Editor’s Note: This is the second in a series in which Denise Wymore and Lou Grilli debate issues before credit unions. In this installment, Wymore, Membership & Advocacy Development Officer with NACUSO, and Lou Grilli, AVP Product Development and Thought Leadership with Trellance, debate “Thought Leadership: Will Credit Unions Die of Old Age, or Are They Adapting?”
By Denise Wymore and Lou Grilli
Background: The earliest credit unions were established with the concept of a common bond of association. A credit union drew from members of a church parish, firefighters belonging to the same fire district, or the employees of a local company. This type of bond helped to reduce the costs and risks of lending to people of good character but limited means.
By bringing people together in pursuit of a common goal, it also strengthened local communities. Over the course of history, many credit unions expanded past these initial bonds, offering expanded services throughout the community. The biggest change came in 1998, when HR 1151, the Credit Union Membership Access Act, was signed into law and with it came expansion privileges and the allowance for multiple common-bond credit unions. As credit unions expanded their footprint, it became more difficult to rely on their member as a good character in the community to determine underwriting criteria.
Below, the two authors debate whether this evolution is good or bad for credit union members.
Wymore: Credit unions are literally going to die of old age starting in the next 10 years.
Grilli: Why do you think that? Each year credit unions collectively add members, add share deposits, and add loans. That trend has been in place since the last recession, and there’s no reason to believe it won’t continue.
Wymore: Right, but are we adding enough youngpeople to this mix? Consider this: the average age of a credit union borrower is older than the average age of their member (which is 47 nationally). Baby Boomers were the largest generation in history and have a voracious appetite for debt, which has kept us pretty content. Plus, they have had so many years of continued employment, continuous homeownership, good credit scores – all the things credit unions tend to value when making a loan decision.
Grilli: That’s the conservative nature of credit unions. The credit union industry on average has a significantly lower delinquency rate, as low as 50 basis points, relative to the average across all financial institutions. This makes the board of directors and the examiners happy.
Wymore: And it makes for lower than average loan yields. It didn’t used to be like that. Before HR 1151, when a credit union would recognize a member by face when they walked in, the decision to issue a loan was decided on the three C’s: character, capacity, and collateral. The credit union knew the financial health and future condition of the employer that both the credit union and the member were associated with, and could take smart risks based on actually knowing the member.
Then credit scores came along and were intended to price the risk, but someone decided to “grade” them and consequently most credit unions only want “A” paper. They are not willing to take more risk because they still have a large enough pool of “A” paper to make money.
Grilli: Right. And along with basing loan decisioning on personal knowledge of the person came loan bias and in some cases, outright discrimination.
A new person in town that “didn’t fit in” would not get a loan based on the way things were before the 80’s and 90’s. Using a FICO score took away the potential for a loan officer to make a biased decision, and with that came tremendous growth in the size of credit unions as they added members and issued loans.
Wymore: And that growth came with consequences. In order to grow beyond the bounds of being tied to a single SEG, many credit unions abandoned their rich history of affiliation and associated ties to a small community, some of them changing their name to something that did not include the words “credit union.” It’s as though they want to look more like a bank.
And, as they expanded, they no longer could know individual members and started making loan decisions based on credit scores – that was not the intent of a FICO score – instead of making loans based on character.
Grilli: Earlier, Denise, you asked if credit unions are doing enough to add young new members to the mix. Credit unions arereaching out to millennials. Many credit unions offer financial literacy programs, in the form of apps that help members save, and rewards for achieving milestones. Millennials, and anyone of any generation for that matter, have the potential and opportunity to build a good credit score.
Wymore: Yes but that takes time. Keep in mind everyone is born with a credit score of 0. And most credit unions will not issue a loan until they have a high score or a co-signer. And also keep in mind that by 2025 millennials will be 75% of the workforce. If 75% of the workforce – all of whom are potential borrowers – get their loans elsewhere, credit unions will have no one to loan to, starting in about 10 years.
Grilli: Yes 75% of the workforce will be the current generation we call Millennials. And by 2025, I believe they will have discovered credit unions offer better rates on auto loans, better rates and terms for mortgages, and higher rates on CDs, and will join as members. There will always be waves of each generation realizing the benefits of being a member. And it would be irresponsible, Denise, for credit unions to notuse credit scores to ensure fairness in the loan process.
Wymore: Yes, Lou, but it is irresponsible for a credit union to notpromote loans to those members who need and deserve those loans. By setting the bar so high for who qualifies for a loan, large community-based credit unions have created an inadvertent age discrimination. That’s why I’m making the claim that credit unions will literally die of old age starting in about 10 years if we don’t review our loan policies and take more risk (and make more money).
There’s a fairly new CUSO that gets it. Credit Union Lending Cooperative (CULC) pulls in information about an applicant that is not reflected in a credit score, such as cell phone payment history, rental history, student loans, etc. This allows them to reach those Millennials that have not established credit yet or have thin files. CULC provides both a way to attract Millennials and offer a product through the popular mobile device that competes very well against fintechs.
The Last Word: One thing we can both agree on, credit unions exist solely and exclusively for the benefit of their members. Credit unions were founded on the principle of, and still have as their mission, the financial well-being of its members. Credit unions that have grown well beyond the boundaries of a single employer need to make sure they are still looking after their members, and not just trying to be a better bank.