So here we are at the beginning of a new year. Your credit union is busy getting ready for what many would predict as a turbulent economy. You are buried in initiatives and goals for 2023 and eager to start the year.
I don’t have a magic ball, I can’t predict the future. If I did, Jessica and I would not have to get on dreadful Southwest Airlines and fly all over the country working with credit unions to make a living. While my clairvoyant skills are not up to snuff I do have enough experience as a lender to recognize an economic cycle. I have been through them before…..
Recently, I was speaking with one of my clients on the West Coast. This is a large credit union and community chartered field of membership. Historically, this credit union has been averse to granting unsecured loans. If you have been a client of ours for awhile you have heard us describe unsecured lending this way:
“Unsecured lending is like black licorice, your credit union either has a taste for it, or they don’t”
CU Lending Advice
Have you ever tried to talk someone into liking black licorice? Personally, I love it, I have never been able to get my kids to like it though. What I would say, is that if you are a credit union >$400M in assets, you need to have a taste for unsecured lending. The market is simply too big for your credit union to stand on the sidelines.
When speaking with this CLO, his concerns heading into a recession, “is now the time to get aggressive with unsecured? ”
No, the time to get “aggressive” with unsecured was 10 years ago when you were half the size you are today and you could actually get something done at your credit union :). Now is the time to be in the market. The challenge for this credit union is that they haven’t updated their limits in 10 years and what they consider “aggressive” is actually standard offerings for credit unions their size.
Back to the economy.
I have been doing this a long, long time, I have lived through several economic cycles as a lender. It is a cycle. It is not a matter of if, the economy will turn down or up, the question is when it will happen. “Even the Hundred Years’ War, came to an end”.
In my opinion, one of the worst things that can happen to a conservative lender is for them to guess correctly.
Guess? Those are strong words Don. Yes, they are strong. There are plenty of variables to contend with in our business, there is enough uncertainty to deal with on a regular basis. Remaining ultra-conservative in unsecured lending 9 years out of 10 to avoid losses in 1 year while giving up 9 years of yield is guessing.
So many times in my career I have heard, “I’m so glad that when the economy turned we didn’t have a lot of losses.” I would expect that when the economy turns that your credit union would have losses, we lend to people that have jobs. The question is not if you have losses, the question is the scale of your losses.
The issue at hand for conservative lenders is a logical fallacy. Low loan losses reinforce a decision- it is called “confirmation bias.” Confirmation bias is the tendency to search for, interpret, favor, and recall information in a way that confirms one’s preexisting beliefs. This is a self-reinforcing cycle, where a lender’s beliefs are reinforced by the evidence they choose to consider, leading them to continue to hold the belief even in the face of evidence to the contrary. This can be a problem because it can lead people to make decisions that are not well-informed or objectively reasonable.
Just today, I was reviewing a call report for a credit union that shut down lending in 2020 and is still digging out of the hole they created. By all accounts 2023 will be a down year. The problem with growing is that you can’t accomplish growth by shrinking.
Give us a call. We would love to help you determine appropriate limits and appropriate risk tolerances in unsecured lending. It is going to be a turbulent year, don’t miss the opportunities that are right in front of you.
Don Arkell
Owner
CU Lending Advice
don@culendingadvice.