Joint Committee on Housing, Planning, Community and Local Government díospóireacht -
Tuesday, 4 Jul 2017

Finance for Social Housing: Irish League of Credit Unions

Chairman

Today's meeting will consider the topic of credit union financing for social housing. The meeting will consist of two sessions. I welcome to our first session, from the Irish League of Credit Unions, Mr. Ed Farrell, CEO and Mr. David Malone, financial controller.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of the evidence they are to give to the joint committee. If, however, they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence.

They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of a long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House, or any official by name in such a way as to make him or her identifiable.

I call on Mr. Farrell to make his opening statement.

Mr. Ed Farrell

I thank the Chairman and members for their invitation. I am joined by Mr. David Malone, financial controller at the Irish League of Credit Unions. The league is the largest credit union representative body on the island of Ireland, with a total of 289 credit unions out of 302 in the Republic of Ireland affiliated to it. We exist to provide leadership, co-operation, support and development for credit unions in the Republic of Ireland and in Northern Ireland where we have another 90 affiliated credit unions.

On social housing, there is clearly a social crisis. There was also a context and timeline relating to the committee's consideration today of how credit union funds can be used to deliver housing in this crisis. In November 2014, the Government published Social Housing Strategy 2020 predicated on "private sector finance which will be raised from a variety of sources which could include the EIB, ISIF, Pension Funds, Credit Unions and other financial institutions, both domestic and international". In response to that specific request, the league made its detailed proposal, Social Housing Funding, in October 2015. In June 2016 the Oireachtas Committee on Housing and Homelessness as a priority recommendation stated, "The Government should seek to mobilise as quickly as possible, all possible sources of funding, including funding from the Housing Finance Agency, Strategic Investment Fund, the Irish League of Credit Unions and Irish Pension Funds, to increase the supply of social and affordable housing." The Department of Housing, Community and Local Government policy document, Rebuilding Ireland, published in July 2016 states:

The Government is also committed to a range of other structural, funding and policy supports to increase delivery by AHBs. Among these measures will be the establishment of an Innovation Fund to support the development by AHBs of innovative financial models ...

Support will be provided from this Fund to an Irish Council for Social Housing (ICSH)/sector-led new special purpose vehicle, involving investors, including the Credit Union movement.

To date no fund has been established, despite our willingness to invest and insistent lobbying to be allowed to do so. The crying need for social housing has not been supported by credit union funds, which are available. There are two roadblocks. One is regulatory and requires the Central Bank to change the criteria for permitted credit union investments. The second is the establishment of a financial vehicle, as committed to by Government in Rebuilding Ireland.

The Central Bank issued its consultation paper, The Consultation on Potential Changes to the Investment Framework for Credit Unions, also called CP109, in May. The league's response has been sent to the committee. This consultation paper has some positive aspects which we welcome, but others we are very concerned about.

On social housing, the Central Bank is considering if it would be appropriate to facilitate the provision of credit union funding to approved housing bodies by way of investment. The initial potential levels of investment proposed by the Central Bank would be up to up to €900 million which, on the basis of 70% finance provided by credit unions at an average notional social house cost of €200,000, would fund close to 6,500 homes. If followed through, this would be a significant step forward. More broadly, but closely connected, the same set of proposals will contribute negatively to the downward pressure on investment income being earned by credit unions. Our affiliated credit unions currently have just under €2 billion invested in bank bonds which are an important source of investment yield. The restriction set out in the consultation paper will severely curtail the universe of bank bonds that credit unions can invest in.

The investment yield for our Republic of Ireland credit unions declined from 3.6% in 2012 to only 1.4% in the six-month period to March 2017. We estimate that the current 1.4% annualised yield from credit unions' investments would decline to as low as 0.3% per annum in the coming financial years. How can credit unions have a sustainable future business model in the context of these future projected investment yields? Given that CP109 would effectively eliminate investment returns, it is essential that investment rules are amended to allow for centralised lending of mortgages and loans to small and medium-sized enterprises in order that some of the €10 billion of surplus funds in credit unions can be lent out.

As the Rebuilding Ireland policy document is being reviewed, our request to the committee is to advocate strongly for the implementation of what has been committed to by Government and recommended previously by the special Committee on Housing and Homelessness. The Central Bank may, further to its consultation paper, at last allow credit union investment in social housing. The net issue then is for Government to deliver on its commitment to establish an appropriate vehicle to do so.

Then there is a wider housing agenda beyond social housing and how that links holistically to the overall viability of credit unions at the very moment our economy has returned to astonishing levels of concentration in mortgage lending especially, but other types of lending also . We need action immediately from the Department of Housing, Planning, Community and Local Government to enable investment in social housing. This should be accompanied and underpinned by real engagement, led by the Department of Finance, to develop a credit union model that can do the "much more" it is so ambitious to do across the board for communities and the economy.

Chairman

Does Mr. Malone wish to say a few words or shall I go straight into questions?

Mr. David Malone

We welcome the feedback on CP109 in respect of the proposals relating to the approved housing bodies' investments. However, as Mr. Farrell has mentioned, we are concerned about some other aspects of CP109, particularly the proposed restriction of bank bonds and other proposed investments put forward in the paper. We feel that the overall impact on credit unions' yields and investments will be quite negative.

Senator Victor Boyhan

I welcome Mr. Farrell and Mr. Malone. I am a member of a credit union and wish to acknowledge the work of the Irish League of Credit Unions. It is a mutual society, its work is highly reliant on voluntarism and other factors and it is community-based. It is to be welcomed that representatives of the Irish League of Credit Unions are here and have made their pitch. The Irish League of Credit Unions makes some very valid points in what is a very concise and to-the-point presentation, for which I thank Mr. Farrell because it is important to get to the kernel of the issue.

Mr. Farrell made the point that Rebuilding Ireland will be reviewed, as the Minister has said. It is timely that the Irish League of Credit Unions' proposal be looked at again in the context of the Government's commitment. As Mr. Farrell pointed out, the Government acknowledged that, among other financial institutions and as part of the Rebuilding Ireland strategy and programme, it would look at the idea of the credit unions. Mr. Farrell said in his opening statement that "there are two roadblocks" and he set them out very clearly:

One is regulatory and requires the Central Bank to change the criteria for permitted credit union investments. The second is the establishment of financial vehicle, as committed to by Government in Rebuilding Ireland.

These are valid points.

I wish to ask Mr. Farrell two questions. First, would individual credit unions outsource all investments and decisions to the proposed special purpose vehicle? He might elaborate on that. Second, is there sufficient expertise within the credit union sector to become involved in offering loans for social housing? Where all this is coming from is important in terms of centrality, decision-making, oversight, policy and governance. There is a huge number of issues here, and proven expertise must be demonstrated by the credit union movement. I thank the witnesses for coming before the committee.

Deputy Barry Cowen

I thank both bodies for their presentations. It was appropriate that the committee acknowledge the process commenced by the Central Bank and also acknowledge and support the submission made by the Irish League of Credit Unions.

We have been saying, until we were blue in the face, that there is a crisis in the provision of housing and an emergency in the provision of social housing. This is a no-brainer. We have the potential for €2 billion in investment which could yield a return to the credit union movement and provide up to 6,500 social housing units, but there are two roadblocks. The Government needs to open the two roadblocks. The Rebuilding Ireland document made a vague commitment to look at the potential which exists in this financial vehicle to support the industry by allowing new finance into the market to create more competitive finance in the marketplace than the restricted finance available from the pillar banks.

This is an emergency but this is available to assist in addressing the crisis. However, the Government and the Central Bank are procrastinating and it is just not good enough. As Senator Boyhan said, this is a simple document and it is clear about what it sets out to achieve. It has benefits for all concerned and I have no question to ask of the witnesses today. I just want to voice my full and vehement support for the recommendations. I have made a submission on behalf of our party supporting that stance. I implore Government and the Central Bank for movement in this area. We are told that NAMA is in the process of winding down and that it has the potential for €2 billion. NAMA also has the NARPS model which promotes a similar type of vehicle to what is being proposed here, one which does not impinge on European regulation. It is not on balance sheet but an off-balance sheet methodology that can work and yield results. There is a role for NAMA as an authority in respect of the management of these and other funds, to ensure we find a way out of this crisis with real and meaningful ways of doing things, different from how we did things in the past. Relying on conventional methods, which the Government is pouring money into, is just not working. It did not work under Deputy Kelly's plan, it did not work under Deputy Coveney's plan and it will not work under the current Minister's plan. This is the way social and affordable housing has to be delivered. Let us get on and do it. Let us ensure this committee plays its part in demanding that Government moves in this direction.

Deputy Eoin Ó Broin

Many of us are enormously frustrated, as is the Irish League of Credit Unions, with the fact that for two years the league has made a series of presentations to the relevant authorities but we are still here discussing it. Many of us on this committee, and across the House, share this frustration. Our party has advocated, in the Committee on Housing and Homelessness and previously, that we need a portion of these funds to be released for precisely the purposes outlined by the witnesses today. As Deputy Cowen has done, I have made a submission to the Central Bank as part of its consultation, which fully supports the proposition.

There is a double win if the State does this, because this is additional money. No funds can be used to provide housing within the Government's housing action plan but it can be used to provide additional units over and above those targets and this is the real value of what is being proposed. We should stress this very clearly. The submission refers to three funding frameworks outlined on page 3.

My own preference - that is what I stated in the submission on the Central Bank - is for option 2, primarily in terms of the capacity of the tier 3 approved housing bodies to deliver units, certainly in the first three to four years. The second option in terms of the annual funds that would be released is probably the most credible not from the point of view of the credit unions, but from theirs. Obviously, if their capacity increased then, the total quantum of the fund could be increased as well, but even on that basis one would be looking at an additional 17,500 units delivered over six years. That is an additional 2,900 units, which would be hugely welcome.

We have been asking repeatedly what has been the real obstacle to a decision on the release of the funds for social housing. I invite the witnesses to be as frank as they can to let us know where is the blockage. We all know off the record or we have our own assumptions but it is important, as part of our attempts to put pressure on the relevant authorities to make the funds available, that the witnesses would share with us whatever information they can about where the obstacles have been.

I would like the ILCU witnesses to talk a little bit about their preferred model for the shape of the fund. The Government's housing action plan was outlined but is that the preferred model of the credit unions and that, as outlined in their schedules, they would put a sum of money into a fund where there would be other private sector funding - the Irish Council for Social Housing would be part of that - and tier 3 approved housing bodies could access that on an ongoing basis in terms of individual projects? Would that be a rolling fund and as opportunities came up for the approved housing bodies, either sites to buy or to build, they could come and seek loan finance?

If I understood it correctly, the Irish League of Credit Unions talked about the possibility of 100% loans versus the 70% loans, with matching funding from the Department of Housing, Planning, Community and Local Government and the local authorities. From within the ILCU's risk assessment, is it conceivable for such a fund to provide 100% loans, obviously with the guarantee of the availability agreement coming through? If that is the case then there would be less reliance on the public funding and that could be used elsewhere in the public housing system. Has there been discussion with the approved housing bodies in terms of their capacity to deliver units? With the best will in the world, even if one has unlimited funding but the sector can only deliver so much. To what extent are the funding schedules on page 3, as a result of any of those engagements?

Has the ILCU had any discussions with the Department on the possible redesignation of approved housing bodies as State entities and therefore on-balance sheet? I am sure the witnesses are aware of the ongoing review between the Department of Housing, Planning, Community and Local Government, the CSO and EUROSTAT. If EUROSTAT and the CSO take the decision here that has been taken across the water in Britain that would obviously change some of the rationale for what is being proposed here, although not substantially in my view. Has the Department included the ILCU in that conversation or are the witnesses aware of those issues?

Deputy Fergus O'Dowd

I welcome the work done by credit unions over the years. When I was younger and buying my house, we got our bridging finance from the credit union. Credit unions are hugely helpful to people, in particular when they are buying homes or making any significant purchase. My question is slightly different from some of the questions that have been asked. One of the difficulties I find is that many of the people who are in trouble with their mortgages are with companies whom I would call vulture lenders, in other words, they charge way above market norms. People are with such companies because the traditional lenders would not lend to them because they are considered high risk and they are paying a higher premium as a result. Many people are still trying to hold on to their homes and as their economic position improves they could sustain a lower rate mortgage, but they cannot sustain the rate they are being charged. Does the ILCU think there is a role for credit unions in the context of the social service they provide to people who would be a higher risk for lending but are in real trouble? They want to hold on to their homes but they cannot find any sustainable way to do so. Has the ILCU thought about that as an option, in other words, that people who are with those companies, whom we all know, could approach a credit union with a view to getting a standard rate mortgage at a sustainable rate, which they did not get previously?

Deputy Pat Casey

I thank the gentlemen for their presentations and record my frustration that the issue has not been resolved. We were all aware of the role the credit unions could have played before Rebuilding Ireland was launched but almost a year later, we have made almost no progress. I focus today on approved housing bodies and the relationship with them. Is there enough governance in place in the approved housing bodies, in particular given their growth to almost 120 bodies in the last three years? It is a significant increase. Is the required framework in place to give credit unions a guarantee? Across Europe, the state provides the guarantee even to approved housing bodies. What are the views of credit unions and their members on this venture?

Deputy Ruth Coppinger

I support the credit union concept and am a member of a credit union myself. Certainly, it is preferable to borrowing from banks. While I support the league's right to put its proposal, it is not a total no-brainer. There are issues around it. The problem in housing overall is not really finding funding because the Government has access to funds should it choose to use them. Last week, the Government chose to pay down debt from the sale of AIB rather than to use the money for housing. The rate the league is talking about is 2.5% and I have seen 3% or 4% on previous occasions. That is still higher than using those funds or the funds in the Irish Strategic Investment Fund. NAMA, of course, has cash reserves of €3 billion. The key issue I have is not so much with credit unions but with all of these concepts. It is the desperate search to find a special purpose vehicle which does not breach EU rules. We have to stop trying to avoid impinging on EU rules, otherwise we will not resolve this emergency. The scale of what the credit unions can provide bears no comparison to what local authorities could provide, given their lands and expertise, if they were funded. That is the essential problem. I see the credit union proposal as a possible supplement but it is no replacement for the tried and tested method of providing housing on a faster, cheaper and larger scale, which is what we need.

The other issue I have has been discussed at the committee before, namely, the proliferation of approved housing bodies. There are problems with them from the point of view of tenant representation, as they tend to provide much less support than one has from a local authority where councillors can step in to assist people who are having rent or other issues. We have all had stories about trying to make contact with them. Even in respect of pyrite, there is an approved housing body we cannot get to communicate with us in the way we can with a local authority.

Is there an international or other model under which the league can foresee credit union funds being lent? Is there a risk to credit union members if credit unions get involved in the housing market? How can the league mitigate that risk? The last thing we need is credit unions gambling the money of those who rely on them and their ethos of co-operation.

Mr. Ed Farrell

I go back to Senator Boyhan's question on individual credit unions and their credit decisions. He asked if they had the required expertise.

Yes and no. There are examples of individual credit unions lending for social housing on a small scale, but the Government's ambition here for the approved housing bodies is on a much larger scale than for individual credit unions or individual smaller approved housing bodies. That is the whole idea behind the special purpose vehicle mentioned in the Rebuilding Ireland report and policy. Collective credit union money on one side would initially go into the fund as per the Central Bank's proposals. We agree with that when it comes to the tier three, the biggest ten or 12 approved housing bodies. The idea is that that fund would then have, either as employees or as a retained firm, people with credit expertise who would help the fund and its shareholders: the credit unions, pension funds and possibly the Strategic Investment Fund. It would not just be the credit union's money that would be in that fund.

There would certainly be expertise then to help make the credit assessment and credit decisions to ensure that the money is put to a safe purpose for whichever individual approved housing body and project. This would be the case whether the project involved one house or ten houses and whether it involved building or buying. Whatever that individual project might be, it has to be a safe and good improvement project. Individual credit unions do not have and would not claim to have the expertise to do the credit assessment on a €500,000, €1 million or multi-million euro loan for a project of that size. That is why the Government's policy is to have a fund or a collective, as it were. The risk is mitigated by being part of a collective.

Deputy Cowen reiterated his support and the fact that he previously sent a submission to the Central Bank's consultation paper.

Deputy Ó Broin referred to tier three and to the preferred model. Our paper and our proposal is ultimately a response to the Government's initial policy document in 2014, the Social Housing Strategy 2020. It was then refined to reflect the updated Rebuilding Ireland plan launched last July. It is fair to say that the 2020 strategy was the Government's policy to enhance the role of approved housing bodies as distinct from local authorities. That is not our area of business, however. Our forte lies in taking in money from and providing loans to our 3 million members. Our surplus funds, as I mentioned in my opening address, amount to almost €10 billion. We are looking to put this surplus into social projects. The money has to be safe, of course, which is why there is a need for credit assessment and credit expertise at a collective level. The model set by the Government's policy is to grant more and more involvement to approved housing bodies and to look for outside funding, not just from credit unions but also from the Strategic Investment Fund and from pension schemes, both national and international.

When it comes to development and acquisition, individual approved housing bodies would approach the fund with proposals for individual projects. The quicker ones to reach the market are those to acquire completed or 90% completed houses. These might be in unfinished estates and the like, although that market has probably largely dried up at this stage. Buying a green or brown field site and then developing it obviously takes longer. Initially there would probably be a bridging loan for the first 12 or 24 months. When the house is built, certified and handed over to the tenants there would be a 30% capital advance from the Department. When the rental agreement and the payment and availability agreement with the tenant kick in we would then set the loan up for 25 to 30 years. We see the fund as having a role in both development and acquisition, though probably more in acquisition to begin with. As we get up and running and gather practical experience, however, there is no reason that we would not have a bit of both.

We have met with PricewaterhouseCoopers, the advisory firm, as part of the Irish Council for Social Housing's remit for this fund, and it was talking about a mix of acquisition and development. I know it is appearing before the committee after us and it will be able to provide more detail. We are more interested in the funding than the actual housing side.

The 100% or 70% is related to the model. The model, as we understand it, is that there is a capital advance payment known as the capital advance leasing facility, CALF, which is worth up to 30%. Large approved housing bodies will get 30% of the project cost on a loan that only has to be repaid after 20 or 25 years if the house does not remain part of the social housing stock. It attracts a low rate of interest but does not get repaid as long as the house is in social housing supply. The other 70% is borrowed. In theory that 70% will be borrowed from the fund. Credit union money would make up some of that fund. That is the model. We did not design the model. It is a safe model for the lender, whether the lender is the housing finance agency, HFA, which is the current main lender, a private bank or this fund made up of credit union money and other moneys. It is as if a private person has a 30% deposit for their house. It is not 80%, 85% or 90% mortgage territory. It is 70%. We would draw the analogy of a borrower having a State job and the State stepping in, if the borrower did not repay the loan, to repay out of his State job earnings. There is a step-in arrangement if the approved housing body disappeared or got into difficulty. The borrower is almost guaranteed its money because it is only a 70% loan initially, and the loan repayment ultimately comes from the payment and availability agreement, which is the rental subsidy from the local authority for the tenant, and the tenant then pays a smaller top up.

The approved housing bodies are in communication. We have had many meetings since the end of 2014, since that initial social housing strategy that the former Minister for the Environment, Community and Local Government, Deputy Kelly, brought out. We have had many meetings with the Irish Council for Social Housing, which is the apex body for approved housing bodies, and with individual housing bodies. We have met with CEOs and finance directors. PricewaterhouseCoopers is assisting them on this special purpose vehicle. We have also met with other financial advisers that the housing bodies were engaging with during 2015, 2016 and this year. We are in constant communication with them and feel that we have a good understanding now of their business model. We have reviewed their annual accounts and their governance structures.

Deputy Casey mentioned governance and regulation or the lack thereof, but housing bodies are now becoming a regulated industry. Tier 3 incorporates ten or 12 of the biggest approved housing bodies, tier 2 incorporates some of the smaller bodies and tier 1 incorporates the very smallest. The 80:20 rule applies to any of our organisations. There are ten or 12 of the really big bodies and then hundreds of the smaller ones. The tier 3 housing bodies are now learning what it is to survive in a regulated environment. I would not speak to their experiences within that regulated environment. They are appearing before this committee later. Certainly credit unions operate in a highly regulated environment. They are regulated by a division of the Central Bank of Ireland, which is the registry of credit unions, to a very high standard, so we would have comfort that the approved housing bodies, some years after the credit union movement, are now regulated. Certainly from now on they are going to be operating in a highly regulated environment, which will provide more comfort on top of the financial contracts that I spoke about earlier, encompassing the 30% and the guaranteed rent. We have had excellent working relationships with the approved housing industry since 2014.

The on-balance sheet versus off-balance sheet debate is going on all the time.

They are trying to keep the approved housing body model off the balance sheet. The Government's desire or requirement is for the social housing model to stay off the balance sheet. That is not something that would involve the Irish League of Credit Unions. We have responded to the current structure for the delivery of social housing. If the discussion about what is and what is not on the balance sheet goes in a different direction, or if the payment and availability of models like the 30% CALF model changes, we will have to consider the changed scenario, structure and environment.

Deputy O'Dowd spoke about individual members having toxic loans or loans with very high interest rates from non-main street lenders. We are talking about private mortgages for private houses. Credit unions are allowed to offer mortgages as a small percentage of their lending. Up to 10% of their loans by value may be offered for periods in excess of ten years. Such loans are generally housing loans. Under their laws and regulatory rules, individual credit unions are allowed to allocate small amounts - up to 10% - of their loans for housing and for mortgages. Now that the global financial crisis has ended and people have more confidence in the Irish economy - perhaps the economic recovery is more evident in the cities than it is as one travels out - more and more people are approaching credit unions to see whether they can switch their mortgages from their current providers, which may include high street banks, non-high street banks and the remains of loan portfolios that were bought from foreign banks that exited the Irish market. To be fair, as Deputy Coppinger mentioned, the credit unions have to make sure such loans are as safe as possible and have as good a chance as any other loans of getting repaid. Ultimately, it is some other local person's money. We always advise members to give the facts to the people in the credit union and they will do their damnedest to facilitate them. When one goes into a credit union, one deals with somebody who understands one's situation and the decision on one's application is made by that person or somebody else in that building. The decision will not have to be relayed back from regional or national headquarters. At least there will be a sympathetic ear. At the same time, it has to make some financial sense.

Deputy Fergus O'Dowd

It has to be sustainable in the context of the applicant's existing income.

Mr. Ed Farrell

Yes.

Deputy Fergus O'Dowd

There is no doubt about that.

Mr. Ed Farrell

The interest rate could be much lower in the credit union. Every lender needs to be able to make an adjudication on ability to repay. I would encourage people to have the conversation. The credit union might have another idea that has not been considered by a stressed borrower or member who is not in a clear frame of mind.

Deputy Casey asked about members' views on credit unions. I invite Mr. Malone to speak about a survey that was done by the Irish League of Credit Unions as part of the preparation of a consultation paper.

Mr. David Malone

As part of the consultation paper, we surveyed all our affiliated credit union members to get their thoughts on the approved housing bodies and on social housing. An overwhelming majority of them - more than 90% - said they were very supportive of the CP109 proposals in respect of social housing. We got feedback from them about the importance of the investment diversification provided by investment in social housing. At the moment, over 90% of the credit union movement's investments are with banks in the form of bank bonds or bank deposits. In many ways, credit unions are somewhat over-exposed to the banking and financial sector as a counterparty. Social housing can provide a significant element of diversification for them.

The credit unions have a regulatory reserve ratio of 16% at the moment. This means they are exceeding the 10% minimum requirement by six percentage points. Across the movement, this equates to €900 million, or approximately the level of funding suggested in CP109 as the maximum level that could be invested to yield 6,500 homes. Deputy Ó Broin spoke about the level of housing provided. It is interesting to note that our survey suggested that the credit unions would be willing to engage in further funding of that sector. If 20% of the credit union movement's investment base were dedicated to housing, almost 14,000 homes could be provided. There is certainly a commitment in the sector to provide substantial social funding for social housing projects.

Chairman

Does Mr. Farrell have anything to add?

Mr. Ed Farrell

I think I have more or less said what I have to say. Deputy Coppinger suggested, in the context of the AIB sale, that funds are not the problem. It is not really for us to comment on that. The Government's position, or Europe's position, is that the Government is under an EU mandate to use the AIB proceeds for something other than capital spending. We will assist in the social housing area if we are asked to do so. We started this process in 2014. I suppose the 2020 document was the written request. We had been engaging for a few years before any documents were produced in this space. Interest rates were at a totally different level back then. In 2014, the rate was approximately 3.5%, which would have been the average in this area. It was at 2.5% in some of the material that was drafted by financial advisers more recently, including late last year. Obviously, interest rates have been decreasing even further. We are into negative interest rates at the European level for the foreseeable future. The latest proposal involved a 2.5% rate. We have not had detailed conversations because, as we understand it, the fund has not been opened and is not nearly up and running. We do not have details of the interest rate. If it is 2% or 2.5%, it will represent good value for the approved housing body. I know the current rates are going to be much lower if they are on the balance sheet than if they are off the balance sheet. If a rate of 2% or 2.5% is secured, that is much better than what is being achieved in Government bonds or in bank deposit accounts at the moment. It would then be a question of issues like prudence and credit assessment, about which we had a conversation earlier. Assuming that stacks up, a rate of 2% or 2.5% would be economically viable for us.

Deputy Coppinger's final point related to the risk to members' funds. We cannot speculate. No credit union will decide to put its members' funds at risk. Every credit decision, from a €500 loan for Christmas or a communion to a €5,000 loan for a car or a loan of €50,000, €75,000 or €100,000 for a house, is put through the wringer internally in every single credit union. Some credit unions even seek outside assessment from experts as well. It is certainly the case that the credit unions exist because their 3 million members trust them. If they tried to do anything that was too risky or not worthy of being approved, the Central Bank would not allow it. The boards of the credit unions would not want to do anything that was not within risk parameters or not appropriate.

Chairman

I will take a few more questions.

Deputy Eoin Ó Broin

I thank the witnesses for their answers. I have two follow-up questions, the first of which relates to the possibility of 70% loans, as opposed to 100% loans. The approved housing bodies have an availability agreement that is guaranteed by the State. They also have the step-in clause that has been mentioned, which means that the local authority can step in if something happens to an approved housing body. I presume the existence of these two arrangements means there would not be a huge amount of additional risk if a 100% loan as opposed to a 70% loan, were provided. The only reason I am asking is that the 30% CALF complicates the lending procedures. Given that the two safety nets to which I have referred - the availability agreement and the step-in clause - are in place, what is the view of the credit union movement from a financial risk management point of view about the possibility of having the 100% loan option?

I want to go back to the first question. I think it is really important for us to press Mr. Farrell on it. Two years ago, capital investment in social housing by the State was at rock bottom. It was approximately €400 million per annum. Many of us challenged the Government to increase capital investment. It said it did not have the money. We challenged that and identified other sources. At the same time that the Government was saying it did not have the money, the Irish League of Credit Unions and others were putting on the table amounts of money that were equivalent to what the State was spending at that point. I am working on the basis of the figures provided by the league.

The credit unions are proposing an annual fund from their own resources, let alone from other funds that may be available, equivalent to what the State was funding at that point, somewhere between €347 million and €520 million. Everybody wanted to know about funds and we asked the Departments of Finance and Housing, Planning, Community and Local Government about this. The Government said it had no funds but the credit unions said, "Yes, we have funds, here they are and here is the sustainable model for funding". From the sector's direct experience with the Central Bank and the Departments of Finance and Housing, Planning, Community and Local Government, can the witnesses tell the committee who was blocking the access to those funds? I believe the public has the right to know.

The credit union sector was saying that it could double the amount of investment in social housing in a way that is good for the credit union members and for the people who need the housing. Somebody was stopping the sector from doing that. Was it the Central Bank's Registrar of Credit Unions, the Department of Finance, the Minister or was it the Department of Housing, Planning, Community and Local Government? Without putting the representatives too much on the spot, could they give their experience of those engagements over the past two years? We are talking about 10,000 to 15,000 homes. This is the kind of quantum of units that could have been commenced two years ago and built over a six year period, if this had been taken up when the sector first proposed it. These are not trivial amounts of homes and families that would have benefited if the Government had taken up the offer two years ago when it was first made.

Chairman

There are no further follow up questions before I go back to the witnesses.

Mr. Ed Farrell

With regard to the 70% and the 100% figures, it would certainly not be the same if the capital advance leasing facility, CALF, disappeared and we were at 100%. It would not be as risky or the same as a bank or a credit union giving a 100% mortgage to an individual person, because there is the payment availability that guarantees 92% to 95% of the market rent by the local authorities or by an arm of the State. The rent is guaranteed and there is the step in, as the Deputy and I have mentioned. It would certainly not be as risky or as out there as lending 100% mortgages would be.

At the same time, I believe that while a 100% mortgage would be a bit far, it is possible there could be somewhere in between because if the value of property went down again, everybody would find themselves in negative equity again. This would not be so good because the accounting has to be reflected on balance sheets. If the stock of housing at the approved housing body level dropped substantially again, there would be minus figures in the accounts. This would not look right even if the houses remained rented and the rent was still coming in. It is possible that somewhere between 70% and 100% would still leave it safe but with some extra capital and investment for social housing by means other than approved housing bodies. I presume this is where the Deputy is coming from.

Turning to the roadmap or the path we have been on for the past two years, to be fair to the Irish League of Credit Unions and the approved housing bodies, early on we identified issues with three significant arms of the State. The Central Bank is the credit unions regulator and we operate in an environment that is highly regulated by the Central Bank. It is very prescriptive and rules driven, and had been long before any global financial crisis. We were never run on the principles-based system, rather it was always on the rules-based system. We have a very prescriptive rule book in legislation and in Central Bank regulation on what credit unions can and cannot do, on how much they can lend and for how long.

Very early on in the debate, or in the journey, we outlined that the first issue was that credit unions could not invest in a collective to do with approved housing bodies. They could only invest in bank bonds, Government bonds and bank deposit accounts. That was one issue on which we have worked and lobbied the Central Bank. We had Members in both Houses to help us do that. The consultation paper that issued in May looks like it is going to open the door to a first phase that could allow up to €900 million to go into tier 3. As a first phase, I believe it to be a good start. There is a commitment from the Central Bank to review that in two years to see if we are looking good and if the approved housing bodies are proving a good investment class for credit unions. The consultation paper issued in May and we started the conversation back in 2014, so it is there but it took a while and a lot of work by us and others to get that consultation paper.

It looks like in the next three months, by the fourth quarter, it will hopefully be up and running and we will be open for business.

The other arms we had identified were the Department of Finance and its role in looking after credit unions on behalf of the Government, and the Department of Housing, Planning, Community and Local Government in the context of housing and social housing. The capital advance leasing facility, CALF, and the payment and availability, P&A, agreements came out.

We have worked with the Departments on the special purpose vehicle also since the Rebuilding Ireland report was issued one year ago, as Deputy Cowen said. During the past year we have lobbied and pushed hard in this regard. We met the then Minister, Deputy Coveney. Before that, we met the then Minister, Deputy Alan Kelly, and recently we met the Minister of State, Deputy Damien English, to push them on the commitment in the report for the special purpose vehicle. As we understand it, they are to provide some support. The Rebuilding Ireland report states that "Support will be provided from this [innovation] Fund to an Irish Council for Social Housing (ICSH) [approved housing bodies] sector-led new special purpose vehicle, involving investors, including the Credit Union movement".

We have been meeting with the two Departments, as the second and third arms of the State in this context, and pushing hard since the end of 2014 and especially since the Rebuilding Ireland report was issued one year ago. The report contains a clear commitment and a clear sense of direction from the Government that it is going to make this special purpose vehicle, or sponsor it, for the approved housing body industry in order to create this fund. We have met PricewaterhouseCoopers, who they have engaged. The NTMA and the Ireland Strategic Investment Fund were also mentioned in the Rebuilding Ireland report as the other State agencies that could or would be asked to come in and help to administer the fund. Professional advisers, custodians and trustees, etc., must be employed by these funds to be compliant with their own regulations. All of those funds, and this one in particular, would be regulated by a funds division of the Central Bank, which is a different division from the credit union registry. It would be a regulated entity in its own right and would have to have professional advisers in the background.

Now that we seem to have the Central Bank door slightly ajar, or looking like it might be ajar later in the year, we will now have to increase our focus and push on to make sure the Departments come through for the approved housing bodies to have the fund so they can take in credit union and non-credit union money.

Deputy Eoin Ó Broin

With the payment and availability agreement being linked to a percentage of market rent, does this create an uncertainty? In Mr. Farrell's view, would it be better if the way in which the payment and availability agreement was calculated was the paying down of the loan plus something additional for the maintenance of the property? Credit unions would then not be dependent on the fluctuations of the rental market for what that is set at. Should it be set to guarantee the loan being paid down plus some maintenance costs for the approved housing body? I know this has been an issue between the approved housing bodies and the Department of Housing, Planning, Community and Local Government. What is Mr. Farrell's view on this?

Mr. Ed Farrell

From a personal understanding of the property market in general, in a rising tide the market rent probably made perfect sense, but in a reducing tide one would want to have the rent bottom lined and with some maintenance built in. I presume that the 30% of CALF was some cushion and the two together stepped in as a bundle made good sense. Two years ago when rents were depleting, it probably had its own challenges. We would assess whatever model is there. When credit union money starts coming into the pipeline, we will have to get expertise to adjudicate if the model is as tight as can be, if it could be tighter, and, if modifications were to be made, the pros and cons as a bundle. As a model, it appears to be a good, secure model with the CALF, the P&A and the step in. We can consider tweaks and changes. We are always on one side or the other of a problem. Property is going up too fast now but three years' ago it was the opposite domain and one would be sorry to be in a market rent. Perhaps long-term investors or pension funds would take the long view, with some better years than others, but credit unions would like it steady as it goes.

Knowing that one is getting 80% or 90% of the basic figure, not linked to a market might actually be more security for us and the extra bit comes as a bonus. At least we know we have the basics covered.

Chairman

I thank Mr. Farrell. As we have no further questions, can I thank our witnesses Mr. Malone and Mr. Farrell for attending this morning and for sharing the information with the committee? I thank the witnesses in the Public Gallery.

As our next session is not due to start until 12.30 p.m. I propose that we suspend the sitting until 12.20 p.m. Is that agreed? Agreed.

Sitting suspended at 12.05 p.m. and resumed at 12.25 p.m.