It’s not the zombie at your door that’s sending chills up your spine. It’s your auto loan payment. As dusk settles on your neighborhood, a shrill wail shatters the evening’s peace. Goosebumps rise along your arms as you hurry your way inside, closing and locking your door behind you.…
It’s easy to ask, but harder to answer. Are credit unions that lend to younger (17-25) or older (65+) people right to consider one inherently riskier than others? From a lender’s perspective, regardless of age, every potential borrower presents a distinctive set of challenges to consider before an approval or denial.
Younger people, including the over analyzed Gen Y generation, present risks stemming from a lack of personal finance knowledge, as well as the limited amount of financial information on which lenders have to make an informed decision.
The risks older people present to lenders are primarily in three areas: health concerns associated with age, the increased probability of job loss or unemployment, and the lack of retirement savings. According to a recent Bankrate survey, among the 60 percent of Americans aged 55-64 who have savings accounts, the median balance is just $100,000.
Risk overlaps between the two demographics. According to millenialbranding.com, younger generations who can find jobs can expect to make a median salary of $39,700. Similarly, retired members living off social security and retirement savings face financial limitations as well, as they are close to or have already left the workforce.
Small to non-existent income streams poor future earnings potential, limited savings, zero credit history and debt issues; one can be excused for thinking younger and older members are riskier than others. But in the eyes of the lenders, age is just a number.
So, The Young and Old Are Not More Risky?
“I don’t think so to be honest,” says Bill Vogeney, chief lending officer of the $4 billion in asset-size Ent Credit Union in Colorado Springs, CO. “I think there are certain things you need to consider and there are things you can do to make lending to anybody less risky.”
Jeff Harper, chief lending officer of the $1 billion in asset-size Orange County’s Credit Union in Santa Anna, CA, agrees. “From my perspective that is kind of a loaded question,” he says. “We like to look at our loan decisions outside of age, because when you start to look at the age aspect of a borrower it could be easy to broad-brush folks.”
Credit unions are in the business of making loans to those with the ability to repay; focusing on age can impede that progress. It’s also not the way member-centric institutions go about their business.
“You might have an older person and you’re thinking this person is 80 years old, so how are they going to pay a 30-year mortgage?” says Harper. “You just can’t look at things that way.”
The opposite applies, as well. While borrower inexperience should not scare away lenders without further review, borrower experience is only part of the lending decision criteria.
“I think that lenders, rightfully so, would look at a borrower in their 50s, 60s, 70s, and say ‘Wow, they have great stability,’” says Vogeney. “They automatically assume they are good credit risks. But I think anybody that has been around in the lending business for 25-30 years would tell you we probably see more borrowers at that stage of life carrying bigger amount of debt than they ever had.”
Looking at demographics can be myopic, especially if the goal is to make quality loans. That’s why Vogeney and Harper’s institutions take a more holistic approach to their lending process. More information begets improved decision-making. Both young and older potential borrowers are approved or denied for loans based on the same criteria, according to Harper.
“The main thing that we look for are the traditional attributes of underwriting, such as the stability of streams of income, what their relationship is with us,” Harper says. “What their collateral is, unsecured debt compared to income, those kinds of things. We don’t really focus on age in that context.”
Ent CU focuses on similar statistics. Through its first time buyer program, it has studied the financial habits of younger people. Vogeney remembers going into the experiment with certain assumptions about the kinds of borrowers the institution would want.
“What we found was the underwriters really didn’t stick to the criteria, and when we looked at the loans that we approved that fell outside the criteria we couldn’t see any reason for approving them,” Vogeney says. “Our experience showed us that if the borrower didn’t have the job stability, didn’t have a year on the job, didn’t have a year’s worth of credit; it really didn’t matter as long as they had some checking account history with us.”
If these borrowers were already members with checking accounts (and weren’t bouncing checks), they became a good credit risk for the institution. For these borrowers, the risk that a borrower will default on any type of debt by failing to make payments was about 1 percent according to Vogeney. For the borrowers who failed to meet any criteria and were approved, the default rate was closer to 10 percent.