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?
(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...
It may simply be a question of conscience...
for a member-owned cooperative.