New Research Unveils Missed Opportunities for Credit Union Lenders
CU lending officers tell researcher their high credit quality is a sign of low service to their communities and missed opportunities.
A study released Wednesday portrayed credit unions as wrestling with a paradox of prudency.
As they tighten lending standards during the chaos of uncertain times, they are missing opportunities and undermining their reputation as the lenders who best serve the needs of minorities, low-income households and average working people.
Credit unions have been finding their delinquencies laughingly low and lending officers worrying that they’re missing opportunities and needs.
At the same time, every tool at their disposal from artificial intelligence to personal conversations poses unique risks and challenges.
The research brief was issued by TransUnion, the credit reporting agency based in Chicago, and the Filene Research Institute based in Madison, Wis. It was written by Melissa K. Wrapp, who is working on her doctorate in anthropology at the University of California at Irvine.
Wrapp interviewed lending officers from nine credit unions across the country whom she quotes by real titles, but fake first names: EVP Josh, Chief Lending Officer Daniel, Michael, Mark, COO Chris, SVP and Chief Lending Officer Lisa, Julie, SVP Laura and Vice President Heather from a small credit union.
The participants expressed embarrassment at their low delinquency and charge-off rates.
”The most common response in this study to the question ‘What are your delinquency rates/?’ was laughter,” Wrapp wrote. “Delinquency rates were described as ‘extremely low,’ ‘scarily low,’ ‘historically low,’ and ‘like Phuket,’” referring to the low tides that preceded the tsunami that hit Indonesia in 2004.
Daniel said he is helping rebuild his credit union’s lending brand to make it “accessible to all regardless of credit profile.”
“When I came here, we were risk averse,” he said. “And so if you’re risk averse, obviously you’re gonna have an A+ and A portfolio.”
Many of the loan officers said their overly conservative approach to lending is a disservice to members and the credit union itself.
“We have been a less risky lender,” Mark said. “We were very proud of our very low charge-off rate. That’s something we shouldn’t be proud of because we end up not doing a lot of transactions that would have made financial sense for both us and the member that we let go because we were so proud of that charge-off rate.”
The lending officers said they believed in the benefits of automation and the use of nontraditional credit data. But then there are the costs, especially the time costs.
Their institutional capacities are constrained not just by the costs of assessing, testing and implementing new technologies, but by the multiplied costs of hooking it into systems already overburdened by spider webs of plug-ins and patches to their existing systems.
And they have to protect their mission from the machine. For example, most said they prevent the machine from declining loans.
“The only ones we would auto-decision would be approvals,” Chris said. “We don’t want to auto-deny somebody. If we can’t say yes, we’d rather be able to say, ‘We can’t do this, but we can do this’ … to get as close to what the borrower requested as possible.”
Preventing the machine from issuing denials also provides a buffer to the biases that can lurk in algorithms.
Many of the lending officers also said the use of custom risk scores was inevitable, incorporating alternative data such as rent payments, cell phone bills and utilities.
Credit unions pride themselves on their strong bonds with members. And knowing their members’ stories provides an old-fashioned form of alternative data.
Yet even the up-close, personal approach has risks. Some lending officers worried about provoking shame.
“Nobody says they’re having a hard time,” Lisa said. “Everybody pretends that everything is great. And then people stop going to the bank because they don’t want their banker to know that they might not be this picture-perfect person that they were. They don’t want to see any of us. They want to go to an anonymous lender and take care of their problem.”
And what better way to remain anonymous than thumbing toward a loan on a cell phone with Quicken Loans, LendingTree, Carvana or other fintechs.
The lending officers admired the fintechs’ convenience, efficiency and slick user interfaces. And they said tech giants such as Apple were identified as particular threats to credit unions for their ubiquitous market presence.
“They’ve already got a captive audience. How many people have an iPhone across the country?” Chris said, “They essentially can have somebody approved with a card downloaded on their phone within 30 seconds. It is really hard to compete with that.”
One of the report’s recommendations was that credit unions should learn from fintechs.
“Whether slashing unnecessary fees or structuring loan payments differently, these small changes are easy to implement and can massively reframe members’ experience as borrowers. Though operating in a different regulatory landscape, credit unions can and should find ways to be more nimble, eliminate inconveniences, and appeal to new generations of borrowers,” Wrapp wrote.
Another recommendation is to “shine on service.”
“Supported by new forms of credit data and risk assessment models, credit unions can leverage this experience in order to take more calculated risks as a pathway to responsible growth,” Wrapp wrote.