This week will feature a two-part series covering how lenders view risks associated with younger and older borrowers. Erik Payne, a writer and researcher for Callahan & Associates (www.creditunions.com), has written this informative series as a guest blogger for rateGenius. Click here for part one.
Part 2: Gen Y vs Baby Boomers
By: Erik Payne
The Importance Of Gen Y aka the Millennials
A 2012 analysis by FICO showed that 16 percent of people aged 18 to 29 did not own a credit card, up from 9 percent in 2005. A decline in credit popularity means these borrowers have and develop little to no credit history. And no credit score equals risk, right?
Gen Y and other young people are risky; there is no doubt. The information with which to base an approval or denial on is slim, but it does exist. A larger problem, it seems, is credit unions find it difficult to attract them to the institution at all. This generation has more options in which to trust its finances than its predecessors, creating a more competitive environment for financial institutions, no longer just competing against one another for membership. They are competing against payday lenders, crowdsourced platforms and websites, all of which offer young people certain conveniences financial institutions do not or cannot.
“We’re all having to fight harder and compete harder for that smaller piece of pie,” says Jeff Harper, chief lending officer of the $1 billion in asset-size Orange County’s Credit Union in Santa Anna, CA
Wants, needs, priorities and interests have shifted. Credit unions want lasting relationships with these young members; want them to fit the ideal borrower of yesterday. The kind who has low debt-to-income, the kind with a stable job outlook, the kind of borrower their parents would have been. Unfortunately, that’s not who Gen Y is. Gen Y expects to stay on a job for less than three years. It’s unrealistic for financial institutions to expect brand loyalty when younger people do not intend to show job loyalty. Financial institutions may want life-long members, but young people may only be interested in the loan.
“You can lead the horse to water but you can’t make him drink,” states Bill Vogeney, chief lending officer of the $4 billion in asset-size Ent Credit Union in Colorado Springs, CO
If this is the new normal, Gen Y should be reviewed differently than other generations. Credit unions adapting to the new financial environment and change their lending review processes (within the context of qualified mortgage and ability to repay laws) will have an easier time attracting the young people they so desperately want.
Harper echoes this sentiment. “If we are going to be relevant, we need to make sure we are considering the changing landscape of how younger people can earn income compared to our Boomers and older generations that had these career jobs.”
As the retirement age stretches from 65 to now potentially 70 and beyond, people are staying in the workforce for longer than ever, many without adequate savings to get them through retirement.
“They just don’t have a whole lot of retirement savings,” says Vogeney. “And if they don’t have a whole lot of retirement savings it’s probably because they have an awful lot of debt, right?”
On a case by case basis, as Vogeney points out, that may not always be true. But more and more older individuals are running into savings shortages. With no or minimal income coming in to offset that, personal financial portfolios can deteriorate.
As with younger people, the response by financial institutions to older borrowers should not be to avoid lending nor continue to employ unrealistic financial standards. It should be to work with these borrowers, offer them help in times of distress. Unlike younger people, this group is more likely to be loyal to the institution. Short term debt help here pays off with long-term relationships, possibly spanning generations.
Though Boomers and older generations have adult children, presumably already with institutional relationships, finance can often be a family affair. “We are trying to make sure that we are speaking to our young members through their parents,” Harper says. “A lot of young folks care what their parents have to say about finance. We see a lot of parents getting involved.”
Vogeney, perhaps unusual for a chief lending officer at an institution of Ent CU’s size, looks at every borrower request for financial assistance on a loan. It helps him learn as much as he can about a borrower before his department makes the decision to approve or deny. Loan modifications can help older borrowers who have had unexpected costs or realized their savings are not as much as they initially anticipated.
What Is The Question?
The question for credit unions to answer is not who is riskier between young and old people, rather, despite the challenges, how can they safely make loans to these groups? Priorities for credit unions revolve around the members and their needs, with positive financial performance a result of a job well done.
“Lending can be as simple as you make it or as complicated as you make it,” states Vogeney. “Oftentimes I’ll tell an underwriter or one of our loan originators, ‘Tell me something good about the loan.’ Tell me something positive. Do the positives outweigh the negatives?”
In a simplified sense, this is what lending is: Do the positives of an application outweigh the negatives? What is the risk? What is the reward? Can the borrower repay this loan?
It’s not about why these borrowers are risky, because all borrowers are. There are many outside factors, social and economic, that create risk in every age group. Good health is never guaranteed, neither is steady employment. Saying that two groups are inherently riskier than others ignores the suddenness and randomness of life.
Risk stems from ignorance. And credit unions, whether due to the heightened compliance standards or the study of more advanced predictive financial statistics, have no excuse to be ignorant (nor are they). There is considerable information available with which to judge an application, credit unions need to decide which works best for them. Which statistics best depict whether a member can repay a loan?