Monday, February 13, 2023

SECU Risk-based Lending # 2

 To: SECU Board of Directors


Dear Chairman Ayers,

As promised, here is the second commentary on Risk-Based Lending (RBL) for you and the SECU Board to consider. Many members believe you and the SECU Board have made a serious mistake - an unforced error - in approving the implementation of  risk-based lending. Hope that you and the SECU Board will at least acknowledge that an error in your decision is a possibility. You need look no further than the last email (RBL #!) to confirm that possibility - as your ill-conceived decision to centralize collections last summer had to be reversed after SECU's loan delinquency mushroomed, doubling in just six months. And probably, the decline in SECU year-over-year assets at 12/31/2022 - for the first time in its 85 year history - was not to be found in your "Strategic Plan."

The SECU Board has received numerous letters from members with substantial expertise in finance - many with significant experience directly with SECU - challenging your decision to implement risk-based lending. Chairman Ayers, as a lawyer, one would hope that you would not only acknowledge the possibility of Board error, but more importantly acknowledge the SECU Board's fiduciary duty to always act in the best interest of SECU member-owners. The decision by the SECU Board to implement risk-based lending does not appear to meet that standard. Those members who question your decision may well be wrong, if so simply pause and fully explain to the membership the basis for your decision. A pause and a detailed discussion with the SECU membership will in no way adversely affect the operation or financial health of SECU - your refusal to listen may. As Thomas Paine said: "Reason obeys itself, and ignorance submits to whatever is dictated to it."

So, let's look at a couple of ideas and impressions that you and the senior staff are putting forth about risk-based lending at SECU (most of the data and quotes comes directly from information provided to the SECU Board or to all SECU employees)
1) Members have been led to believe that SECU doesn't serve "A" paper borrowers. (Members who are rated "A" have credit scores between 720-850). That is simply not true. Here is the actual breakdown of SECU borrowers toward the end of last year (the SECU Board received this information):


Of 1,179,000 borrowers at SECU at the time of your analysis, 247,000 were "A" paper! The percentage distribution looked like this:

Most folks would say that's a well-balanced portfolio!

1a) Might be well to also note the total balances owed by each "Tier":

"A" paper loan balances: $8.9 Billion           Looks like the "underserved" "A" paper folks owe the most!
"B" paper loan balances: $6.6 Billion
"C" paper loan balances: $5.7 Billion
"D" paper loan balances: $2.1 Billion
"E" paper loan balances: $0.3 Billion 

2) The other most frequently heard "justification" for moving to risk-based lending is that "A" paper folks will flock to SECU for the better rates RBL will offer; that's probably not true too! Here's why:

!!! [BTW, the risk-based lending terms and rates were distributed to the staff on 2/1/2023 with a projected implementation date of @ 3/1/2023. There is no indication that the SECU Board has developed plans to educate or inform the members of the new RBL program]

The new SECU proposed RBL "A" paper rate (the 720-850 folks) on an $18,000, 5-year used auto loan is 5.75%. Here's a [link] to "Bestcashcow" one of numerous used car rate websites available on the net. Looks like with a 740 credit score a member can get a 4.69% rate at Bank of America! (and also beat SECU's new "A" paper rate at JPMorgan - 3.49%, USAA - 5.19%, PenFed - 2.89%, Suntrust - 5.44%, Coastal FCU - 3.44%...hey you can even get a 4.99% rate over at Local Government FCU through CIVIC FCU!)

Chairman Ayers, why do you and the SECU Board believe your risk-based lending scheme is going to work? Do you really think members are going to flock back for a "half A'd"  rate? Have you been sold a bill of goods? Or is a bill of goods being sold to the membership?

3) Probably the most insulting impression given to SECU members about "the benefits" of risk-based lending are the following quotes from SECU senior staff in memos to "All SECU Employees":

"Today, we attract a fairly robust number of members with low credit quality because our rates are so favorable for them. [ Mr. Ayers, why do you and the SECU Board perceive this to be a problem?] In fact, our overall portfolio is actually overburdened by low credit quality borrowers." [Mr, Ayers, how is SECU "overburdened" by lending to our members who need help?]

"We will not take advantage of our lower credit profile members [are you sure?]. We will still be the best product they can get. So while they may pay a slightly higher rate [ Mr. Ayers, +2% for "C", +3.50% for "D", +4.50% for"E" is not "slightly" higher!] than they have today for a loan, they won't be able to find a lower rate somewhere else" [Sure sounds like "taking advantage" to me!]

4)  Risk-based lending brings much higher rates on SECU loans "at best" to all members with credit scores in the  "C" tier. the "D" tier, and the "E" tier. That is (Mr. Ayers, according to your own data!) 290,000 "C" members, 298,00 "D" members, and 111,000 "E" members ...699,000 total members...or over 59% of all SECU borrowing members.

Mr. Ayers, as a lawyer, do you and the SECU Board truly believe that disadvantaging 700,000 North Carolinians who are  faithfully repaying those "burdensome" loans [according to your own data 99.3%!!! of these "low credit quality" C, D, & E loans are repaid] will pass muster in meeting your fiduciary duty to SECU members?

5) And lastly, the impression that more and more members have of the SECU is [link- let Mr. Potter v George load]...

Chairman Ayers, hope you and the entire SECU Board will pause and reconsider risk-based lending because...

As Jimmy Stewart said in the clip:"... just remember this rabble you're talking about, they do most of the working and paying and living and dying in North Carolina."

SECU should continue to treat all members with the utmost dignity and equal members, as equal human beings.

Have a great weekend.



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