Sometimes the effort credit unions take to protect themselves creates the opposite effect. The effort itself harms the organization’s best interests and the interests of those you dedicate yourselves to helping.
A recent study by Filene Research and credit reporting agency TransUnion found that as credit unions have tightened lending standards during this uncertain era of the COVID-19 pandemic, they may be overlooking or even hurting their historic standing as the resource who can best serve the financial inclusion needs of the underserved or low-income households.
According to the study, credit unions have been finding their charge-off rates and delinquencies alarmingly low, with their lending officers worrying their organization may be missing out on chances to improve their community’s financial health and inclusion goals while capitalizing on such a powerful and relevant product.
Wrapp said the lenders’ common response to the question “What are your delinquency rates?” was outright laughter.
“We’ve never, in my 25 years, seen it this low.”
From lenders’ lips to credit unions’ ears
The study, written by Melissa K. Wrapp from the University of California at Irvine, claims that every financial asset available, from artificial intelligence to in-person consultations, features risks and challenges. Despite that justification, lending officers included in the study voiced embarrassment at the reasons for their credit unions’ charge-off rates and excessively low delinquency.
According to the study, Wrapp said lenders’ common response to the question “What are your delinquency rates?” was outright laughter. “Delinquency rates were described as ‘extremely low’, ‘scarily low,’ or ‘historically low.’ ‘We’ve never, in my 25 years, seen it this low,’ said one lending officer.”
One participant said he is working to improve his credit union’s lending reputation in order to make it accessible to all regardless of the member’s credit profile. “When I came here, we were risk-averse. And so if you’re risk-averse, obviously you’re going to have an A+ or A portfolio.” And that represents the crux of many credit unions’ situations.
To that lending officer, only lending to A+ borrowers is looked upon as “depressing” because it goes against everything the credit union movement stands for. The wish to move away from risk-aversion isn’t inspired by greedy profit ideals but the aspiration to ethically weigh possible risk against the ability to offer more loans to the community. “It’s really not a goal of ours to have low delinquency,” a lender participant explained, “because we feel if we have really low delinquency, we’re probably not helping enough people; we’re not taking enough risks for the individuals who actually need our help.”
Many of the loan officers echoed that participant’s perspective. They claimed their respective credit union’s overly conservative approach to lending is unfair to members and the credit unions themselves. But when it comes to complementing both new and technologically advanced systems of small dollar lending, the participants were unsure how to proceed.
Taking the leap into fintech
A number of the participants expressed apprehension in deserting the human-centric, in-person relationship of the borrower and the manual processing of the small dollar loan. “Machines don’t have a personality,” said one participant, implying an automated fintech program may lack the “human touch” necessary for such an intimate and personal evaluation of one’s financial state.
However, even those in-branch, in-person consultations can be found to be inaccurate because the borrower may feel a sense of embarrassment or shame. “Nobody says they’re having a hard time,” says another lender participant. “Everybody pretends everything is great. And then people stop going to the (financial institution) because they don’t want their (lending executive) to know they might not be this picture-perfect person that they were.” How much complete information is the borrower withholding? When it comes to taking out a small dollar loan and the urgency with which to do so, this is where the privacy and convenience of fintech makes its mark.
Regardless of where the credit union member resides or the time-sensitive nature and purpose of the loan, fintech like QCash offer a private, automated, quick-cash mobile solution that employs relational underwriting that incorporates a 360-degree evaluation of the borrower’s financial status with the credit union in order to determine funding.
Among the report’s recommendations was that credit unions need to learn from fintech. Despite their apprehensions about the loss of the in-person dynamic with borrowers, the lender participants saw automated underwriting as a positive move forward that could be incorporated into credit unions’ existing systems.
The report offered five perceived benefits of automated underwritings for small dollar loans:
- Reducing the volume of applications loan officers have to assess
- Ensuring consistency in decisioning
- Removing unconscious bias
- Freeing up more time for loan officers to analyze difficult cases
The use of non-traditional credit data — pay-as-you-drive insurance, rent payments, cell phone bills, utilities, unexpected emergencies — was universally seen by the lender participants as an important means of accurately and fairly evaluating loan applications and working toward more financially inclusive lending processes for underbanked or unbanked individuals.
“Alternatives are especially important with our new Americans coming in, if they don’t have a credit history,” a participant noted. “They may not have had a banking relationship but it doesn’t mean that they’re a bad credit risk, and we need to be able to think about ways to do that differently.” Is your credit union considering an automated, white-label, mobile life event loan solution? What aspects of such a program are you most excited about? Tell us in the comments or on Twitter or LinkedIn!