors who meet once a month (with no date set for the next meeting). Is this acceptable and should they just wait on the board to meet/decide or should they push the issue with the manager? I didn't think that this should need the board to rule on it? Thanks.

    Update: just read this bit from Brendan earlier in the thread:
     
  18. CU Manager

    CU Manager Frequent Poster

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    Just a technical point: If a member has his/her entire shares offset against their loan they would cease to hold membership of the credit union. Such a measure is usually taken only when a loan is written off.

    General point: Many CU's like to hold onto the pledged security (shares) and use same to offset debt recovery costs if it is necessary for the loan to enter a collections process.

    All CU's are different and the position of CU Manager can mean different things in different CU's. Some are little more than Office Administrators with little or no decision makkng authority whilst others (especially in larger CU's) are de facto CEO's.
    It maybe that the manager does not have teh authority to make a decision. You shouldnt assume that the CU is misleading you. I would be very surprised if that was the case!
     
  19. ClubMan

    ClubMan Frequent Poster

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    Thanks - as per the earlier discussion the plan was to offset all shares against the loan less whatever amount is required to retain membership and benefits (e.g. loan insurance etc.).
    Be that as it may the CU legislation quoted earlier seems clear - CU members can elect to offset some or all of their shares even below the "usual" 25% limit against an outstanding loan.
    I didn't - but as I have experienced in the past it's difficult to get a straight answer from them. Probably a case of Hanlon's Razor rather than anything more nefarious.
     
  20. Sapling

    Sapling Guest

    My experience

    I read this thread with interest because I had 2 loans with my CU and also obliged to contribute to save shares so I decided to follow Brendans advice and requested that my shares be offset against my loan excepting €100 or so.
    I was at first straight off declined and followed the advice and quoted the Credit Union Act stated here so was told it had to go to the commitee and the I was advised it had to go to the directors meeting. I recently received a letter quoting my request in the first paragraph.
    The second paragraph stated:

    'This request is declined'

    4 words. I am slightly annoyed as I can't withdraw the sum and it would really decrease my loan interest.

    Why are there Credit Union Act Laws and different practises?