Friday 16 November 2018

Directors of bust credit union were told lending practices broke the law

Leaked documents show Financial Regulator tried to rein in Newbridge

FACING DAIL QUESTIONS: Patrick Honohan
FACING DAIL QUESTIONS: Patrick Honohan

MAEVE SHEEHAN

THE volunteer directors of Newbridge Credit Union, which was bailed out at a cost of €54m to the taxpayer, were warned more than eight years ago that they were breaking the law.

Leaked documents obtained by the Sunday Independent reveal how the board of the credit union failed to rein in its lending policies in apparent defiance of the regulators.

The credit union had lent huge sums to builders and developers during the boom but the documents reveal that when they were warned that they were breaking the law, the board claimed that it was the law that was at fault.

The credit union had to be bailed out by State-owned Permanent TSB following a dramatic High Court hearing last Sunday, landing taxpayers with a bill for €54m.

The confidential minutes and letters reveal how the regulatory authorities had tried to force the board of the credit union to tow the line since 2005.

At one fractious meeting with the then Financial Regulator, Liam O'Reilly, on December 15, 2005, the volunteer directors were told that they were "way outside" lending limits and had to "comply with the law".

The exchanges are contained in correspondence leading up to the meeting on December 5, 2005, and minutes of what transpired during it. They show how:

* The volunteer directors refused to meet the overall Financial Regulator in Dublin to discuss the breaches, forcing him to travel to Newbridge instead.

* One director suggested the law, not the credit union, was at fault and said the financial regulator "hadn't done enough" to get it changed.

* Another director accused the financial authorities of making "threats" to volunteers and "dictating" to the credit union in "a manner that was unacceptable".

* The Financial Regulator and his team had to repeatedly point out that they were responsible for implementing the law, not changing it, saying: "The law is in place and it is being flouted."

The letter reveals how the registrar of credit unions, Brendan Logue, caused upset when he telephoned volunteer directors at their homes to discuss the breaches. Mr Logue explained that he "did so in order to explain to them informally our position on the breaches ... Contacting volunteers at home for such an informal discussion is the only effective means open to me."

Mr Logue, who is now retired, confirmed the meeting with the Financial Regulator but said that it "achieved little or nothing".

Asked to comment on the minutes, he told the Sunday Independent: "Newbridge continued to trade outside the scope of the Credit Union Act and was in breach of the act. Eventually, we had to appoint investigators, third-party investigators, to look into the matter."

The investigation was conducted by MKO, an accountancy firm. The report was never published but the credit union had to pay half the estimated €300,000 cost.

At that time, there was no legal mechanism to take sanctions, despite the ongoing serious concerns of the financial authorities. New powers allowing enforcement action against directors and managers of credit unions only came in to effect last August.

The regulator accused Newbridge of breaching sections 27 and 35 of the Credit Union Act, which include limits on the size of individual credit union loans and which cap the number of loans that can be repaid over five and 10 years.

One local builder received loans totalling €3.2m over several years, which exceeded the legal limits. As of September, €2.8m was still owing on the loan.

The Dail's Public Accounts Committee plans to question the Central Bank Governor Patrick Honohan about the Newbridge bailout.

Mr Honohan has defended the regulation of the credit union, especially since 2009, when the Central Bank became aware of the scale of loans and lending practices.

He told RTE's Prime Time last week: "We put in a special manager when it was clear that the existing management and directors were not capable or willing to do what was necessary."

A former board member, who asked not to be named, insisted that Newbridge Credit Union was compliant with the rules within a year of meeting the Financial Regulator, forcing members with large savings to remove them.

"The registrar, instead of helping credit unions to help their members, increasingly tightened the noose around members and their loan repayments," the former director said.

"Volunteers in credit unions across the country have been targeted by the registrar and Central Bank. They know of the crippling regulation and reserve control practised by a Central Bank against people who work for the good of their communities without pay."

A group calling itself 'Concerned Members Action Group' has highlighted "professional development" expenses in the credit union's annual reports, which amount to more than €800,000 over 10 years. More than €142,000 was spent on professional development in 2010, €130,893 in 2009 and €144,991 in 2008.

The group has also highlighted loans to directors of the credit union. According to the 2010 annual report, loans to directors stood at €967,881 in 2009 and €688,966 in 2010.

The annual reports were analysed over 10 years by accountants Des Swan, John Munnelly and Alan O'Neill and financial manager Ian Hennessy, all members of the credit union.

The effective collapse of Newbridge Credit Union has led to widespread concern about other community-based credit unions, with 20 believed to be in serious trouble.

Sunday Independent

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