Prudential Regulation Authority Rulebook

17.1

Credit unions that provide mortgages are expected to consider the additional risks to which they are exposed, and put in place appropriate systems and controls to monitor and mitigate those risks. As part of this, the PRA considers it good practice for these credit unions to consider the key risks inherent in mortgage lending as highlighted in SS20/15 Supervising building societies’ treasury and lending activities.^[16] The PRA acknowledges; however, that the expectations set out in SS20/15 may not all be applicable to such credit unions and the size, scale, and nature of a credit union’s mortgage book should be taken into account to ensure a proportionate approach. For example, the ability to gain Mortgage Indemnity Guarantee (MIG) insurance may not be feasible due to low volumes.

17.2

In particular, it is good practice for credit unions that provide mortgages to have regard to Chapter 3 of SS20/15 (lending) and ensure they consider relevant sections. It is good practice for such credit unions to:

• be able to evidence that they have given consideration to the relevant risks and put mitigating controls in place where they consider it appropriate. Risks to be considered include:
  • affordability risk profile including appropriate controls over interest only mortgages, to ensure that repayment of the loan principal at maturity is achievable;
  • accurate and verifiable assessment and valuation of security;
  • pricing of risk. Credit unions are expected to have risk pricing models that at a minimum take into account the factors outlined in Chapter 3 of SS20/15; and
  • the risks inherent in different sub categories of mortgage lending (eg impaired credit, buy-to-let lending, self-build lending, shared ownership, lending in and into retirement, and commercial real estate lending).
• review their board-approved lending policy to ensure its aims and contents align with Chapter 3 of SS20/15.
• put in place risk management controls that are appropriate and proportionate to the types of business undertaken, as set out in SS20/15.
• have in place lending limits set by reference to available management expertise and risk management capability as set out in SS20/15. The PRA expects the lending limits outlined in the credit union’s lending policy to resemble the Traditional Approach set out in Appendix 2 of SS20/15 (credit unions should; however, use ‘total mortgage book’ instead of ‘total loan book’ when calculating the indicative limits). In some instances, credit unions may set different limits dependent on their risk appetite; in such instances the credit union should make the PRA aware of the limits, the rationale, and any risk mitigation arrangements.

17.3

In line with the requirements in Rule 10.3 of the Credit Unions Part of the PRA Rulebook, credit unions providing mortgages should also consider Chapter 4 (Financial risk management) of SS20/15 and be able to evidence that they have given consideration to the key financial risks described, and how they are managing and mitigating these. The key financial risks include:

• liquidity risks, arising from maturity transformation;
• funding risk, arising from the relative stability of different funding sources and reliance on new funding to replace outflows;
• wholesale counterparty credit risk interest rate risks: a credit union that provides mortgages should have an adequate system for managing financial risks arising from fluctuations in interest rates. The PRA expects credit unions that have a fixed-rate mortgage book to be able to demonstrate that they are managing the interest rate risks adequately. Such credit unions should follow, to the extent possible, the risk analysis elements of the financial risk management indicative control framework in Appendix 3 of SS20/15 for the administered approach. The PRA expects such credit unions to discuss their approach for managing interest rate risk with their supervisor and share their plan; and
• operational risks in treasury and related activities.

17.4

Credit unions that provide mortgages are expected to have in place internal controls on treasury financial risk management (see Rule 10.3 of the Credit Unions Part of the PRA Rulebook). As such, these credit unions should review relevant sections of paragraphs 4.6- 4.31 of SS20/15 and consider, as evidence of good practice:

• establishing a board-approved treasury management policy that governs all areas of treasury activities (see paragraph 4.6 of SS20/15);
• the imposition of policy limits (see paragraphs 4.9-4.13 of SS20/15);
• putting in place risk management systems and controls that are proportionate, and appropriate for the business they intend to undertake. This includes stress testing to evaluate the impact in income of abnormal market conditions, and board information reporting; (see paragraphs 4.15-4.27 of SS20/15); and
• conducting an independent review of treasury activities, including adequacy of controls over maturity mismatch (see paragraphs 4.28-4.31 of SS20/15).

17.5

Credit unions that provide mortgages are expected to meet the liquidity stress testing expectations set out in paragraphs 12.1 to 12.4. 

17.6

Credit unions engaged in, or wishing to engage in, commercial real estate lending should be mindful of the different nature of the risks associated with this activity. For example, commercial property will generally require different valuation skills to residential housing and has a significantly higher default rate. As such, the PRA expects credit unions undertaking or considering undertaking this activity to carefully consider paragraphs 3.48- 3.53 of SS20/15 and be able to evidence that they have adequate risk controls in place.