Credit unions are in a crisis. The mortgage meltdown was the start. The over-tightening of regulator oversight exacerbated the problem. Weakened consumer loan demand added fuel to the fire. And credit union leaders' subsequent move to avoid all risk made have made this bad situation worse.
But that's not the true crisis. The crisis is our unwillingness to talk about the real issue. While there is pressure to keep delinquency ratios and allowances for loan loss in check, we have decidedly turned our backs on one of the core reasons credit unions are in business: making loans available to consumers for provident and productive purposes who can't get help elsewhere. Our crisis is an underwriting problem. More to the point, we have an underwriting under-writing crisis.
So, I'll start by telling my story (post-financial crisis)...
Two years ago I moved from North Carolina to Wisconsin. I called no fewer than five credit unions to get a mortgage, but none would help. I was moving from a contract position to a salaried position at the same company. I had worked in financial services for the past eight years. I had an 800+ credit score and was bringing nearly $55,000 to the table as a down payment. My debt to income ratio before and after the move made me creditworthy by any financial institution's standards.
But I couldn't get a loan.
I didn't have enough work history, they said. Another said I'd have to wait until I moved to Wisconsin before I could apply (still don't understand that one). This was too atypical of a case for underwriting.
So, I Tweeted that I needed a mortgage in Wisconsin. Nearly everyone in my network works in credit unions (and they all say they are on social media to connect with members and find opportunities), so I expected to get at least a few bites.
Until a couple of days later a follower from a Wisconsin credit union sent me a direct message with contact information for a loan officer. Sure enough, I ended up getting a mortgage.
I got a mortgage, but I've also gotten quite a few headaches. The paperwork at closing was wrong. I was charged PMI (800+ credit score, but 82% LTV... rules are rules). Escrow was required, but not distributed correctly. My home insurance company had not been paid. Later, we found out that PMI payments weren't sent to the insurer at all for the first year. I received five different payment coupon books in the first two years of the mortgage because the credit union kept miscalculating my "payment amount due" (I overpay each month, but they weren't applying the extra payment to principle properly).
Finally one day this summer my wife decided enough was enough. She asked me to look into refinancing the loan with another financial institution.
"I just don't trust them anymore," she told me. "I have no confidence that they know what they're doing with our mortgage."
The timing was right. 30-year fixed rates were at 3.625%, and I had already been eyeballing a refinance. I have a habit of checking rates, and found it to be quite fun to see if I could "time the market." At least once a week I'd check rates at five to ten credit unions to see who was offering the best deal. I had shopped around enough to know where to apply for different types of loans to minimize closing costs and APR.
So, I filled out an application for a 30-year fixed mortgage at another credit union in Wisconsin. The application took forever to complete, but gave me an instant approval. An email confirmation told me that a loan officer would be in contact with me soon to complete the process.
A week passed.
Finally, eight days after I applied I got a call from a mortgage loan officer on my way home from work. He congratulated me on my approval and quoted a much higher rate than I applied for. When I asked what happened to the 3.625% rate (it was still the rate on their site), he said, "Hmmm. I don't know. Let me check." (Don't get me started on that.)
Turns out there was a collection item that appeared on two of the three credit bureau reports.
"I've never seen anything like this. You're an 804 on one bureau's report, and in the low 700s on the other two," he said (paraphrasing).
"Oh, some guy in Alabama keeps using my identity to buy cable, cell phone plans, and satellite television," I replied. " I keep disputing the entries at the credit bureaus, and they keep being removed, but it's hard to keep up with it. What's the collection item?"
"Looks like it's DirecTV," he informed me.
"That makes sense. I got that collection item successfully disputed from Equifax and assumed it had been taken off of the TransUnion and Experian reports. Should I just email over the successful challenge paperwork so I can lock in the lower rate?"
"Sorry, we can't do that. You'll have to get it taken off of every report before I can give you a lower rate."
"Really? How long does that usually take?" I asked.
"Usually 30 days, but sometimes longer."
"Ok, this is ridiculous, but I need to get this stuff taken off of my credit report anyway. Should I just call you again when that takes place?" I asked.
"Absolutely. I'll keep your application open and just wait for you to call me back. Then I'll rerun your credit scores."
"Rerun my credit scores? Won't that decrease my score?"
"Not that much. Besides, I can't process your application unless I can prove these items were taken off of your reports."
"But I have proof that the collection account isn't mine...isn't that enough?"
"No. All three credit bureaus must show that it has been removed."
I hung up the phone. Stunned. I have spent the last decade talking about the credit union difference... how we do things differently than banks. And this credit union is letting a machine do all of its thinking? This credit union has completely removed empathy and rationality from the equation.
I disputed the collection item with the other credit bureaus, and within a few weeks the charges were removed. I emailed the credit union to inform the loan officer of this fact and asked for next steps.
A week goes by.
Then, I get an email from a new loan officer saying something to the effect of, "I'm your new loan officer, the person you were dealing with is no longer with us."
So I emailed back, telling him the back story and asking what the next steps were. Note that in the meantime rates had already increased from 3.635% to 4.5%.
Another week goes by.
So, I email the loan officer back and copied the CEO on the message:
My experience with YYYYY Credit Union during my mortgage refinance process has been a far cry from what I would expect from a credit union. I have dedicated my career to the credit union movement, and spend every day helping to improve consumers' lives through not-for-profit financial cooperatives.
Between slow response times, illogical application analysis, and a sloppy hand-off between ZZZZZ and you, I have yet to see anything from your department that remotely feels like the credit union difference.
At this time, I have no choice but to do my business elsewhere. I respect your credit union, and think the world of your CEO, and that is why I am writing this note. Your members deserve better service than this.
I still haven't received a response to this letter. It was sent June 13.
I keep hearing from credit unions about their desire for loan volume. More specifically, I get comments from credit union executives like, "It would be nice to have some more qualified loan applicants." For me, our actions are not aligned with our words.
If we really care about improving consumers' lives and the financial health of our credit unions, we have to put action to our words. If a consumer with capacity, character, and capital can't borrow from a credit union, who can? We can't claim we're concerned about relevance, membership growth, and loan volume if our actions suggest that realizing those goals is too risky, too uncomfortable, or too against absurd policies.
To me, we must start talking about these three things:
- Identifying new ways of qualifying borrowers for loans. Credit scores are imperfect, and our reliance on them is driving our irrelevance. There's no way we can lower the average age of a credit union member unless we find new ways to qualify people with little or no credit history. A few years ago I met the founder of Sociogramics, a firm that uses the social media activity of consumers as a way to evaluate credit risk. The idea is simple: if a thin- or zero-credit-profile consumer constantly updates her Facebook and Twitter status and has a large number of social media contacts, she is a better credit risk than someone without such activity. Why? Character and Collateral are key components of credit qualification. Consumers' character can be (at least somewhat) evaluated by their social media activity. Even more powerful, when you know what and when a delinquent borrower is eating, where they're traveling, and who they are friends with, it's much easier to retrieve collateral if a loan goes bad. Dupaco Credit Union, Del Norte Credit Union, Currency Marketing, and Filene Research Institute teamed up recently to create "The Great Credit Race" to try to figure out how and how quickly consumers with 0 credit scores can establish a creditworthy score. By gaming the credit scoring algorithm this contest does two things: establishes a framework for consumers to qualify for loans and highlights how ridiculous our over-reliance on these scores really is. If we find out that a borrower can go from a 0 score to 700 score in three months, we're admitting that our decision-making is flawed. Models that look at rent, utilities, and other regular expenses as a way to predict creditworthiness are a start, but it's vital that we have deep discussions about how we can better evaluate the likelihood that a loan applicant will pay back a loan.
- Giving loan officers the authority and flexibility to make decisions. The centralization and/or standardization of decisioning has turned loan officers into form-filler-outers. From my perspective most loan officers are smart, empathetic, and achievement-oriented. How might we give loan officers a new vision for what their job function is, give them wider guidelines within which to operate, and trust them to execute?
- Remembering the mission of credit unions. If credit unions are only providing loans to the most qualified borrowers with run-of-the-mill paperwork, why do they exist? Alphonse Desjardins started a caisse (the first credit union in North America) from his house in Levis, Quebec, to help people who the banks were unwilling to help. His idea was that if people with a common bond saved together they would have funds necessary to help each other when times got tough. He didn't take this mission lightly. He knew that this model could prevent people from poverty in the event of an illness. He knew this model would give members more control over their financial lives. He also knew that he had to balance the caisse's social mission with the protection of its assets. Lending decisions, then, were as carefully considered as possible by a committee of the applicant's peers who knew him/her well. Most of all, he knew that what he did mattered...and that without his caisse, his members and community would suffer. If your credit union is making the same loans that Bank of America is making based on the same qualification criteria, you don't matter. Without you, the same borrowers will have the same options they had with you around.
Let's start writing and talking about the things that really matter.
Matt Davis lives in Madison, Wisconsin. As the Director of Innovation at the Filene Research Institute, Matt Davis guides the prestigious i3 program to create new products, services, processes, and business models for credit unions. Matt authors one of the longest running blogs in financial services, creditunionwarrior.com, and is the co-founder of cuwatercooler.com.