Sunday, February 19, 2023

SECU Risk-based Lending - # 8

 To: SECU Board of Directors


Dear Chairman Ayers,

Truly sorry for veering off the risk-based lending (RBL) path
to comment on the tax prep "disruption" you help create in western N.C. and to remark on the so far inexplicable SECU Ad Campaign recently launched. But, let's get back at it, class is in session!

image.pngBy the way, lot's of members were amused by the "joking" reference to the possibility of an SECU Super Bowl Ad; and of course, were relieved when there wasn't one! Now, I haven't mentioned to anyone - not a soul! - that word has it around WRAL, that you and the SECU Board actually had purchased Super Bowl ad time - but pulled it at the last minute (but still had to pay for it!). Not sure why you did that, but let's just keep that between ourselves, okay? I won't tell and I'm sure you won't!  ('Cuzz you'll duck!) No need to be transparent on everything, right?

Just to recap again : RBL # 1 noted that credit scores have known to be error prone; RBL #2 debunked the myth that SECU isn't serving "A" paper folks; RBL #3 gave an example of the $121 million extra interest costs to members from RBL; RBL # 4 showed that SECU's rate tiers are arbitrarily set and how just 1 point difference in your score can cost you plenty; RBL # 5 provided a better alternative than RBL, just lower loan rates for all members!; RBL # 6 demonstrated how just one, 30 day past due payment can trash your credit score; and RBL # 7 showed that if you're a young, black and/or female SECU member, your risk of paying more is higher under RBL; because, on average, credit scores for those groups are lower - that sure smacks of discrimination to me!.

So let's talk a little about discrimination,
whether it is by age, race, gender, economic "class" - or with this Board-approved, risk-based lending scheme - discrimination for potentially all SECU members!

But first, let's make one thing very clear, it is not the credit bureaus nor credit score modeling companies which are discriminating against SECU members with RBL. Those folks only gather the credit report data and calculate the credit scores. Those folks don't decide how SECU - or anybody else for that matter - chooses to use a credit score. Got that, it's important? The credit score companies just provide the information, they don't set lending policies, nor the "A-B-C-D-E" rate tiers, nor the interest rates charged for each "risk" tier. The decision on how "to discriminate against SECU members" is in the hands of someone else - Chairman Chris Ayers and the SECU Board of Directors.

It's important for you to know that a credit score - yours and mine! - is no more than a prediction - an estimate - of the possibility that a group of people - a "credit tier"  (720-850 for example) - may or may not repay a loan on time. Key here is "prediction" and "group" - keep those two in mind!

Every credit bureau and credit score company will tell you - without exception - that their prediction of future, untimely payments for a group is pretty accurate. All credit score companies will also tell you that - without exception - they have no "*#!*x*!x"*" clue (excuse the language!) which individual  in that group ("tier") will actually end up paying late. Did you get that, or do we need to run through it again? The point is that, while a credit score may be accurately predictive for the group; it does not and it can not predict which individual member in the group will not pay.

Okay let's try an example from real life that will make this clearer.
Remember in elementary school when the teacher left the classroom and "someone" (not you of course!) put a thumbtack in the teacher's chair?  When the teacher "realized" his surprise, he asked who did it? 'Course no one would fess up or rat out their friends; so the teacher said everyone would have to stay after school for an hour as punishment! Even though you, me, and most of the class "didn't do it", everybody had to stay after. Fair? Well no, not really!

image.pngThe SECU Board has evidently - using the same unjust logic as that teacher! - decided "to put you in your place" - in some arbitrary RBL credit class! It's going to be very expensive for many SECU members "to stay after" with RBL. Unfair? Well, "tough duck"!

Using that $18,000 used-car loan example (see RBL # 3), each individual in the "E" paper group - each! - will have to pay $2250 more than the "A" paper folks over the life of the loan. Although the credit score company admits that they have no idea which individuals in the "E" tier (group) - or class - will fail to honor the loan commitment;  according to the SECU Board's thinking, all members in the "E" class are presumed to be guilty until proven innocent - and will be monetarily penalized!

Although SECU's overall loan losses are very low; let's assume that there are 10 (individual) SECU members in that "E" paper tier (group/class) and 1 of those members defaults (that would be a 10% default rate!) From the 10 (individual) members in the "E" paper group, nine out of ten of those individual SECU members have repaid their loans exactly as promised, but have each been overcharged $2250 by Chairman Ayers and the SECU Board for the loan - is that fair? The SECU Board has evidently decided  that the whole "E" class, in this example, has to stay after school - even though 9 out of 10 repaid the loan exactly as promised.

With risk-based lending, the SECU Board has agreed it is right and fair to penalize 90% of the individual members in this artificially contrived tier/group - even though they did nothing wrong?
Thought SECU and the whole Country worked on the principle of "innocent until proven guilty'?

Guilty until proven innocent is definitely a new culture and a new direction for SECU?

image.pngimage.pngRisk-based lending is a "double duck up" by Chairman Ayers and the SECU Board! Members are beginning to wonder if the SECU Board should be kept after class?


No comments:

Post a Comment