New Resolution 49 Standard

1. New Resolution 49 Standard

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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’

12. Chapter 15 6th May 2009 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

13. Chapter 15 6th May 2009 Loan repaid as agreed Repayment Schedule - Amortisation Table Wk Scheduled No. Amount Interest Principal Balance 57.29 17.31 39.98 10,000 .00 57.29 17.24 40.05 9,960 .02 57.29 17.17 40.12 9,919 .97 57.29 17.10 40.19 9,879 .85 57.29 17.03 40.26 9,839.66

14. Chapter 15 6th May 2009 Loan not repaid as agreed Repayment Schedule - Amortisation Table Wk Scheduled Actual No. Amount Interest Principal Balance Balance 45.00 17.31 27.69 10,000.00 10,000.00 45.00 17.26 27.74 9,960.02 9,972.31 45.00 17.21 27.79 9,919.97 9,944.57 45.00 17.16 27.84 9,879.85 9,916.78 45.00 17.12 27.88 9,839.66 9,888.94

15. Chapter 15 6th May 2009 After 91 weeks .... Member has continued to pay €45 per week Scheduled Actual No. 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

16. Chapter 15 6th May 2009 After 91 weeks .... New Resolution 49 Calculation:- Looks at the Amortisation Table to see what week the actual balance equates to. Scheduled Actual No. Balance Balance €6,109.83 €7,251.84 66 €7,251.84 Weeks in Arrears = 91 – 66 = 25 weeks (Old calculation was 19 weeks)