Think Before You Sink

Today’s blog comes courtesy of Denise Wymore, owner of consulting service for cooperatives, Denise Wymore, LLC.

Recently I heard a credit union CEO say they were looking to add a new branch in a new city. Not earth shattering news, but I was a little surprised they would consider it in this economy and with a 52% loan-to-share ratio. Plus, this city is practically “owned” by one of the largest credit unions in its state.

So I asked these questions: “Have you already saturated your current marketplace? Are your current branches at their limit? Do you have people queuing up Apple-store-style for your latest loan promotion? Have you ever had to restrict the number of members entering your building because you are violating fire codes?”

Okay – maybe I didn’t ask all of those questions. But I wanted to. This strategy feels desperate and dangerous. The build-it-and-they-will-come arrogance that has forced countless credit unions to close branches and refocus today.

It’s time to get back to basics. On the one hand we fought hard (HR 1151) for a community charter so we could serve more people. On the other hand, we’re so used to lending to employed people with credit and direct deposit that we’re afraid to lower our standards. The average age of a credit union member continues to trend upward, the loan-to-share ratios are expected to trend downward. This is mathematically the beginning of the end of credit unions.

We forget that the Great Depression was the best thing to happen to the movement. Banks would not lend to the “little guy.” The person of modest means. And don’t confuse this with low-income, public assistance. We’re talking school teachers, blue-collar laborers, postal workers, etc. They had jobs, they just didn’t have much. They often lived paycheck to paycheck, so when an unexpected expense occurred, they needed help.

Making a $500.00 loan was commonplace (even as late as the 1980’s). There was no such thing as a credit score, and so we were forced to get to know them as an individual. Character, capacity, collateral. When the last two C’s were minimal, we would fall back on the first.

Community charters and credit scores have choked off our supply. The majority of people we’d like to lend to don’t need money. They are old, paying off their debt and getting ready to retire.

So how do you make money on risky paper and small amounts? Volume. The way we used to do it. You charge more, lend less and lend often. And don’t tell me these small loans are too time consuming to process. (Warning – grumpy old man statement coming up). Back in MY day, we had to type the advance vouchers on an IBM Selectric typewriter on triplicate carbon paper. To pull a credit report meant dialing up a modem and placing the receiver in a holder while the other end demanded perfection or you would be cut off, only to have to start all over. A monkey could do a signature loan today if you have the right technology in place. And if you don’t, how about spending money on that, rather than brick and mortar?

The branch you built several years ago is up and running and ready to serve people of modest means. I’ll bet in this economy you have tons of them in your backyard. They might not work for the post office, or the factory, but they need your help.

History is repeating itself. What will the history books say about us in 20 years? Are we the new era of bank-like exclusion or are we ready to act like a credit union again?

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2 thoughts on “Think Before You Sink

  1. Well said Denise! It never ceases to amaze me how willing some CUs are to consider making the huge investment in new branches instead of spending far less to penetrate their existing markets which are seldom anywhere near saturated.

    Your point about going back to what was a key driving force in the emergence of the credit union movement is also right on point. There are individuals who can benefit greatly from access to smaller loans that help them meet immediate needs, and credit unions are well positioned to serve them when other financial institutions won’t. The same is generally true of small businesses–many of which need small loans that can easily be handled by CUs that are no where near the limits on small business lending.

    These are important strategic questions and ones that CUs need to answer…their survival lies in their response, or lack thereof, to the situations you outine.

    • Thanks for your comment. You make an excellent point about small business loans. This is a niche we could own! Banks, just like after the Great Depression, are not going to take this kind of risk.

      We are in the “risk” business – and by taking the time to get to know someone, and taking a chance on them, is bound to build the kind of loyalty that mitigates some risk. We need to remember that those loyal credit union members always “paid the CU first” when times got tough.

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