Below is an Irish Independent article written by Charlie Weston, the only financial journalist in Ireland that has taken any interest in the plight of credit union members.
The original article is here: http://www.independent.ie/business/personal-finance/the-questions-you-need-to-ask-your-credit-union-35246214.html
His writing is in black text. I have added some of my own thoughts. My text is in red italics. I do not dispute any of Charlie Westons writing, I just added a few bits.
The article text starts here:
The three million members of credit unions have been rattled by the forced shut-down of Rush Credit Union.
Evidence given to the High Court shows Central Bank regulators have been heavily engaged with the north county Dublin lender since 2009 over persistent breaches of directions.
This closure of Rush is likely to prompt members of the State's 315 other credit unions to ask themselves how they can be sure something similar is not happening in their local lender.
Here are 10 questions to ask to work to out if your credit union is financially sound:
Q: Are my savings, or member shares, safe?
A: Members' savings remain safe, as the state deposit scheme covers savings in credit unions up to €100,000 per depositor.
Shares and savings can be the same thing. If you are a member of a credit union, then you are a shareholder, in the same way that a person owns a commercial company. You have the right of one vote at any meeting to decide the future of the credit union.
Q: How would I know if my credit union was in trouble?
A: There are five key questions you need to ask the manager and/or board:
All questions should be directed in writing to the board directly. Some managers will do their utmost to keep the shareholders away from board members and committee members. A good credit union manager, will take your query on-board, answer your questions and ensure it is brought to the attention of the board members. The good manager is rare in larger credit unions. If you do not know the manager personally, or, if you do not trust the manager and/or the chairperson, then, put your questions in writing. Send the questions by email, (so there can be no doubt that you put your questions in writing to the credit union board). Allow a reasonable time for a response, (seven days should be enough). Post a copy of your email on the credit union notice board for your fellow shareholders to see. Post a copy of the response. Start a public Facebook group for your credit union members to share information.
Has the board been told by the Central Bank to postpone the annual general meeting? If it has, it is a sure sign the regulator is unhappy with the way the lending is being run. Rush CU had no AGM since 2013.
It is not just the lending that causes concerns for the Central Bank. The manner in which the credit union is managed as a whole comes under the remit of the Registrar of Credit Unions (the actual regulator in the central bank). Corporate Governance are the buzzwords that encompass all aspects of managing the credit union. Many boards seem incapable of managing their affairs competently and within the corporate governance regulations. In the case of an incompetent board, then the members should be informed and given the opportunity to replace the board with competent people. If the members cannot provide competent board members from its own ranks, the credit union needs to close down.
Will a dividend be paid, and was one paid last year? Credit unions that are reporting losses are being barred from paying a dividend by regulators. No dividend was paid in Rush since 2008.
Paying no dividend might actually be a good decision, provided, that decision is taken at the AGM with full disclosure of all information relating to the management of the credit union. An example is: Where a strategic decision to use any dividend, "for investment in management strategies" to improve the efficiency of the credit union.
Is the loan book shrinking? A declining loan book is an indicator that income is set to fall fast at a credit union. It may have lending restrictions imposed on it by regulators. Although it could also be due to low demand for loans.
Shrinking loan books for credit union principles is a good thing, but, for the income of the credit union, it is a bad thing. It is vital that the board of management prudently manages the expenses incurred in the credit union operations. Experience has shown that cliques and fiefdoms have resulted in huge pay increases for some staff members (usually the managers) that are close to board members . This is usually the scenario where the chairperson and manager dominates the board.
Are loan arrears rising? And how many loans are three months, six months or nine months in arrears? Rising arrears are a sign of trouble ahead.
Loan arrears increasing is a bad thing for credit union principles. However there may be a reasonable explanation for this. For example a large employer in the town/village/community might close down, and many borrowers find themselves unemployed. This can also affect the income of the credit union very badly. If the management of the credit union is prudently considering all aspects of lending then the consequences should be minimal. Rising arrears should be explained fully to the shareholders and in writing.
How much money has been put aside to cover loans unlikely to be repaid? The level of provisioning, compared with previous years, should tell you how healthy or otherwise the credit union now is.
Official Provisioning only tells you the credit union is compliant with the regulations for provisioning. It does not tell you that the board might have hidden lots of bad loans. This tactic has been used by boards to hide bad loans. The issue of hiding bad loans is indicative of dishonesty and an incompetent board. Giving loans to pay off arrears is illegal for the credit union, but, it is practiced widely. Its very easy to do this, as, the member usually gets some short term benefit from it.
Q: Are more credit unions likely to end up being shut down by regulators?
A: Rush was a rogue. The Central Bank has been heavily involved in trying to tame it.
Most other credit unions are sound. However, one in the Munster area needs a rescue merger.
All this is because a small number of credit unions have not been immune to the financial downturn. Loan arrears, loan defaults and rising costs are all impacting, although these problems are easing. Some 100 credit unions have been merged into larger ones in the last two years, with many now bigger and run by professionally qualified managers.
Rising costs are the most serious issue affecting credit unions. A prudently managed credit union abiding by the principles of credit unions can usually address any issues that arise. Costs as a result of increased wages or extra staff for compliance purposes can be a huge drain for smaller credit unions. Each credit union has to look at ways to reduce staff costs and to maximise income from investments. Easier said than done, but, it is possible, if the board have competent people available to advise them.
Rising costs are the most serious issue affecting credit unions. A prudently managed credit union abiding by the principles of credit unions can usually address any issues that arise. Costs as a result of increased wages or extra staff for compliance purposes can be a huge drain for smaller credit unions. Each credit union has to look at ways to reduce staff costs and to maximise income from investments. Easier said than done, but, it is possible, if the board have competent people available to advise them.
Most mergers were not actually mergers. They were takeovers. I have no evidence that any shareholders were actually consulted in relation to mergers. The Central Bank authorises the board to bring about the merger, without any consultation with the shareholders (members). The board can refuse this instruction and insist the members are consulted, but, as far as I am aware, this has never happened.
Strategic mergers can be a good thing, but, the reality is, the service for members will deteriorate over time. Mergers are creating little banks, and in my humble opinion, this seems to be the ultimate goal of the regulations. Most takeovers happen because the credit union needs to reduce its costs. A credit union can reduce its expenses radically by reducing the pay for managers. Managers are the biggest single expense for most credit unions. More volunteer tellers can be utilised. There are many ways to reduce costs without agreeing to a takeover. It is possible to run your credit union with all volunteer staff acting as tellers, general administrators, reduced opening hours, using a website to process many transactions, and loan applications, etc.
Profits can be generated by strategic investments. This option is rarely taken by boards, because, they lack the expertise to carry it out. Appoint investment experts to oversee this process, would be one way to generate profit.
Q: Have many credit unions gone bust lately?
A: Credit unions have been casualties of the financial collapse, but nothing like to the extent of the banks. Rush is only the second to be forcibly shut down, after Berehaven in Cork. Newbridge in Kildare was taken over by Permanent TSB and eventually closed.
In reality the vast majority of credit unions are well run and solvent, so it is unlikely that the registrar will have to intervene again to the extent that they have with Rush, Newbridge and Berehaven.
If the credit union is going bust, then it is a symptom of incompetent management. There is no other credible reason that a credit union can go bust. Going bust will usually mean the same people have been on the board for years and years. Going bust or merging could be considered a sign that, the board want to hide something from the members. In my opinion, if, a credit union is in danger of going bust, then the central bank should dismiss the board immediately and ask the members to provide a new board. If a new board is not forthcoming, then the credit union must be closed or merged.
Q: Can the credit union call in my loan?
A: The credit union can only demand immediate repayment of your loan if you stop paying it. This is not something it will want to do.
The credit union can only demand payment if an exhaustive effort has been made to assist the borrower.
Q: The credit union manager and chairperson assure me everything is fine, but I am still suspicious. Where else can I get information?
A: You should only be concerned if there is no AGM. If you're not happy with the response from your credit union, write to the registrar of credit unions in the Central Bank to find out what the problem is, though it's doubtful that they will outline what the problem is either.
The real problem is that when a credit union gets into financial difficulty members are generally last to know.
You should not wait until the credit union is showing signs of trouble. Demand information in writing at the appropriate level from the board. If you get stonewalled, then make a formal complaint to the Central Bank. Call a meeting of the members. Demand the board and oversight committee attend this meeting, and get information in writing. Record the meeting on video if possible. The credit union is obliged by law to have a formal complaints procedure for members. If this procedure is not easy to follow, then you can be sure the board are hiding something.
If the board members or oversight committee members are somewhat anonymous in the community, then it is most likely there is something wrong. Board members and oversight committee members should be very visible in the community and proud to be doing the thankless work they undertake every week.
It is the members credit union. It is your credit union. You own it. Treat it the same way as you would treat anything that you own and care for. Value it, and treasure it. Do not take guff or stonewalling off anybody. Guff and stonewalling indicates something is wrong with the management of the credit union. A well managed credit union will welcome the opportunity to explain things to the members.
Q: I have a loan. Would that get wiped out in the event that my credit union goes into liquidation?
A: Unfortunately not, no one gains from these events. You are still obliged to honour your debt in full. Your loan book will probably be sold to another financial entity, probably another credit union.
Unlikely, in my opinion, that another credit union will buy the loan book from a bust credit union. It would be completely against the credit union principles. More likely a vulture fund will buy the loan book. It would be better if all the members that have no loans were to get together and use your shares refund to buy the bust loan book at a very reduced rate. Start a new credit union with your refunded shares and away you go.
NOTE: You must give your permission for the terms of the loan to be changed. If there is any attempt to change the terms of your loan, (and you do not like them) then write back and tell them you will pay the loan in a way that suits you. You must never refuse to repay the loan.
Q: Are members entitled to know what is going on, particularly where there's a problem?
A: Yes, they own the credit union. But there are flaws with the current system. Where a credit union has financial problems, it typically has to work closely with the Central Bank to resolve them. While this is going on, the AGM is delayed, so the members get cut out as the annual communication is at the AGM.
The oversight committee are supposed to be directly elected from the AGM. They are supposed to be the eyes and ears of the members. They are supposed to be keeping an eye on the board and the general management and day to day operations of the credit union, on the members behalf. They report only to the members. They advise the board to improve things. They act as an asset to assist the board. They have the authority to call a meeting of members without needing the permission of the Central Bank. If members have concerns then make it known to the oversight committee members that they should call a meeting and tell the members what the board are doing.
Q: If there is no annual meeting, will there be no new board?
A: If regulators tell a credit union to delay an AGM it will delay the election of a new board.
The old board, probably through a lack of ability, may have caused the problems. This means there is probably a real need to vote them out and for new more able replacements to be appointed. And that can't happen unless an AGM is held.
The members can demand an EGM. The oversight committee has the authority to call a meeting to discuss matters of importance to the work of the board. This meeting can decide to demand an AGM. Unlikely the Central Bank would refuse to allow the AGM in those circumstances. Therefore there are ways and means to get some of the old board replaced. Unfortunately, under current regulations, it is the old board that will decide who can go forward for election as new members of the board. The members have lost the right to put suitable people forward for election to the board at the AGM. This is a huge problem for members. When an incompetent or dishonest board is in place, they will only choose people that will be sympathetic to their plight. The new board members will, then, most likely, do their utmost to hide what the previous board did in relation to mismanagement or dishonesty. It will be couched in well meaning rhetoric, but, it is wrong, no matter what way it is looked at.
Q: How could members be better informed?
A: Members could ask the registrar to host a communications meeting for members where they could set out the problems - typically poor practices and governance. However, the Central Bank will be reluctant to do this.
If members feel that the board isn't handling it particularly well, 50 or more members could request the registrar to allow them to hold a special general meeting to replace some or all of the board.
Write to the oversight committee and tell them to convene a meeting. Invite members of other credit unions to observe and advise this meeting. Consultants exist to advise, but they will need to be paid. There are many expert members that will advise you free of charge.
