With Great Power Comes Great Responsibility
Over the past three years, nearly 500 community charters have been granted by NCUA and their state regulatory counterparts. One of the premises behind a community charter is that the credit union will serve the entire community. A portion of the conversion application describes the ways the credit union will reach out to all segments of their proposed community, which include marketing efforts, new branches and direct mail. Programs such as former NCUA Chairman Dollar's Access Across America and Board Member Debbie Matz' Partnering and Leadership Successes have made it easier for credit unions to reach out to all members in their new fields. And one of the toughest, yet best, decisions that I made during my tenure at NCUA was to repeal the Community Action Plan (CAP). CAP would have brought the regulators and the examiner into the day-to-day operation of the credit union, which was not necessary because the oversight of "serving the underserved" should be left to the credit union. However, as Uncle Ben said to Spiderman, "with great power comes great responsibility." And for credit unions who have been granted this extra "power," there is a responsibility to serve everyone. But therein, lies the rub. How does a credit union serve EVERYONE? Not all members are created equally. Some need special attention, some need assistance and some need a break. When a typical credit union breaks down its current membership base, it will find that the "A" members are declining, the "B" members are staying steady and the number of "C" and "D" members is growing. This is a trend that has been evolving over the last 20 years, not something that just happened over night. Consider that 20 years ago an average family's debt represented about 66% of its discretionary budget, and today it's about 113%. An average family of four spends 21% less on clothes, 22% less on food and 44% less on home appliances than a similar family did in the 1970's. It is not that today's families are saving more either. They are going without because they don't have that money to spend. And when they do spend on major purchases, it is usually done with a credit card. Credit card debt has increased from less than $10 billion in 1968 (inflation adjusted) to more than $600 billion in 2000 - an increase of more than 6,000%! These families are the new generation of the credit union movement. They are also the new consumers of the financial services industry. What is being seen is not just a credit union phenomenon, but a national one. People are saving less and spending more. Housing and tuition costs continue to rise while salaries are not keeping pace with these increases. More Americans are going without health insurance. Companies continue to downsize and move jobs overseas. And with each of these challenges, members are getting caught in the middle. With the continued rise in bankruptcy, more members are finding themselves behind the financial eight-ball. Do these members shop too much or spend frivolously? The numbers don't support that assumption. According to a 2001 Consumer Bankruptcy Project report, 87% of all bankruptcy filings are due to three reasons: job loss, medical problem or change in marital status - divorce or separation. The reasons for the other 13% of all filings include bad investments, crime victim, credit card overspending and natural disasters. These facts just don't indicate that members are just buying too many Armani suits, Prada shoes or H2 SUVs. Serving all members of the credit union's field requires some creativity and innovative thought, and it is incumbent upon the credit union to work toward a goal of 100% service. While it may not be possible to serve every member, this should be a goal of all credit unions - not just those which have been granted a community charter. How Can the Credit Union Serve All? The first way to reach all members is by attempting to reach all members. If the effort is not made, it will never have a chance for success. Many times, loan policies at the credit union are too restrictive and do not take into account those members who are not "A" material. Risk-based lending is an excellent alternative to no lending. The credit union motto of "not for profit, not for charity, but for service," addresses the concept that the credit union must be willing to make sound business decisions that allow it to serve all of its members. Members with impaired credit understand that they are an increased risk for the institution and are willing to pay the increased cost of such risk. In fact, they will probably be grateful for the chance to borrow. Too often, these applications are denied and the member is given no chance but to turn to a predatory lender. Keep in mind, there is a distinct difference between sub-prime lending and predatory lending. This discussion centers on sub-prime, or special finance, lending. There is no place for predatory lending within the credit union movement. Credit unions need to examine their loan procedures and products to ensure that all members, regardless of credit score, have the opportunity to apply for a loan. It may not always be possible to grant the loan, but the credit union must work within a profit framework to bring as many products as the membership desires to all members. For those members with special finance credit scores, it is important to credit unions to note the trend of the member's finances. Is the member keeping up with the mortgage or rent payments? Are they putting money into savings? Is the member trending up or trending down? The answers to these questions are important. While past actions often predict future behavior, the more immediate past actions should take precedent in this application process. What Is the Role of Regulators? There seems to be agreement among regulators that credit unions should serve all the members in their field of membership. Their role is to remove roadblocks, not to create impediments. It would be inconsistent to ask credit unions to serve all members while penalizing them for doing exactly what is being asked of them. That's why both federal and state regulators must be willing to grant some leeway to those credit unions who are trying to fulfill the ultimate mission of serving all members. It would also be sending the wrong message to force credit unions to limit lending when the stated goal is to increase lending opportunities. If a credit union is going the extra mile, regulators owe them the chance to reach the finish line. This may mean new training or updated regulations, but creative and innovative thought must be shared and adopted throughout all levels of the credit union community in order to fully realize the charge to serve the underserved.