Canada’s credit unions are applauding the recent federal decision allowing them the freedom to operate nationally – but they are taking a long breath before taking the plunge.
“Credit Unions make up less than 12 per cent of the Ontario market, compared to the Western provinces,” says Robert Leaker, VP of emerging markets and innovation at Meridian Credit Union.
That suggests his company based in Canada’s most populous province is likely to stick close to home. Still, all bets may be off for migration in the opposite direction.
In fact, credit union insiders point westward in identifying where lobbying to see the federal government allows credit unions to extend their charters nationally and become the federally regulated institutions Canada’s big banks are.
The government ceded to that request late last year, with that new protocol coming into force December 19. Credit unions have yet to take Ottawa up on its offer.
Traditionally restricted to operate within their home province, credit unions would reinvent themselves to go national – like B.C.’s Vancity – which formed the online Citizens Bank of Canada in 1997 to expand beyond the Rocky Mountains.
“In Manitoba and Saskatchewan, more than half of the population (in those provinces) are in credit unions,” Leaker points out. “Especially in British Columbia, there is a lot of competition in the credit union space.”
Credit unions in British Columbia are a considerable force in that province’s active mortgage market – and the opportunity to expand in Ontario to do battle with the big banks is likely, say analysts, pointing to lenders looking for new markets outside their mature and declining one.
“They have been lobbying for it,” says Leaker. “They want the Ontario market.”
The big banks have historically dominated in Ontario, and continue to do so with a plethora of branches and massive national advertising campaigns. For credit unions, it means they’re like David fighting Goliath.
And flying under the radar has helped cement a relation with brokers, seen as key to driving growth where consumers don’t readily think credit union when looking for a mortgage.
Some of the best advertising and brand marketing for credit unions are the mortgage agents themselves, says Phil Fiuza, manager of broker originations at IC Savings.
“We have roughly 2,000 mortgage agents in southern Ontario, and are expanding into the Ottawa and London markets,” says Fiuza. “Branding is absolutely important – some of the best ambassadors we have are our mortgage agents; the veterans who have been in the channel some time and understand what our needs are.”
IC Savings, which expects to expand to seven retail branches in the next few months, stresses personal relationships and local underwriting in analyzing its success.
“The mortgage agents we work with best understand that we need to know the client, know their story and what they need, so we can better serve their needs,” says Fiuza. “An automated adjudication system doesn’t work for us. We don’t work with formulas; we don’t deal with the matrix. We deal with people.”
Like Meridian, IC Savings is focusing on the Ontario market, with no immediate plans on expanding outside of the province. The fact is, says David Phillips, CEO and president of the Credit Union Central of Canada, many CUs are taking a strategic look at applying for a federal charter.
“If I were to speculate, I would say it will be four or five years before you see a federally chartered credit union,” says Phillips. “Many are taking the long-term look – they are eager to take advantage of crossing provincial borders, but no one is jumping in just yet.”
As for credit unions losing that local, community approach to banking by going national, Phillips doesn’t feel that will happen.
“I don’t necessarily see it that way,” he says. “I don’t see it undermining the strength of credit unions – the local, community approach. Maintaining the local service, the democratic principles; that is what credit unions were founded on.”
But more and more, the underwriting flexibility that credit unions enjoy by not being federally regulated entities is what’s driving broker originations. That’s something they may be loath to give up.
“We will go behind another lender for a second mortgage; or if the client has damaged credit, we will treat each on a case-by-case situation,” says Leake. “We will do 100 per cent financing; OSFI regulations won’t allow banks to do that.”
OSFI Guideline B20 regulates residential mortgage underwriting practices and procedures for Canada’s banks.
Understandably, Fiuza argues that the B20 guidelines are really not a concern for IC Savings.
“When the rules came in, the drafts for B20, we saw there was quite a bit there that we have already been doing on a consistent basis,” Fiuza says. “We didn’t have to change much.”
Set out in June of last year, all federally regulated financial institutions (FRFI) are subject to five onerous principles that effectively block transactions brokers have considered their stock and trade.
In many cases, these rules would handcuff how credit unions currently operate, especially In the case of HELOCs, OSFI expects FRFIs to cap LTVs at 65 per cent.
Principle 1: FRFIs that are engaged in residential mortgage underwriting and/or the acquisition of residential mortgage loan assets should have a comprehensive Residential Mortgage Underwriting Policy (RMUP). Residential mortgage practices and procedures of FRFIs should comply with their established RMUP.
Principle 2: FRFIs should perform reasonable due diligence to record and assess the borrower's identity, background and demonstrated willingness to service his/her debt obligations on a timely basis.
Principle 3: FRFIs should adequately assess the borrower's capacity to service his/her debt obligations on a timely basis.
Principle 4: FRFIs should have sound collateral management and appraisal processes for the underlying mortgage properties.
Principle 5: FRFIs should have effective credit and counterparty risk management practices and procedures that support residential mortgage and underwriting and loan asset portfolio management, including, as appropriate, mortgage insurance.