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New Resolution 49 Standard

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AGENDA - New Resolution 49 Standard

- Background / Justification / Challenges

- Benefits of New Resolution 49 Standard

- Workgroup – background, objectives and impact of changeover

- New Resolution 49 Standard – key elements & worked example

- Conclusion

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New Resolution 49 Standard

Resolution 49 of BDM (2003) – new standard is in compliance with actual Resolution passed. It conforms to “Best international standards and practice”.

ILCU Board approved the new standard from 1st February 2010

Resolution 49 - “Delinquency shall be measured by reference to the arrears of repayment of principal under the loan agreement”.

Loan arrears shall be categorised and provision made by reference to the net loan balance in respect of each category as follows:

Category Provision

0-9 weeks 0% of net loan balances

10-18 weeks 10% of net loan balances

19-26 weeks 20% of net loan balances

27-39 weeks 40% of net loan balances

40-52 weeks 60% of net loan balances

>= 53 weeks 100% of net loan balances

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New Resolution 49 Standard

Challenges Calculation challenges

- Level Payment Loans

- Lump Sum Loans

- Temporary, non-contractual agreements

- Net Loan Calculation- Multiple Accounts, Guaranteed Loans

- IT System Changeover Reconciliation Issues

- Lack of a Standard

- Solution – uses an Amortisation Schedule

Change in Market Conditions

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New Resolution 49 standard

Workgroup (set up by National Technology Committee) comprising:-

Credit Unions

Tim Molan, Cashel (CUMA); Selina Gileece, ASTI (CUMA); Eugene O’Brien, Pennyburn

Eugene Kearns, Carlow; Paul Bingham, NI Registrar’s Office

IT Suppliers Forum

Represented by ICE, Octagon, Pallas & Everest

League Staff

Ciaran Bishop, Tom Kiely, David Hewson, Kathleen Meenan, Joe Timmons & Belinda Lyons

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New Resolution 49 standard

Objectives

To implement the new standard for Resolution 49, on a more prudent, transparent and accurate basis

Prudent – address current under-provisions & provide a better provision calculation for a credit union's loan portfolio

Transparent - audit trails and reports improved

Accurate - standardise calculations, reconciliation and reporting across systems & assist credit unions migrating to new systems

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New Resolution 49 Standard

Testing –

Up to 100 credit unions, across three IT suppliers, already using the amortisation calculation

IT Suppliers fully committed to the process via the IT Suppliers’ Forum

Responsibility for testing rests with IT Suppliers, in conjunction with their credit unions

Impact of changeover to standard –

Amortisation Schedule - percentage increase in provision of up to 40%

Other changes – not as significant

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Main Benefits of the new Standard

For Credit Unions – better reports, control of manual overrides, more transparency

For the Regulator – more accurate Prudential Return, positive views on new Resolution 49 calculation

For the League – Field Officer visits and loan reviews, Pearls ratios

For Auditors – interim audits and year-end reports

For IT providers - standardisation

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The Regulator’s Viewpoint

2007 Guidance Note identified the following issues:-

Lump sum repayments

Provisions

Loans rescheduling – more transparent

Security for loans – records loans for special treatment

New Resolution 49 Standard will result in improvements in these four key areas

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Key Elements of the Standard

Standardization of processing

Uses Loan Amortization Schedule to calculate Weeks in Arrears

Reporting and monitoring of Loans for Special Examination

Rules for Net Loan Calculation (incorporating multiple accounts, etc.)

Inclusion of an Override Provision function

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Conclusion

• ILCU Board approved the new Resolution 49 Standard from 1st February 2010

• New Standard is a better and more robust starting point for Bad Debt Provision calculation

• Governance – ensure that Accounts reflect ‘true and fair view’

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Amortisation Table

Worked example:Loan Amount €10,000

Interest Rate 9%

Term 4 years, weekly repayment

Calculated Level Repayment €57.29

Level Repayment – interest portion falls & principal portion increases as loan is repaid

Chapter 15 6th May 2009

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Loan repaid as agreed

Repayment Schedule - Amortisation Table

Wk ScheduledNo. Amount Interest Principal Balance

1 57.29 17.31 39.98 10,000.00

2 57.29 17.24 40.05 9,960.02

3 57.29 17.17 40.12 9,919.97

4 57.29 17.10 40.19 9,879.85

5 57.29 17.03 40.26 9,839.66Chapter 15 6th May 2009

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Loan not repaid as agreed

Repayment Schedule - Amortisation Table

Wk Scheduled ActualNo. Amount Interest Principal Balance Balance

1 45.00 17.31 27.69 10,000.00 10,000.00

2 45.00 17.26 27.74 9,960.02 9,972.31

3 45.00 17.21 27.79 9,919.97 9,944.57

4 45.00 17.16 27.84 9,879.85 9,916.78

5 45.00 17.12 27.88 9,839.66 9,888.94

Chapter 15 6th May 2009

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After 91 weeks ....

Member has continued to pay €45 per week

Scheduled ActualNo. Balance Balance

91 €6,109.83 €7,251.84

Arrears are €1,142.01

Old Resolution 49 Calculation:-

€1,142.01 / €57.29 = 19.93 wks

Round down to 19 weeks

Chapter 15 6th May 2009

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After 91 weeks ....

New Resolution 49 Calculation:- Looks at the Amortisation Table to see what week the actual balance equates to.

Scheduled ActualNo. Balance Balance

91 €6,109.83 €7,251.84

66 €7,251.84

Weeks in Arrears = 91 – 66 = 25 weeks

(Old calculation was 19 weeks)Chapter 15 6th May 2009