My business partner, John Gregoire, thinks that credit unions these days should concentrate on finding NEMO. Not the little fish in the movie. But rather their mostly middle class members who are Nervous, Embarrassed, Mad and Otherwise anxious.
Consumers today are nervous, because every day brings more economic bad news. They're embarrassed that their FICO score has dropped and the credit card company just reduced their line for reasons they don't understand. Maybe for the first time in their life they were turned down for a loan.
They're mad because the bank executives and hedge fund managers who made millions creating this mess have not been held accountable, and federal stimulus plans look like more political pork. And they're otherwise anxious, as prospects for achieving their dreams have seemingly slipped away.
Take Nothing For Granted
For many middle class people and especially those nearing retirement-and for the first time in a couple generations-the basics of housing, food, health care and education can no longer be taken for granted.
The "O" in NEMO also stands for Open. Even before the financial crisis really hit, the last presidential campaign showed that Americans are open to positive change, indeed eager to embrace it.
The big-shot bankers and the politicians failed them, and the middle class is open to finding a new solution for their financial needs that truly has their interests at heart. For those who are not yet members, the credit union offers just that.
Credit unions came into their own during the Great Depression. While banks failed at record rates, credit unions established their credibility as a consumer-owned alternative that was willing to extend credit to ordinary people, while keeping their savings safe. We have a similar opportunity today. People are nervous, embarrassed, and mad, but they are open to new ideas. We need to be there for them now.
So what should we be doing? For starters, we should engage our members and listen to them. I'll suggest some ideas, but what really counts is what the members think, what they need. We can build on their trust right now by hearing them out, whether by holding a town meeting, conducting special surveys, or hosting small group discussions.
For my part, I think we should also start by taking a hard re-look at how we've been making loans. It has been easy to just rely on credit scores and underwriting by the numbers. Few credit unions today still have loan officers who can smell a good loan, who can spot the member with good character who will repay if he or she possibly can. This is a lost art that we need to regain and nurture.
A credit union CEO for whom I have great respect recently voiced the firm suspicion that people who used to have 720 FICO scores and who recently had them dropped to 600, were probably 650s all along and still are. Relying on credit scoring alone, in his view, means turning down good loans when members need the credit union most.
If we've learned nothing else from the financial fiasco of the past year it should be that statistical credit modeling needs to be taken with a large dose of salt. Reliance on predictive models can result in bad credits being granted, to be sure. But equally it can mean that good credits are being declined.
And that is exactly what is happening more and more to the middle class people we serve.
Taking a new view on loan underwriting will be a hard sell to volunteer boards, who are likely even more scared today about doing the wrong thing.
Examiners will be no help either, even though credit unions have the best capital ratios in the financial industry and can clearly do more to meet the credit needs of society. While credit union lending won't be enough by itself to restart consumer spending, it behooves us to be part of the solution and not, like the banks, part of the problem.
It all comes down to having a plan. Most consumer defaults will continue to occur for reasons that are unpredictable in the individual case when the loan is made: job loss, bad health, and divorce. Divorce rates decline in a recession, but the other factors go up by even more.
No Two Ways About It
There are no two ways about it: credit unions will have higher delinquencies and defaults over the next few years, unless we follow the banker example of shutting off lending to all but the best customers.
Doing that would be a breach of trust with our members, it would damage credit unions for years to come, and it would be bad for our country. CEOs should be up front with their directors and their examiners, with business plans that reflect the new reality and the fundamental fact that they have member capital more than sufficient for the task at hand.
There is a temptation today for us credit union people to just hunker down and breathe a sigh of relief that we've been largely untouched by the financial crisis.
In fact, however, this is exactly the time for us to reach out, think creatively and be open to new ways of achieving our purpose, which is building wealth and security for our owner/members.
Congress passed the Federal Credit Union Act in the depths of the Depression to help free up credit markets, to make credit available to more people. Over the years, we enabled millions to become solid members of the middle class, and it is the middle class who needs us now.
The middle class is Nemo, lost at sea and looking for security. We have an amazing opportunity if we help them rediscover that credit unions are there for them in bad times as well as in good.
Ralph Swoboda is a principal in The ProCon Group, LLC, which specializes in helping credit unions uncover strategic opportunities, build more effective board governance and strengthen their leadership teams. For info: www.theprocongroup.com.