Ever made a poor decision in life? (Y/N?) Bet we all answered that one the same!
Took Saturday off to let the anonymice run free and get some exercise, but we need to get back to work on risk-based lending (RBL). Over the last 5 posts in this series, tried to demonstrate that: 1) SECU has been highly successful for the last 85 years - without RBL, 2) SECU has been financially successful - last 5 years "most profitable ever" per CEO Brady - without RBL, 3) SECU members - per SECU Loan Administration estimates - will pay literally hundreds of millions of dollars in excess interest on loans - with RBL, 4) the same rate, "A-paper for all" lending approach is a superior "marketing" strategy - without RBL, and 5) there are no financial, nor operational reasons for the SECU Board not to pause future RBL implementation to re-discuss its decision with the SECU membership.
That last refusal to pause and review RBL with the SECU membership looks like the classic example of the SECU Board adopting a circular firing squad strategy. Perhaps the 2023 Annual Meeting carried no message for the SECU Board about the need for transparency with the membership?
But let me do a quick brush up on that "A rate for all" lending approach. First, SECU Loan Administration (LA) folks appear to think that they can come up with an "A-paper" lending rate which will be highly competitive and attractive to SECU members. I agree that is a good goal for LA to focus on! If LA can implement that market "A-rate" at SECU, then hopefully more "A-rate" SECU borrowers will use SECU. Sounds really good, hopefully it works! SECU will become even "more profitable" in the future as SECU converts those low-yielding investments (earning less than 1%!) into loans earning much more. Go for it!
But, if you're perhaps shrewder and wiser; consider the "marketing and reputational" value SECU would achieve, if SECU also offered that competitive "A-rate" to every other qualified SECU borrower - whether B, C, D, or E paper! Does anyone doubt that all those B, C, D, E SECU borrowers will be getting the best rate (the A-paper rate!) possible for them from their Credit Union? Do you think all those B, C, D, E qualified borrowers will always consider SECU first for their future financial needs? And, tell their friends, families and coworkers to check with SECU first? Can't buy that kind of support and loyalty with a Super Bowl ad, can you?
Every SECU member wins with the same rate "A-paper for all" lending strategy; the majority of SECU members lose hundreds of millions of dollars with RBL! Wouldn't a pause be prudent?
... RBL: the "risk-based losing" strategy. A circular firing squad approach?
Disagree. You can make more loans to lower score borrowers by pricing them in accordance with their risk. Making more loans helps more borrowers. Most financial institutions (including other credit unions) don’t even make loans to E-paper borrowers because the losses are too high. You can’t give a true competitive A-paper rate to all borrowers on all loan products and stay in business. SECU has never given a competitive A-paper rate on all loan products. Making loans to e-paper borrowers, even at 18%, is a great deal for those borrowers and provides low cost options to the loan sharks, payday lenders, pawn shops, etc, who charge way more than 18%.
ReplyDeleteLooks like same old mantra, SECU can't survive if we don't use RBL. Guess you don' believe Ms. Brady's 5 most profitable years comment at the Annual Meeting?
DeleteExplain how you can make more loans by charging higher rates? Most folks would say that's logically a pretty silly idea. The higher the price the more we will try to borrow? That thought doesn't fly with anyone I know. Most trained economists say the markets work the other way
BTW, what is a "true competitive A rate". If you don't have a definition, just give us an example of what the "true competitive A-rate" is today. Assume you would say the "true competitive A rate" is SECU's A-rate, right? Or is SECU fooling members?
Somewhat sketchy on your facts. Look forward to understanding how your theory of raising prices will increase loans!
BTW, I have a $1 million used car I'd like to sell to you! If you're A-paper, I'll let you have it for $500,000 - deal? If that price offer is too low, I'm willing to raise it for you...
Not sure there really is a definition, but I would say a rate that falls in the 51st percentile or greater (ie beats the majority of the market).
DeleteOnly thing that response confirms is you don't know exactly what you're talking about...see losing credibility wit membership elsewhere. Can't come up with a loan rate?
DeleteI’m not SECU - just one of the 2.6 million members.
DeleteGoogle NCUA risk based lending and click on the first result. According to the NCUA:
DeleteRisk-based lending is a means by which a credit union may be able to more effectively meet the credit needs of all its members. It involves setting a tiered pricing structure that assigns loan rates based upon an individual’s credit risk. Risk-based lending generally has the most significant benefit for two broad categories of borrowers:
those attempting to “repair” their credit due to previous mishandling of credit (e.g., seriously past due credit, prior charge-offs, bankruptcy, etc.) and
those attempting to establish credit (e.g., first time borrowers, borrowers with little credit history).
Although the rates paid by borrowers with less than perfect credit histories are higher than rates paid by borrowers with strong credit histories, these members are able to obtain loans without paying the excessive fees charged by many alternative “financial providers” such as finance companies, rent-to-own stores, title loan companies, and pawnshops.
Believe Jim H and Leigh both said that SECU market share has been declining over the past decade and rbp will better allow SECU to regain market share. Seems like a good business justification to me.
DeleteWhy is "market share" important to the individual SECU member?
DeleteBTW did you notice that the NCUA "guidance" says "may be able"...Do the employees and Board at SECU work for NCUA or for the members? Can you name the last three innovative member service ideas that originated at NCUA? Last 2? Ever been one?
DeleteSo why are you looking to a regulator for insight as to the future? The status quo is "The Earth is Flat" until someone points out that "the Emperor Wears No Clothes"!
Based on that NCUA document, I don’t think rbp was NCUA’s idea or that they were promoting it. They appeared to just be providing information on its safe use (they’re in charge of the insurance fund).
DeleteSorry for the multitude of questions. I’m just trying to verify my assumptions are correct (you know what they say about assumptions). Do credit unions have concentration caps on fixed rate mortgages? If so and a credit union reaches that cap, would they have to stop making fixed rate mortgages or sell them on the secondary market? Does the secondary market require risk based pricing?
ReplyDeleteThere is no mandatory concentration cap on fixed rate mortgages or any other loan type, why did you think there was? The secondary market does not require risk based pricing? Why did you think that is true? But perhaps you might want to tell folks what your definition of the secondary market is, so we can understand what you mean?
DeleteDo you understand that folks don't want to spend time in the weeds on these issues if you don't first declare yourself on the higher level questions...like would you be willing to offer A-rates to everyone if you could?
Believe NCUA may have concentration limits on longer term fixed rate debt (ie fixed rate mortgages). Fannie/Freddie are the largest sources of liquidity in the secondary market. Believe secondary market could mean any buyer of mortgage debt. Both Fannie and Freddie have loan level price adjustment requirements for their loan pricing that includes credit scores. If SECU meets its long term fixed rate debt cap, they would have to stop making certain mortgage loans (most likely the popular 30 year fixed rate) or sell in the secondary market. Due to SECU’s size and scale, selling in the secondary market would most likely require selling to Fannie/Freddie and would require rpb.
DeleteMaking it up as you go? Just take the first NCUA comment and show folks where to fid that rule or law...ok? Look forward to your answer!
DeleteI am not the one that posted the above comment, but here is what I found https://ncua.gov/files/letters-credit-unions/LCU2010-03Encl.pdf. Looks like each credit union is guided to put sound concentration limits and controls in place.I am sure they must provide further guidance in a different document too.
DeleteSECU hasn’t offered a competitive A paper on all loan products since the financial system implemented risk based pricing. When the financial system operated the same as SECU did (ie offering everyone the same rate regardless of credit score. - mainly because there was no such thing as a credit score), then yes I believe SECU was able to offer a competitive rate. Or exactly apples to apples (or whatever fruit comparison you enjoy).
ReplyDeleteDo you know when Credit Scores were first available?
DeleteAccording to FICO 1989.
Delete@11:45 Are you serious? This definitely isn't true. Where have you been?
DeleteIs there any statistic or argument that could be given to sway you to support TBP? Just be honest with this question.
ReplyDeleteDo you support unfairness in business (Y/N?)
DeleteNo. There is nothing unfair about pricing a loan to its underlying risk.
DeleteAs usual, not willing to answer a direct question. That's why the credibility of SECU is of growing concern - can't seem to level with the members.You don't seem to get that.
DeleteTry this - Could you be wrong? Sure blew $100 million on that centralization of collections decision, didn't you? Still stand by that decision?
Believe the answer of no did directly answer the question.
DeleteGetting closer! If RBL was unfair to SECU members, would you continue to support it?
DeleteNo
DeleteThank you ! Making progress! BTW, I would fully support TBP, if it was in the best interest of the membership. Fair enough?
DeleteFair
DeleteMembership as a whole or individual members? There is a difference.
DeleteMy biggest concern with RBL is there is nothing we can tell our members to do about how their score was determined. In my 20 plus years of doing this I cannot begin to tell you just how many scores were confusing as to how their score was so low. I explained that to my SVP this week and she agreed. That is my concern and I hate not being able to be truthful to my members.
ReplyDeleteAbsolutely valid point. Believe additional education is necessary for sure.
DeleteOmg I so agree with this. It just isn't fair to members and I know what you mean. We used to always say everyone gets the same rate in our talks in the community and members loved that. Not anymore though.
DeleteThat and there are business out there where people can pay money to be added to someone’s credit card as an authorized user to boost their score. So those people might have a 700+ credit score and have never paid a debt in their life
DeleteI wonder if there is any correlation between credit tier at origination and what delinquency rate are for each tier. Do you think the delinquency rate is the same for A and E tier?
DeleteSECU CEO and Loan Administration have all the data, if they would simply be willing to give it to the membership. Transparency is easy, other than a few LA folks who are afraid that the actual facts might embarrass them personally. The too proud/afraid few, against the best interests of 2.7 million North Carolinians!
DeleteYou could be a billionaire and still have a bad credit score if you paid everything in cash ...
ReplyDeleteJust like man can't read someones heart, Credit scores can't begin to analyze a person's ability and/or desire to pay back what they owe. Some of the worst people to trust are those with lots of money, why because they don't want to give it up... they are consumed with wealth.
And then there are those who only have 2 nickels to rub together but they have the integrity one needs to fulfill their obligations.
Agree with most of what you said. Credit scores don’t represent a borrower’s ability to repay (debt to income and disposable income ratios represent ability to repay). Ability to repay can certainly change over time. Credit scores represent a borrower’s willingness to repay. If someone doesn’t have the income to repay, then believe they would be denied. A person’s willingness to repay is what is being priced in with rbp. Not a perfect science, but lending never is.
Deletethis is a bunch of malarkey. married woman with no debt. Applied for an Amex credit card and was denied b/c " no credit history." husband applied for same card. Got it. Infuriates me. discriminatory and unfair. Everything has always been joint. Is this where SECU is heading? Is that right? Is that fair? "Credit scores represent a borrower’s willingness to repay." I am WILLING to repay any loan. I am also able. That willingness is absolutely NOT what a credit score reflects. It is some useless algorithm with a male prejudice. Discriminatory and unfair.
DeleteCommenter chose to act offended rather than do a little homework to "validate" that "represents a borrower's willingness to repay" statement
DeleteIt’s on the SECU website that they use credit reports to analyze willingness to repay. A credit score is only based off of information in the credit report.
DeleteThis discussion is obvious to me. The comment "There is nothing unfair about pricing a loan to its underlying risk" says it all. First, this is a non-profit, member-owned cooperative. Ask the membership to vote on how they think loans should be priced. Second, I think you, commenter, are wrong. I disagree with RBL morally, but I think it is flawed logic that you believe you are actually pricing the risk in. Most people pay their bills. It's when bad things happen to them that they stuggle to do it.
ReplyDeleteRBL aside, I work in operations and it is a mess. 5 times more people and 10 times more mess. A lot more dodging. It's easier to hide when there are so many more people.
eventually the Wheat will be Separated from the Chaff
DeleteSECU is putting their trust in a vendor's algorithm that is proprietary and SECU has no idea exactly how it is computed. It is inherently unfair to minorities, women and younger adults. Is RBL a fair way to lend? No, it's a false premise. It's also Lazy Lending, letting someone else's secret formula make lending decisions for your members.
ReplyDeleteYes, every member, IF they qualify, deserves the best rate. Period.
SECU is a cooperative for crying out loud! One of its core tenets is one member, one vote, along with every member having an equal opportunity. To place your members in classes based on a vendor's numerical score (which SECU does not understand) while not illegal, is most certainly morally and ethically corrupt. SECU is different, wish folks would stop trying to pound a square peg into a round hole. Credit Unions are different, SECU is different. SECU is a family of members. You don't separate your family in to the Haves and Have-nots.
ReplyDeleteYes, every member deserves the best rate if they qualify.
Credit Unions are different, good luck finding another credit union of a decent size that does not have risk based pricing.
DeleteSECU - There is a Difference!
Deleteremember that?
Exactly. Literally every single credit union in the country uses RBL. SECU is a dinosaur.
DeleteAlways have admired this commenter's quality of thinking which is: If you're not doing what everybody else is doing, you're a dinosaur. Definitely a prehistoric mindset!
DeleteWait til AI starts its process ... if you don't have a good social score ... so sorry .... you won't have a clue how they define that process, 'smoke & mirrors' ...
DeleteWell, guess I should have said credit unions are "supposed" to be different. Aspiring to the mediocrity of industry standard should be no one's goal, least of all SECU's. Leaders lead, it's what SECU has always done until the last 2 years. SECU will eventually lead these other folks out of the RBL desert and prove it is the right thing to do for your members.
DeleteRBL is a bankers dream ... if you're wondering how these people think. They DON'T CARE about members or owners or whatever we want to call ourselves. This organization has been taken over by a bunch of moneychangers... I don't care how they want to spin it.
ReplyDeleteRBL is only one piece of this puzzle ... and once all the pieces are put together to form a picture, it'll be a BIG FINGER to all the members/owners!
I should add and employees (except those in management).
DeleteThey have been giving the finger to the employees for a while now, so many good long-term employees have left over the last few years and employee morale is at an all time low for those remaining.
DeleteThe Board picked Hayes over Brady as CEO, is there anything else we need to discuss?
ReplyDeleteNot for me. He was unfit. He hired others who were unfit too.
DeleteAll this is a horrible way to waste a beautiful weekend. And, as you see the back and forth between anonymice and yes butt commenters - including me - doesn't improve the analysis much of whether RBL is a fair, member positive practice.
ReplyDeleteWould be far better for the SECU Board to direct the LA staff and CEO to re-document their reasons for recommending and supporting RBL - and represent those well documented reasons to the Board.
Would be wise for the Board to share that analysis openly with the membership and staff for review also What harm could come from that?
Shouldn't the CEO and LA staff have been doing something more constructive than this over the weekend?
In my opinion SECU doesn't really have an A paper rate.. . SECU just went up and up on rates for everyone. . . I'm not a genius but I would think if the CU wanted to give better rates for A paper they would have gone down on existing rates and left the existing rates for less than A. Not what I think is fair but fairer than skyrocketing rates for all.
ReplyDelete