Friday, December 1, 2023

SECU - Risk-Based Lending: A Sleight Of Hand On Good-Hearted People, Your Family And Friends..

Almost all  financial institutions in the U.S. have jumped into the practice of risk-based lending.  A few were just flat-out duped and fooled; but the vast majority were willing victims - they really didn't mind playing the fool at all.   

Lot's of money to be made fleecing folks with risk-based lending!  For decades lenders were repeatedly caught purposefully overcharging and exploiting the unknowledgeable, the vulnerable, the too trusting - y'know good-hearted folks, your family and friends. Lenders looked like heartless loan sharks when exposed - and were. 

Lenders  needed protection from this type of constant harassment by "do-gooders" - y'know good-hearted folks, your family and friends..

Faux "statistical legitimacy", consciously misapplied via credit score pricing, has now provided risk-based lenders with the political cover, which today makes the shearing of the sheep mere child's play - easy pickings!!  

And generally, when given a choice between "good and gold"... well, you know how that usually comes out these days!

In risk-based lending, credit scores are used to establish a tiered-rate chart with members with lower scores paying higher rates. The statistically valid idea is that if lower credit scores create higher loan losses, then those members causing the losses should reasonably be charged for those higher losses  No problem with that!  

😎 The problem arises when you overcharge the wrong people (over 80%+ of the time!) for those higher losses. An 80% error rate in any product or service should be unacceptable, shouldn't it? Borrowers who default don't pay for the losses - as they say "duh-h-h-h"! They don't pay anything at all - that's what "default" means - got it?!?  The "wrong people" being charged for those losses are of course the SECU members in the group who faithfully do repay their SECU loans. And, you know who those folks are? Yep, you guessed it - good-hearted folks, your family and friends. 

Let's take a look at an example of why RBL is a really bad deal for SECU borrowers.

See the five face-down cards below? There are 4 jacks and a queen in the hand.  All five represent regular working folks, who all have low credit scores of 580 for various reasons, which implies that 1 in 5 (20%) of these folks will default on their loan over the next 24 months..  All are, therefore, charged the highest ("E-paper") interest rate.  Let me help you with a hint in this exercise (which you wouldn't get in real life.) The surefire fact is the queen is the card which will default in the future.
Pick the Queen!
Your odds are 1 in 5 - 20%.

Now just for the sake of argument, let's assume you used a bit more rational, fair and defensible method of determining the risk of the borrower, rather than just "eenie-meenie" or the "pick a card" risk-based lending model.  

Imagine that you actually sat down with each loan applicant individually and went over their financial condition, asked for explanations of the credit blemishes, and listened to them honestly as fellow members and human beings. Through the face-to-face interview and additional information gleaned, here's what the five borrowers would start to look like to you:

Your odds of picking the Queen have vastly improved... now approaching 100%! Too simplistic you say!  No not really, it works in real life (and SECU had an 85 year low loan loss rate to prove it!)..... if you want it to, if you're really seeking to help people - y'know good-hearted folks, your family and friends.... But lots of folks don't want it to work.  
Why? Because the four jacks - with that old bad queen gone - are now "statistically certain" to pay, won't cause a loss, and deserve a much better rate.  You won't be able to "statistically" discriminate - with a straight face or clean conscience - against them any longer and there goes the "The Strategic Plan",  there goes the "record profits" year, there goes the bonus and hubris....

Risked-based lending is a statistically "stacked deck", a bad hand, an unfair deal, a falsified game of chance played ruthlessly and recklessly by lenders against people - y'know good-hearted member-borrowers, your family and friends.

And you know who holds all the cards... on this sleight of hand, this slight of the membership?

Becoming a house of cards?