Archive for August, 2011

Peer-to-Peer Lending and the Credit Union Tradition (Pt. 2)

Posted by on Monday, 29 August, 2011

In this, the second part of a two-part series, Matthew Cropp outlines his opinion on how peer-to-peer lending may help credit unions capitalize on the the social capital of their members. Don’t miss Matthew’s first post on the topic, here.

From Matthew Cropp:

When Alphonse Desjardins and Edward Filene began spreading credit unionism in North America at the beginning of the twentieth century, their primary motivation was to stop loan sharks from preying on those of modest means.

Have you seen The True Story of Credit Unions comic book?

At that time, most banks felt that small consumer loans were too risky and costly to be worth providing, and so, when they needed credit, working people often had to turn to loan sharks who would charge hundreds, or even thousands, of percent interest. Such debts could quickly spin out of control and immiserate borrowers, who would often end up paying many times the loan’s principle.

Thus, to bring affordable credit within reach of millions of people, the early credit union model functioned to leverage the social capital of members by requiring that credit unions have a narrow common bond. In practice, this often took the form of a workplace, church, or neighborhood; essentially, any community in which people regularly interacted with each other in roles other than that of “credit union member.” The social knowledge generated by those relationships was then used by the organization’s credit committee to determine whether or not to approve a loan.

The volunteers on the credit committee were respected community members who were elected democratically by the membership as a whole, and they generally viewed their role as an important trust. Thus, while commercial banks shied away from borrowers of modest means, credit unions were able to leverage the social capital of their “host” communities in order to fill the gap by providing low-interest loans to their members.

However, as the banking industry grew and became more sophisticated following the Second World War, the consumer credit niche that credit unions had dominated became more and more competitive. Pressured to provide increasingly complex and capital-intensive services in order to remain relevant, the nexus of the credit union movement’s growth shifted from the creation of new credit unions to increasing the size of existing credit unions through mergers. In 1969, the number of individual institutions peaked at 23,761 before beginning a steady, continuous decline.

At its core, this transition from small, tight-knit organizations to the large, community-based credit unions that form the bulk of the contemporary movement represented a profound trade-off.

On the one hand, the new credit unions could leverage economies of scale in order to provide newly developed services that would be far beyond the means of a traditional credit union to offer. Conversely, as they added an increasing diversity of membership groups to their common bonds, the social capital that the new credit unions could leverage for the accurate provision of credit rapidly declined, and the responsibility for determining credit-worthiness shifted from the volunteer credit committee to the professional loan officer.

On net, however, the benefits of economies of scale seemed to trump the losses that came with decreasing institutional social capital, and so the trend towards larger and larger credit unions has persisted down to the present.

The recent (re)emergence of p2p lending suggests that, for credit unions, the economies of scale vs. economies of social capital trade-off may no longer be necessary.

This does not mean a return to the simple credit unions of old; indeed, the nature of “community” has radically changed for many people since the first half of the twentieth century. Back then, there were numerous institutions that people expected to remain part of for large parts of their lives: the life-long employer, the church parish where one was both baptized and laid to rest, etc.

In the modern, globalized, intensely interconnected world, however, the flexibility of many people’s careers and lives means there are few large, geographically stable communities in which they are deeply invested that can be tapped by credit unions for social capital. Community still exists, of course, but its webs of trust and obligation are widely distributed and far more protean than in previous eras.

As such, fully leveraging the social capital of credit union members while also retaining the benefits of economies of scale requires a re-examination of a subtle aspect of credit union identity. In the past, credit unions were founded as institutions that provided their host communities with the infrastructure necessary to financially reinvest in their constituent members. However, as credit unions grew in size through mergers, the institutions’ identification with any particular community decayed, and with that identification went the ability to mobilize that community’s social capital.

What has remained is a commitment to serving the member as an individual rather than as a member of a specific community.

It is this contemporary commitment that provides a powerful opportunity for credit unions to re-engage with the social capital of their members. Instead of being devoted to the development of an already existing community, credit unions might see their current mission as facilitating the development of the plurality of communities in which their members are participants.

There are a variety of ways to approach this goal. In my opinion an obvious one is for credit unions to construct infrastructure that allows their members to lend directly to each other on a peer-to-peer basis. By providing expert guidance and systems designed to make originating, receiving, and collecting such loans a relatively simple process, credit unions would be empowering their members to fully leverage their idiosyncratic social knowledge of each other to increase the availability of credit, especially for people in their communities for whom loans at reasonable rates are currently out of reach.

Though utilizing a novel approach, I would argue that such a program would, in fact, be carrying on the vitally important work, begun by Desjardins and Filene more than a century ago, of credit unions harnessing the power of social capital to improve the lives of under-served and marginalized populations by making available affordable credit.

 

Matthew Cropp is author of the blog Credit Union History and earned his MA in History at the University of Vermont.


Deadline extended for scholarships to CCUC

Posted by on Thursday, 25 August, 2011

Scholarship deadline for Community Credit Union Conference extended

The deadline to apply for a 2011 Community Credit Union & Growth Conference scholarship has been extended to September 9, 2011.  Up to 30 scholarships to the event will be co-sponsored by Credit Union National Association (CUNA) and CO-OP Financial Services.

To be held October 24-27, in San Francisco, the conference will focus on how to turn growth-generating ideas into action plans.  To access the conference website, including the simplified scholarship form and scholarship criteria, please visit training.cuna.org/ccuc.

To apply for a scholarship, please click here.

Applications are due Friday, September 9, 2011.  Recipients will be contacted by Thursday, September 15, 2011.


CUNA Article Positions Credit Unions as a Safe Harbor for Nervous Investors

Posted by on Wednesday, 24 August, 2011

MADISON, Wis. (August 24, 2011) – CUNA’s Copy & Art Express newsletter service is offering credit unions two new free articles—“Your Credit Union: Safe Harbor in Financial Storms” and “U.S. Credit Rating Slips: What (If Anything) Does it Mean to You?”—to remind members that credit unions are strong and stable.

“These two articles remind consumers that credit unions are a safe haven for their hard-earned money, even during times of economic uncertainty,” explained Vikki Kinsler, manager of the Copy & Art Express newsletter service.

While the downgrade in the U.S.’s credit rating has shaken investors, the credit rating drop has actually had a positive short term impact on bonds, the “Credit Rating Slip” article explains.

“Major swings in the stock market can be unsettling for consumers, making this a good time to remind them that credit unions insure members’ savings to at least $250,000, says Kinsler. “Federal insurance from the National Credit Union Administration protects members’ money in credit union share savings, share draft/checking, money market, share certificates, trust, and retirement accounts.”

The “Safe Harbor” newsletter article reminds members that credit unions have a strong capital position. That strong capital base—undivided earnings and reserves—helps credit unions and their member-owners weather uncertain economic times.

With the economic outlook uncertain, it’s good to remind members that credit unions are safe and secure.

To access these articles and other resources from Copy & Art Express, visithttp://www.cuna.org/finlit/copy_art_express.htmland click on “Preview Copy & Art Express.”

Resources: Copy & Art ExpressTM is your source for credit union-specific personal finance articles, ads and graphics, as well as more than 250,000 royalty-free stock photos from PhotosToGo. Visit http://www.cuna.org/finlit/copy_art_express.htmlto learn more.

 


Peer-to-Peer Lending and the Credit Union Tradition (Pt. 1)

Posted by on Wednesday, 24 August, 2011

This is the first in a two-part series from Matthew Cropp, budding historian and author of the blog Credit Union History. Look for his second post in the coming days which outlines Matt’s opinion on how peer-to-peer lending may help credit unions capitalize on the the social capital of their members.

From Matthew Cropp:

In recent years, the emergence of “peer-to-peer” (p2p) lending has been one of the most interesting and discussed trends within the world of financial services. A number of for-profit companies, such as Prosper.com and LendingClub.com, have sprung up which allow individuals to make loans directly to each other (minus a service fee), and the open-source project Rain Droplet has been pioneering the provision of such services on a quasi-cooperative basis. The fast-growing industry, which has originated hundreds of millions of dollars in loans, has even been recently featured in the New York Times.

The reason to which much of the media ascribes the success of this phenomenon is that p2p lending represents technologically facilitated dis-intermediation of the provision of credit. By cutting out a large percentage of the bureaucratic apparatus that separates the person with surplus savings from the individual with need for credit, the story goes, “depositors” can receive higher rates of return and “borrowers” lower rates on loans than either would get from a traditional financial institution.

While true as far as it goes, a myopic focus on this dynamic neglects another factor that has been key to the explosive growth of p2p lending: “social capital.”

According to the sociologist Robert Putnam, social capital is the idea that “social networks have value. Just as a screwdriver (physical capital) or a college education (human capital) can increase productivity (both individual and collective), so too social contacts affect the productivity of individuals and groups.”[1]

In the case of the provision of credit, social capital is key to determining the riskiness of a particular loan in two vital ways.

First, it allows for the lender to more accurately assess the riskiness of a borrower. At a traditional financial institution, the relationship between the loan officer who decides whether or not a loan is extended and the potential borrower is generally characterized by a low level of social capital.

Working with such sources as credit scores and interviews in which borrower attempts to put the best face on his or her situation, even the most skillful professional will be left with a great deal of uncertainty that has to be priced into a loan. As a result, many borrowers must pay more than would be necessary had their financial institution access to perfect information, and some deserving borrowers are excluded from credit altogether.

By contrast, the information that a lender who is also a personal acquaintance of a borrower has to work with can potentially be far more comprehensive. Not only can the p2p lender see the same “objective” measures as the aforementioned loan officer, but he or she can also factor in the idiosyncratic knowledge that can only be gleaned from observing the potential borrower in a variety of social situations over time.

Thus, while a borrower with a bad credit score might be rejected by an institutional lender, an acquaintance who better understands the full context of that number might judiciously decide that the borrower could, in fact, meet the desired obligation, and thus decide to extend him or her credit.

In and of itself, such an informational advantage would likely be sufficient to drive the growth of p2p lending. However, its effect is augmented by the fact that greater social capital doesn’t simply allow for more accurate predictions of default risk; rather, it actively reduces that risk.

When an individual defaults on a loan originated by a large institution to which he or she has little social connection, the consequences are predictable and almost entirely economic. That person might have certain objects repossessed and will have more difficulty obtaining institutional credit in the future, but the fabric of relationships that constitute his or her social life remains relatively unaffected.

In addition to carrying the economic consequences outlined above, defaulting on a loan from an acquaintance can have profound social consequences. Not only can it disrupt the valued relationship with the lender (including access to the resources and opportunities that said relationship provides), but the default can also spill over and affect the defaulting borrower’s relationships with mutual acquaintances. Unless there is a very good reason for the default (such as an unexpected job loss or catastrophic health event), those mutual friends would interpret the default as an injustice inflicted upon the lender and might thus socially punish the borrower in a variety of ways.

As such, borrowers are incentivized to work far harder to continue servicing p2p debts than they would debts originated by impersonal financial institutions.

By leveraging social capital in these ways, it is clear that, all other factors held equal, p2p lenders can rationally provide cheaper credit than can impersonal financial institutions. However, when recent journalistic reports have contextualized the practice as a new phenomenon that is entirely dependent on recent technological innovations, they’re ignoring a fundamental fact: that, for its first fifty-odd years, the growth of the credit union movement was driven by the very same dynamics, and that it can, in fact, be understood as having pioneered p2p lending.

(continued…)

More to come in Matt’s next post, including his opinion on why social capital in today’s world can help credit unions.


[1]Bowling Alone, 18.

 

Matthew Cropp is author of the blog Credit Union History and earned his MA in History at the University of Vermont.

 


New CUNA Youth Activity Book Highlights Saving, CU Difference

Posted by on Monday, 22 August, 2011

MADISON, Wis. (August 22, 2011) — The new Clink! Clink! It’s Money Time activity book from Credit Union National Association (CUNA) invites kids to make sense of earning and saving with fun activities and stories like dollar-and-cent Tic-Tac-Toe and “The Story of Walter the Waster and Susie the Saver.”

“Recent research shows that very young children are capable of understanding basic concepts that underlie consumer decisions,” says Vikki Kinsler, a manager with CUNA’s consumer publishing team. “Clink! Clink! gives parents opportunities to have conversations about the use of money with their kids at an impressionable age.”

Suited for youth ages five to twelve, the full-color book features engaging activities such as a crossword puzzle, a water slide maze, and a financial word scramble that incorporates saving, financial literacy, and the credit union difference in a fun way.  Kids also can “Crack the Credit Union Code,” matching famous faces with corresponding coins or bills, and discover ideas for thoughtful gifts to create on a budget.

The message that the credit union is the smart place to save is built into the exercises, covering such topics as:

  • Credit union terminology (member and share)
  • Saving terminology (deposit, withdrawal, account, interest, and principal)
  • How saving at the credit union keeps money safe for the future

Designed for youth who make deposits, Clink! Clink! It’s Money Time works well as entertainment in the branch while adults conduct business or as a handout after a school presentation.

To view a sample of the activity book online click here or visit finlit.cuna.org and enter “30025” in the Product Finder. You can also obtain more information by calling 800-356-8010, and press 3.

Resources:

Clink! Clink! It’s Money Time activity book: http://cuna.org/products-services/detail.php?sku=30025

More books for youth of all ages: http://www.cuna.org/finlit/activities_handbooks.html#youth

National Credit Union Youth Week: http://www.cuna.org/finlit/youth_week.html

 


Should Credit Unions Offer Private Student Loans?

Posted by on Thursday, 18 August, 2011

Madison, Wis. (August 18, 2011)–Some readers will remember the bad old days of student loans when financial institutions would lend students funds for college expenses with few questions asked. The money went directly to the students often without the school involved. And if finances went south, bankruptcy was an option used to get out of paying off the loans.

Should Credit Unions Offer Private Student Loans? is a white paper recently released by CUNA’s Lending Council that charts the evolution in the private student loan market. A change in the student loan business model occurred after the credit crisis of 2008. After that time, many lenders got out of the student loan business while those that remained changed their ways and implemented conservative underwriting.

When a reporter asked chief lending officers for recommendations to discuss the private student loan market, one name was near unanimous—Mike Long, EVP and chief credit officer, UW Credit Union, Madison, Wisconsin, $1.3 billion assets and an Executive Committee member of CUNA’s Lending Council. The credit union is number two in the nation with almost $50 million in outstanding private student loans; the average interest rate on student loans, 4.8%, is the lowest of the top ten lenders in the private student loan market.

According to Long, the most frequent question asked concerns the credit union’s private student loan performance. Some 32% of the loans are currently in active repayment.

“As of June 2011, our delinquency ratio—calculated on loans in repayment—is less than 1.2% and charge-offs are 0.01%,” he says. “The average loan is $6,200 and 86% of the loans have co-signers and credit scores average 732. We processed more than 18,000 applications and approve roughly 50% of the applications.”

Long advises credit unions to be “mindful of the amount of money you allow people to borrow from you and make sure your loan portfolio isn’t too heavily into private student loans. We have a policy that only 10% of our total loans are in private student loans.”

The UW Credit Union started a CUSO, CU Campus Resources, which has been in existence for about one year. It is a CUSO designed for credit unions with a similar size to the UW CU, $1 billion in assets or an organization that has a university in its field of membership. The members of the CUSO should have a goal of originating 500 or more private student loans a year.

CUNA Council members are entitled to complimentary copies of these and more than 200 white papers; non-members may purchase the white papers for a price of $50 per copy.

The papers are available online in the white paper section of www.cunacouncils.org – select the “Lending” tab for both.

Press can contact Jenny Jackson at jjackson@cuna.coop for a copy of the whitepaper.


CUNA Councils helping members more than ever – Prizes!

Posted by on Friday, 5 August, 2011

Natalie Sherry

From Natalie Sherry:

When I began working for the Credit Union National Association nine months ago as the Membership Manager for CUNA Councils, I was excited to join the largest professional organization supporting credit union executives!

Since 1994, Councils have provided the resources and networking opportunities necessary to help credit unions thrive, and along the way, have experienced continuous growth.  Serving marketing, human resources, finance, lending, technology and operations executives, membership has doubled since 2003.

In 2005, the membership reached 3,000 and in 2007, it reached 4,000. And now in 2011, we’ve reached yet another membership milestone:  the CUNA Councils have now reached (and exceeded) 5,000 members!  (I have to admit, it’s a pretty nice feeling to start a new job in a year when the organization is anticipating reaching a historic milestone!)

As the Membership Manager, I’m well-acquainted with the benefits of joining the Councils (discounts on education & training, endless networking opportunities, white paper research… the list goes on), but I wanted to hear straight from the source what our members have to say!  So we asked, “What is it about the CUNA Councils that is helping members now more than ever? “

Here are just a few stories we’ve heard:

The greatest thing about being a member of the Council is to network with our peers.  I was able to get all the information needed to create a new position for a director of lending, including qualifications.  It is the greatest thing to have this vast information at our fingertips.  Everyone on the Council is willing to share and assist.  We do have some amazing people in the credit union world!
— Carol R., Lending Council

I’ve been a member of the CUNA Marketing & Business Development Council since I began working at my credit union in 2008. When I started, I was a college-student and didn’t know what a credit union was. Being part of the Council made it easier for me to understand what it meant for credit unions to be cooperative. Today, more than ever before, the Council is a source for peer-reviews of vendors and programs, feedback and idea generation. I can’t count how many times a week I read an email that makes me think — why aren’t we doing that?! It allows me to bounce ideas off a network of marketing professionals from across the country and stay up-to-date with new technology and practices. It also allows me to ask questions to more experienced credit union marketers when it comes to strategy and compliance or regulations. At the end of the day, I value the Council more than ever before because it allows me, a one-person marketing department in a small community credit union, to feel like I have the support of a marketing staff of hundreds.
— Francesca I., Marketing & Business Development Council

The CUNA Lending Council has helped me develop and improve a lot of my credit union’s policies and procedures. I have received information on foreclosures and mortgage processes to streamline many of our processes. CUNA Lending Council gives me instant access to so many professional and intelligent people that have improved my credit union and hopefully the credit union movement as a whole. I will continue to contribute and learn from the Council.

Thank you CUNA Councils!!!!
— Kimo R., Lending Council

Among all of the “More Than Ever” stories we’ve already received, there is one undeniable theme:  Council membership connects credit unions to each other in a way few other industries can claim.  We collaborate, we grow and we support each other.

To acknowledge the milestone of reaching 5,000 members, we did a little celebrating here at CUNA with cake (ofcourse!) and we’re excited to announce that we have some more surprises up our sleeves so the credit unions we support can celebrate too.

We love to hear what members enjoy most about their membership and are continuing to grow larger every day!  Current members who share their “More than Ever” stories or new members who join the Councils by August 31st will be entered for a chance to win one of five prize drawings!  Plus, the icing on the cake — we are offering a special ½ year rate and a chance to win a $5000 CUNA scholarship! Join in the celebration!

Please help yourself to a slice of virtual cake—-it’s calorie free! :)

Thanks for celebrating with us, 5000 members strong — we couldn’t have done it without YOU!

Natalie Sherry is the Membership Manager for CUNA Councils