Friday, November 3, 2023

SECU - Risk-Based Lending: What About Profitability, Loan Losses, And Fairness? # 5 ... was SECU formed to leave money in members' pockets? Or take it out?

Going to try to move in a slightly different direction today. Analyzing loan losses/chargeoffs will take some effort and a look back; and, of course, "where the rubber hits the road" - or "the stuff hits the fan" - on risk-based lending is the critical issue of fairness. Fairness, as we glimpsed in #3, "A-Paper for Everyone?", can quickly become a twisted issue.

Is risk-based lending more profitable than "same rate for everyone" lending? (Y/N?) Of course it is; that's why banks have adopted it! Not too hard to figure out how that works. Interest charges to members under the "same, A-rate for all" standard of the past are going to be less than RBL where you charge "B" members a little more, "C" members a good bit more, "D" members a lot more, and take "E" members to the cleaners. Add them up and the total interest taken out of members' pockets will always be more - hope no one argues with that one!

How much more is SECU charging its members under RBL? Good question! SECU knows the answer, but hasn't told us yet. Again, not too hard to compare the loans under each lending strategy. You can be assured that the extra interest charged to members under RBL will be in the hundreds of millions of dollars - very big bucks, out of small pockets. 

Does SECU need to take this money from members to be "more profitable"? (Y/N?) No, as CEO Leigh Brady proudly proclaimed at the Annual Meeting: SECU has just finished its 5 "most profitable" years in history (See #2). - all BTW before the introduction of RBL! So, this will just be "piling on" in terms of "profitability" - at the members' expense. 

If making more money is not the issue with risk-based lending at SECU, then charging some members higher loan rates must have to do with the cost of those extra loan losses which may arise with lending to members with lower credit scores. (Y/N?) Certainly could be, because SECU is currently experiencing a higher % of losses on loans to folks with lower scores . 

Surprised I would say that? (Y/N?) Why? 

If you could "resolve" the loan loss issue, would you be okay with the same fair rate for all members? (Y/N?)

... this may get interesting!