I was having lunch with a credit union CEO friend recently, and we got to talking about some of the challenges his credit union has been facing during these very tough times. He runs a large, diverse institution that has taken huge loan losses and is still seeing delinquency rates higher than they’d ever imagined possible.
As he talked about the things they are doing to deal with these issues, and even shared some hard-to-believe stories about how members have tried to justify their failure to fulfill obligations on the grounds that doing so wasn’t in “their best interest financially,” it occurred to me that with all of its difficulties, this amazingly tough time might bring at least one positive for lenders: credit histories that tell the whole story about borrowers.
The way I see it, for the vast majority of today’s borrowers (especially in the high-flying West where my friend operates) this is the first serious economic downturn they’ve ever experienced – or at least, the only one recent enough to still be reflected in their credit scores. So, when a potential lender looks at their history, what shows up is a record of how the borrower has performed when times were good; when he or she had a job that could be counted on, was optimistic about the future, and was generally on solid footing financially. And for most, the record reflected that yes, when times are good and money is plentiful, this person pays his or her bills.
What recent credit histories haven’t reflected (until now) is how that person performs when times are tough, when money isn’t so plentiful, when tough choices (which should I skip: the credit card payment or my morning latte?) have to be made. Well, now we know, and in way too many cases, what we’ve learned is not good. Unlike in past generations, when an obligation was still viewed as an obligation even when fulfilling it meant sacrificing some comfort (or even some basic necessity), now too many people are deciding that just because they said they’d pay the money back doesn’t mean they’ll still try to do that when their circumstances change (or in some cases, when their circumstances stay the same but what the heck, everybody else is doing it!).
They say that tough times build character. Maybe, but for sure, tough times expose character, and that exposure should help credit unions as they decide who to entrust members’ money to in the future.
Steve Kelley is BCI’s vice president for branding services and consults with credit unions on branding, marketing and strategic planning. His email address is skelley@bcihq.com.