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 Cuna Mutual, the world's biggest credit union insurer, is working
with UK lenders to provide a 'debt waiver' facility for borrowers
which ensures they do not have to make repayments on loans if they
fall ill or lose their jobs.
The product increases the attractiveness of loans offered by credit
unions and comes at a time when they are being urged to grow at the
expense of payday lenders such as Wonga, which charges an annual
interest rate of 5,853 percent.
Paul Walsh, Cuna's chief executive who was previously an insurance
executive at Barclays <BARC.L>, says adopting the waiver could
heighten their popularity.
"I think it's a very credible way of transforming the attractiveness
of their products. It makes them more innovative and more relevant
to certain types of customers," Walsh said.
Cuna has been offering similar waiver products in the United States
for the past 75 years, where it has been adopted by the Navy Federal
Credit Union, a savings club attached to the United States military,
which has a $35 billion loan book.
Credit unions, or community-run savings clubs, are less developed in
Britain but are expected to grow in number as the authorities see
them as an alternative to payday lenders, which have surged in
popularity since banks tightened lending activity after the 2008
financial crisis.
Britain is clamping down on the previously lightly-regulated
short-term lending market and the Archbishop of Canterbury has vowed
to drive them out of business by using the Anglican church to build
up a network of credit unions. Last week, he hired Britain's former
top financial regulator to lead a task force as part of the
campaign.
According to data from the Association of British Credit Unions,
around 1 million Britons currently use them, with over 600 million
pounds ($986.66 million) loaned to members as at September, 2012. In
comparison, payday lenders lent between 2-2.2 billion pounds in the
2011/12 financial year.
Cuna's product provides an alternative to payment protection
insurance (PPI), which was sold by banks and other lenders to
millions of customers but which was discredited when it emerged many
borrowers were ineligible to claim on it — leaving the industry with
a 20-billion-pound compensation bill.
Walsh was a commercial director at the insurance division of
Barclays, Britain's third-biggest retail bank, between 2004 and
2007, a time when PPI was being mis-sold across the industry.
However, he wasn't involved in the marketing of the product, for
which Barclays has set aside 4 billion pounds to compensate
customers for mis-selling.
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Since 2010 banks and other mainstream lenders have stopped offering
PPI or any alternative protection, fearful of further mis-selling
scandals, leaving millions of borrowers with no security should they
fall upon hard times.
The waiver was developed for credit unions and customer-owned
lenders rather than banks so it would only partly plug that gap.
Walsh estimates that more than 95 percent of UK mortgages are sold
to customers without any insurance.
"There is a growing protection deficit in the United Kingdom. It is
going to come home to roost. Consumers don't have any creditable way
of protecting their loan," he said.
Public policy think tank ResPublica, whose advisory board members
include Anthony Browne, chairman of the British Bankers Association,
said in a report last year that the government should encourage
state-backed Royal Bank of Scotland <RBS.L> and Lloyds Banking Group
<LLOY.L> to adopt the waiver.
Cuna launched its first payment waiver product in Britain last year
in partnership with Plane Saver, a credit union with 8,000 members
set up by British Airways staff in the 1990s. Plane Saver, the 4th
biggest credit union in the country, with 31 million pounds of
assets, has seen a 23 percent rise in lending since introducing the
waiver last September.
Cuna has agreed similar partnerships with Clockwise, a credit union
linked with Leicester City Council and the Scottish Police credit
union.
The waiver facility is written into the loan agreement and no third
party is involved. The lender purchases a business-to-business
insurance policy which transfers the risk of default from its
balance sheet onto the insurer.
Walsh said Cuna is also talking to building societies, including one
of Britain's top 10 mortgage lenders, about offering the facility
alongside mortgages.
($1 = 0.6081 British pounds)
(Editing by Carmel Crimmins and Louise
Heavens)
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