Lending Perspectives: Take a Cue From High School Physics

My regular readers understand this about me: I try to be funny when I write. My wife likes to say I think I’m funny. I remember my high school band teacher, Mr. Cummins, liked to tell me, “You might be funny, but looks aren’t everything!”

What could be funnier when writing about lending than trying to equate it to high school physics class, which admittedly, most of us slept through? It’s not that far-fetched with a little creative thinking.

The First Thing I Remember About Physics Is…

Inertia. A body at rest tends to remain at rest unless acted on by an outside force. The opposite is also true, a body in motion tends to remain in motion unless acted on by an outside force. So, what does this have to do with lending?

Here’s where the creative thinking comes in. Consider the average consumer; they may not be thinking about their financial condition, future needs, etc., until they’re acted on by an outside force. Sadly, that outside force often involves something breaking. A blown transmission. A refrigerator that pretends to be a food warmer. A broken bone.

Remember that statistic about how half of Americans don’t have $1,000 in savings to cover a basic necessity (I just made that up, but it’s probably pretty close). Sadly for you and your member, they’re probably going to choose the easiest, most convenient credit available when something breaks. That means they may not borrow from your credit union.

How do you combat the outside force? Your credit union must be the outside force before something bad happens to your member. Let me count the ways you can do that:

1. Don’t forget the personal line of credit. Wells Fargo made headlines earlier this year after deciding to sunset all personal lines, including overdraft. It’s also surprising how many credit unions have chosen to do the same thing in pursuit of non-sufficient funds fee income. You likely can price these much more attractively than a credit card and still make a nice return. A personal line makes it easy for your members to access funds when they need it—along with your credit card product.
2. Actively review your closed-end personal loans for members who’ve paid down the balance. Back in my finance company days, I’d notate an account picked for future marketing, “1500 KSP.” That translates to the idea that “the borrower can get $1,500 and keep their same payment.” How difficult would it be to query your core system for loans that have paid on time, and have paid down $1,000, $2,000, $3,000, etc.? Take it a step further, and how do you get that info in the hands of your front-line staff to sell the member? Or email members with that offer? Perhaps you can load that as a banner ad in home banking as well!
3. Try this related idea for auto loans. While lenders like to dwell on all the borrowers who are upside down on their car loan, there are a lot of people who have equity or are close to paying off their loans. What are you doing for those members? Is there a vendor that could give you updated auto values based on the vehicle identification number (hopefully stored in your core system) and compare that figure to the loan balance? Your credit union could have a similar marketing strategy to my personal loan idea.
4. Get better at cross-selling and relationship underwriting. Here’s the scenario. Jim wants a $15,000 personal loan, which might be more than you’d normally lend him. But Jim also happens to have a loan on his truck with Ford Motor Credit, and he owes close to what it’s worth. Can you strengthen the relationship you have with Jim by instead of saying no or approving a lesser amount on his personal loan, saying yes to the full amount if he brings over his truck loan? You’ll hopefully save him some money there as well! From being a collector in my finance company days, I know you have a little more leverage collecting that personal loan if the member also has their car loan with you. We stretch our guidelines all the time on loan requests to loyal members who have given us a lot of business. I suppose, with this concept of relationship underwriting, you’re giving the member a chance to become more loyal. To me, this is just old-school lending; yet at times we’re moving so quickly that it’s hard to take the time to be the outside force.
5. Have a pre-qualified credit offer for qualified members 365 days a year. Frankly, we’re not there yet and we’ve been working on it for a decade. You could accomplish this via the use of a pre-screen with the bureaus or offer a “pre-screen for one” link on your webpage (a consumer-initiated action to see what they might qualify for that uses a “soft-hit” to the credit bureau, and the bureau has the lender’s attributes to pass on the pre-qualified amount to the consumer). But it doesn’t matter how you do it. The important thing is that your members need to be conditioned to think of your credit union when a need arises.

The Second Thing I Remember About Physics Is …  

Reaction. For every action there is an equal and opposite reaction. Let’s face it, a lot of lending opportunities are created by movements in rate:

• Mortgage rates go down, refinance activity blows up.
• Car rates go down, refinances also happen.
• Rates go up, people jump from credit cards and consolidate.

The classic “action and opposite reaction” is what we’re seeing now with mortgage rates having doubled since late last year. Mortgage volume drops, and we’re literally flooded in home equity applications. I’ve been joking that home equity loans are the new cash-out first mortgage refinance. After all, homeowners will always need cash, and there’s no reason to refinance a 3% first mortgage to get $25,000 cash out to rebuild the deck and pay 6%.

The key to levering this action-reaction is anticipation and preparedness. While our mortgage area was crazy busy for 19 months following the COVID-19 outbreak, we never forgot about home equity loans. Even though we were getting killed by payoffs from members consolidating their first mortgage and our HELOC, we kept up the emphasis on home equity. We have staff who’ve done a little bit of everything, and as soon as mortgage rates started to rise, we finalized plans to re-deploy people. We even did a little bit of product management over the last few years, thinking of how we could make our home equity lines more attractive in a rising rate environment. All without a “me-too” strategy, meaning don’t copy everything the big banks are doing with their HELOC plans!

More on Reaction Through Financial Education

Remember my suggestion that applying high school physics to lending required some creative thinking? Here’s where your credit union could get really creative. There are a lot of bad things happening to the consumer, from higher rates and inflation to higher gas prices. The proper, equal and opposite reaction to bad things happening? Help your members make good financial decisions.

Consider Paul who drives 20,000 miles a year and gets 20 miles per gallon in his current car. That’s 1,000 gallons a year he’s buying, and today’s gas prices means he’s spending about $2,000 more on gas a year than he did maybe 12 to 18 months ago. Because of that, he’s considering buying a $65,000 EV (I won’t even attempt to address the issue of paying well over sticker or buying a several-year-old model for more than it originally sold for.)

A bad decision is potentially adding a lot of debt to save $2,000 a year. Imagine Paul owes $15,000 on his current vehicle, as he’s paid it down for several years and pays $500 a month on the loan. Let’s say he gets $20,000 for his trade, and with taxes and all he’ll wind up close to $70,000 in debt with a payment north of $1,000 a month. Yes, he’s spending $6,000 extra a year ($1,000 new payment -$500 old payment times 12 months a year) or more annually to save the extra $2,000 a year he’s been paying for gas. It’s true that he’s really spending $5,000 a year total on gas. The electricity he’ll use to charge his EV will be way cheaper than gas—but still add to the cost.

It’s easy to fall into the trap to spend your marketing dollars on promoting specific loan products. Yet there may never have been a better time to focus on helping members make good decisions in bad times; your members will thank you for it.

Equal and Opposite Reaction, Part 3

I’ve given you a few ideas, some perhaps better suited to bigger credit unions, and others that might be easier executed by smaller shops. Inspired by my longtime friend, former employee, and current smaller credit union CEO, Genice DeCorte, I’d tell you this: Sometimes if you’re big it makes sense to think small, and if you’re small, it pays to think big.

CUES member Bill Vogeney is chief risk officer and self-professed lending geek at $9 billion Ent Credit Union, Colorado Springs.