Thursday, February 23, 2023

SECU Risk-based Lending # 13


Letter to SECU Board of Directors


From: Mike Lord, 

Retired CEO of SECU


Greetings.  I hope you are well.

Felt you would benefit from the following information as you evaluate the impacts of risk-based lending/interest rate pricing on members.

Below please find 3 links and one PDF to recent articles from Forbes, CNN Business, Wikipedia, and Marketplace/Center for Responsible Lending that discuss some of the flaws and errors in credit scores used in determining the interest rates charged to consumers.  As you know, credit scoring usually prices loan interest rates in four tiers (A, B, C, and D) with “A” credits getting the lowest rates and “D” credits getting the highest rates (significantly higher).  Implementing such a rate pricing scheme will result in making fewer loans at higher interest rates to our existing members, rather than growing the member loan portfolio.  Many members will either not qualify and be denied the loans or, if approved, be less able to afford the high rate and high payment loans. 

Studies reflect that risk-based rate setting will also sustain inherent historical bias against black and latino members and those with little to no credit history (folks just starting out in their careers like new teachers and state employees).  Their interest and loan denial rates will be much higher because of the algorithms used to construct credit scores.   Please read the articles below for more information on these subjects.  The benefits of the Board’s focus on Diversity, Equity and Inclusion will be cast aside in a dramatic way as credit scoring is neither equitable nor inclusive—it’s just the opposite A significant percentage of our members (60% or more?) will end up paying much higher interest rates going forward (even after having paid their existing loans on time for years).  Or they will be denied the loans altogether.

Three years ago SECU provided more than 25% of the total lending needs of a typical member household; today it has shrunk to 15%.  The conclusion that the cause of this is that SECU is not able to attract the “A” credit members is incorrect.  The solution to this legitimate concern is simple and has nothing to do with risk based credit score rate setting.  This can easily be addressed by simply lowering current loan interest rates to attract the “A” member-borrowers.  Doing so would result in higher loan volumes while continuing to benefit all member-borrowers.  Moreover, the drop in market share and volume was primarily caused by other factors.  The most significant factor was the gigantic rise in Fintech lending which has taken market share from all banks and credit unions in both the consumer and mortgage areas.  Wall Street Banks and others backed by hedge fund and other institutional money got into the lending business in a big way.  Additionally, the huge influx of federal COVID stimulus money coupled with the large income tax breaks of 2020 and 2021 (increased child care tax credits, higher exemption thresholds, etc.) allowed many members to reduce borrowing and live off the funds provided by the government.  Despite these factors, however, our mortgage loan activity reached a record volume of 15,000 loans in process at the apex of demand in 2021—this volume dwarfed all prior loan origination records.  Our member loan portfolio grew dramatically, even throughout the pandemic, despite these competitive and economic forces.  As interest rates shot up over the past year the volume has now dropped to 5,000 loans in process (but the portfolio continues to grow albeit at a slower pace).  Attractive rates, fair products and convenient, responsive, friendly and informed service will continue to grow the portfolio.

Earnings are strong, loan losses are low, Allowance for Loan Loss reserves are high, and increased loan volumes will earn enough income to easily handle an increase in losses into the future.  All members will benefit from lower loan interest rates and higher deposit rates.  No select group needs to bear the weight of substantially higher loan interest rates to make this happen—this is exactly why SECU started in 1937–state teachers and employees pooled their savings and lent them to one another at the same rates to provide access to affordable credit for all (because banks either wouldn’t lend to them or offered only usuriously high interest rates for those at the lower end of the economic scale).  This is one of the differences that set us apart from the banks.  One we have a long history of being proud of.

This matter is very important to our members—particularly the vast majority who will end up being charged higher loan interest rates.  Damage will be done to our reputation of always looking after our members.  We have an opportunity to help our members by continuing our history of sharing the benefits of membership with all of them.  We have always strived to “Do the Right Thing” by our members by not employing risk based credit scoring in setting loan interest rates.  It was, and remains, the right thing to do.  You can continue to make life-altering differences in members lives by offering fair, equitable and low-priced products to all.  

Thank you for your attention to this matter.  Please share with the Board member for whom I have no email address.

——Mike Lord


Here are the articles for your reference (3 links and one PDF):

Wikipedia on Credit Scoring System:

Credit scoring systems in the United States have garnered considerable criticism from various media outlets, consumer law organizations,[1] government officials,[2] debtorsunions,[3][4] and academics. Racial bias,[5] discrimination against prospective employees,[6] discrimination against medical and student debt holders,[7] poor riskpredictability, manipulation of credit scoring algorithms,[8] inaccurate reports,[9] and overall immorality are some of the concerns raised regarding the system. 

Forbes Advisor (February 21, 2021):  “From Inherent Racial Bias to Incorrect Data—The Problems With Current Credit Scoring Models”

CNN Business (August 3, 2022):  Equifax Issued Wrong Credit Scores for Millions of Consumers”

Marketplace & Center for Responsible Lending (August 2022):  Credit Scores and the Bias Behind Them”