Wednesday, July 27, 2016

Some Really Good News!

Lend Me An Ear ...

Never have liked folks who always whine and
complain; so instead of just grousing about the potential problems with risk-based lending, thought I'd offer up some more positive solutions to boost your credit union's lending... 

Has your loan-to-share ratio plummeted to a new low?  Is your expense ratio getting as tight as your teenager's jeans?  No problem.  Here are ten time-tested, sure-fire methods of increasing loans, boosting profitability and protecting your bonus:
1) Lower Credit Standards:  Just a little, it won't hurt (much!). You've tightened up too much, stimulate a little demand! C'mon take a walk on the supply side!

2) Make Long-Term Fixed Rate Loans - and Book'em!:  Drop the paternalism; stop trying to give members what they need - give 'em what they want!  Earnings will be great; and you've been around long enough to "time the market" and sell early before the upturn!
3) Offer Incentives for Loan Officers:  Heck, the more the merrier!  You want performance?  You gotta pay these days to create a little excitement and to spark their interest - especially their "self" interest and "conflict of" interest! 
4) Purchase Loans from Out-of-State Lenders:  Claim it's diversification and book some great up-front fees too! You can really spread your risks by having a few bad loans in every state!
5) Develop a Taste for Loan Participations:  The rates and terms are simply fantastic!!!!
6) Buy Asset-Backed Securities and Novel
Derivatives:  Innovation is the key to our future success and "synthetic" loans are the future.  Can't miss with this!  The underlying assumptions are absolutely empirical!  The brokers just exude confidence and they must know what they're doing, 'cause Guccis, Rolexes, and gold chains ain't cheap!
7) Trumpet Credit Cards:  Stop whining about bankruptcy, your members aren't worried about it!  Why be such a stick-in-the-mud?  Credit cards aren't any more dangerous than handguns!
8) Make Commercial Loans:  There isn't any real difference between consumer loans and commercial loans; same process, just much bigger bucks!  Let's stop hitting singles and swing for the fences!
9) "Sell" Loans To The Membership:  Don't you want to help cure this recession?  Let's help members shop 'til they drop! Nobody said their entire head had to be above water; keep lending until you can't see their noses!
10) Make Indirect Car Loans:  We're losing market share!!!  If the member is going to get shafted anyway, the least we can do is make it convenient!  Get in bed with these guys; sleep around a little; it won't hurt their reputation.

But for the very best professional advice, check around Monte Carlo or on the beaches of Jamaica where the "best and brightest" lending gurus  live very comfortably; circling like sharks, the "scent of  blood" rising from "lending innovations" now once again surfacing within the credit union movement....

Tuesday, July 26, 2016

The Bargain Basement...

Mr. Filene
Been having several Edward Filene Moments over the last few days as the discussion gained heat on risk-based lending, but not the type you might suspect. 

'Course everyone associated with credit unions knows that Mr. Filene was the principal benefactor and key driving force behind the creation of the credit union movement in the U.S.

What many forget is that Mr. Filene was also a truly world class innovator  in "retailing" - the "Steve Jobs-like, marketeer extraordinare" of his era. His flagship store was Filene's in Boston and his "guy in a garage" retailing innovation incubator was the famous Filene's Basement.

Filene's was a creative sensation with an entrepreneurial spirit, which introduced many of the core sales techniques still used today, including "fixed price/same price" for all merchandising, "% OFF" discounts, "two-fers", closeout sales, and lay-away plans. Filene knew how to create sales excitement in the department store space and shopping frenzies! 

Part of Mr. Filene's great interest in the credit union movement was to help create a source of credit for working men and women, so that they could purchase some of the "small luxuries" in life "on installments." Fair and reasonably priced credit gave workers greater purchasing power, at places like Filene's Basement! Filene most certainly understood his business, but more importantly he understood human nature, which made his fortune!

But, in talking about risk-based lending and other recent "innovations" in the credit union movement, sometimes wonder how all this will turn out. 

Are we actually following in Filene's historical footsteps or have we become something quite different, but not different at all?

Monday, July 25, 2016

Risk-Based Lending... In A Political Year

So, how can you support both Dennis Moriarity's and Gregg Stockdale's views of risk-based lending?

Isn't that like saying you are going to vote for Hillary Clinton and Donald Trump in the upcoming Presidential election?


Let's take the second question first - that ain't funny!!!

One can support both Gregg and Dennis, because Gregg is right on the "macro" level and Dennis is equally right on the "micro" level. What does that mean? 

Well, using a large ("macro") pool of folks
(millions and millions of borrowers) for the analysis - the basic technique the Fair Isaacs Company ("FICO") uses - the statistics are right! In our example yesterday, one in five (20%!) of the folks in the queen/jacks pool are highly likely to become delinquent and perhaps "default" (which is defined as being past due 90 days or more). So, Gregg is dead on!

But, looking more closely at the "micro" (small) level - looking at each of the individual members of the queen/jack group - it becomes very clear that if the queen can be identified as the culprit "defaulter" then the jacks "statistically" will not default. FICO says empirically that not everyone in the group defaults - only 20% will, the jacks will repay and not default.  So, as Dennis points out, why do we overcharge the jacks (80% of the group!)... and also penalize them on their insurance, housing, employment....

In the macro world of finance you can legally
and logically use risk-based lending to charge much higher rates to our "queen /jack" group even though you know that approach "over-rewards" the queen - she does default and doesn't pay the higher rate! - and overcharges the jacks who do meet their obligations and do not default! It's unfair to everyone when you look at it that way!

So, although risk-based lending may be legal and "logical", the question for credit unions - who are owned by those queens and jacks - is are we willing to take some extra time to take a "micro" look at our members to try and improve the fairness of the lending process (and substantially lower their borrowing cost!), or are we going to continue to act like we don't know...

Sunday, July 24, 2016

A Really Bad Deal.... From A Stacked Deck! One For Dennis Moriarity and...

(... and Gregg Stockdale!)

Many financial institutions in the U.S. have in the past been
lured into practicing risk-based lending.  Some were just flat-out duped and fooled; while others - willing victims - really didn't mind playing the fool at all.  

Lot's of money can be made fleecing the poor with risk-based lending. "The empirical legitimacy" which misapplied mathematics provides the practice, makes the shearing of the sheep mere child's play - easy pickings!!  And generally, when given a choice between "good and gold"... well, you know how that usually comes out these days!

In risk-based lending, credit scores are used to establish a rate chart with members with lower scores paying higher rates. The statistically valid idea is that if lower credit scores create higher loan losses, then those members causing the losses should reasonably be charged for those higher losses. No problem with that.....
.... except that it's a lie.  
Let me show you clearly why.

See the five face-down cards below? There are 4 jacks and a queen in the hand.  All five represent regular working folks, who all have low credit scores of 580, which implies that 1 in 5 (20%) of these folks will default on their loan over the next 24 months..  All are, therefore, charged the highest ("E-paper") interest rate.  Let me help you with a surefire fact, out of the 5 cards - the queen is the card ( the 20%), the 1 in 5 which will default in the future.
Pick the Queen!
Your odds are 1 in 5.

Now just for the sake of argument, let's assume you used a bit more rational, fair and defensible method of determining the actual risk of the borrower, rather than just "eenie-meenie" or "pick a card".   

Imagine that you actually sat down with each applicant individually and went over their financial condition, asked for explanations of the credit blemishes, and listened to them honestly as fellow members and human beings. Through the face-to-face interview and additional information gleaned, here's what the five borrowers look like to you:
Pick the Queen!
Too simplistic you say!  No not really.... it works in real life.... if you want it to....

But lots of folks don't want it to work.  Why?  Because the four jacks, with that old bad queen gone, are now "statistically certain" to pay, won't cause a loss, and deserve a much better rate.  You won't be able to statistically discriminate against them any longer and there goes the business plan, there goes the "bottom line", there goes the bonus....

Risked-based lending is a statistically "stacked deck", a bad hand, an unfair deal, a falsified game of chance played ruthlessly and recklessly against good-hearted, member-borrowers....  

And you hold all the cards!

But wait a minute, just a minute, whose credit union is it anyway?

Saturday, July 23, 2016

The Robust Theory Of Risk-Based Lending ...

An economy on the edge...!
In this economy, if you, as a consumer, have recently experienced a couple of those unfortunate, unexpected, "real-world, real-life" financial flareups don't despair! Proponents of risk-based lending (RBL) know how to help you get out of trouble!  

According to risked-based theorists, the best answer for those on the "financial ropes" is to offer you a loan with a higher rate!  If you can't handle the regular rate,  "upping the ante" is bound to enhance your ability to repay - right?  

'Ya follow that logic, don't 'ya?!?

These guys have come up with "a new financial life preserver" for those who are economically "drowning".   
Here it is...

Friday, July 22, 2016

A Robust Pause for the Weekend...

Let's take a bit of a breather -OK?  
Need a day or
two to digest the approved NCUA Strategic Plan. But for all the disenchanted NCUA naysayers, I hope you will at least acknowledge the many "greenshoots" you see budding from the recent actions of the NCUA Board - they may not blossom, but there has been a noticeable turn towards Spring.

Getting a handle
on VaR...

Couple of folks have asked: What's with the "VaR - (Vacuous and Robust !)" phrase?,  which was used in a recent send-up of the not-so-funny  misapplication of statistics and economic modeling by one of our favorite groups from Never-Neverland - those  prognosticating, robusterian gnomes. 

Well, you already know that vacuous means "empty, thoughtless" and robust means "written by an idiot"; so I assume the question is about "VaR".

Here's what the "Financial Times" says about VaR - or "Value at Risk":

"Value at risk are economic models which have been a key part of banks' and regulatory risk management toolboxes for the last two decades, despite being heavily criticized for failing to predict the large losses incurred during the financial crises."

"The models attempt to forecast how much money banks could lose from operations, lending, and trading, within a certain time frame, by overlaying historic market movements with statistical analysis."

Economic "Quacks" should fear
Black Swans and other B.S. including their own ....
Sounds like gobbledygook I'm sure, but the focus of the FT article ("Bond Yields Threaten Risk Models") was that models were once again demonstrating that they in fact can not correctly anticipate nor accurately forecast future markets - despite the "seemingly sophisticated", but repeatedly faulty, mathematical/statistical window dressing .

But, so what...

Thursday, July 21, 2016

NCUA: An Agency at the Crossroads... Part X

The NCUA Board meets today and one of the key agenda items for the meeting is approval of the five year  "Strategic Plan" for the Agency.  Like the famous 5-year economic plans formerly published by the old communist Soviet Union; governmental strategic plans are rarely taken very seriously by anyone, because they invariably are packed with future goals fabricated to support the status quo - more of the same old same old, wrapped in gobbledygook.   I'm kinda out on a bit of a limb here speculating about this critical document, since I have not read the "new plan", but I like my odds - be sure to take a look! 

We have been talking the last few days about
change at NCUA.  If change is needed, think we all recognize significant, serious change must
come "from the top", from the NCUA Board. Look to see if you believe the new, proposed NCUA Strategic Plan is a serious document - for it is the Board's plan if approved.

Thought you might like to also consider a few excerpts from a recent opinion piece in the American Banker Magazine. The writer is Richard J. Parsons, a former BOA exec:

"When a bank fails and the resulting loss to the FDIC crosses a certain threshold, regulators are required to write a material loss report (MLR), explaining why the bank in fact failed. Well over 100 such MLR's have been written in the past few years." 

[For you CU folks the same rules apply to the NCUA when losses at a failed CU exceed $25 million.]

"... the banks' examiners almost without exception gave these institutions good to excellent CAMELS ratings nearly right up until the point of failure."

"Start all the way back at 1979 - the year the CAMELS system was developed - and the total number of bank and savings and loan failures is now north of 3,400 institutions, including 470 that have failed since 2008.  The evidence of more than 3,400 failed banks and the ratings these institutions received shortly before folding simply overwhelms any defense of the usefulness of CAMELS."

"This isn't a matter of implementation or execution. The problem is the system itself... 

The U.S. needs a new, 21st century model for identifying, monitoring and reporting risk. It should be transparent to bankers, depositors, and investors in bank equity and debt.  The new model should be based on objective measures."

But Mr. Parsons suggests a solution...

Wednesday, July 20, 2016

NCUA: An Agency at the Crossroads.... Part IX


"The credit unions do not represent their members."
(Guess that's because the members are 
"an audience that does not exist".)

If change is needed, NCUA has in place the strongest and most capable Board in a decade.
(one "spot" has changed!)

And, as a commenter noted yesterday with exquisite precision, if there is a problem...

Tuesday, July 19, 2016

NCUA: An Agency at the Crossroads... Part VIII


The NCUA senior staff finds no need to..

"... speak to an audience that does not exist."