There was a big election last week in North Carolina. Not for a political office though, but for the board of directors of the State Employees’ Credit Union. Members of the credit union, which is the second largest of its kind in the country, ousted three members of the board in favor of candidates who oppose a major change the credit union has made to its lending policy. It’s something Carli Brosseau has been following, and she wrote about it for The Assembly. She joins me now.
Marshall Terry: So let's start with that major change SECU made recently to its lending policy. Can you tell us more about it and the reasoning behind it?
Carli Brosseau: Yeah. The major change is the adoption of tier-based lending, which some people also call risk-based lending. And what it means is that the interest rate on a loan will depend on the borrower's credit score. So people with a higher credit score will be asked to pay less in interest than people with a lower credit score. And the underlying assumption is that people with a lower credit score are more likely to default, and even if they don't, collecting the loan could be more expensive for the credit union. They might have to make repeated calls, have meetings, change repayment terms, stuff like that. Tier-based lending is very common at banks and even other credit unions. SECU is a credit union, so it has members.
But it's a really big change for SECU, where SECU charged each member the same interest rate for the same product for its whole 86-year history. And it was really a point of pride at the institution. But board members and the CEO, Leigh Brady, told me they just didn't think they could do it anymore. They said the competitive environment had changed really quickly and dramatically, and now it's really easy to shop for rates online and take out a loan without leaving your couch, and credit union members were increasing in doing that — particularly the members with high credit scores. They were also thinking about some other things when they made the decision — one of those is that SECU still has a lot of low-yielding investments on its books that they took out during the pandemic. And they also have a bunch of 30-year mortgages with low interest rates. So that combination made it harder for them to pay higher rates to depositors. It's now paying just 1% on money market accounts. And some of those members are starting to move their money out because they can get a 4 or 5% rate somewhere else.
Terry: Now about these three new board members, they're opposed to this change. Who are they, and what's their argument?
Brosseau: The three new board members are Michael Clements, Barbara Perkins and Chuck Stone. And they all had long careers in public service, and they were longtime members of SECU and also did a lot of volunteer service with SECU. Part of what makes SECU special is that it has this huge group of members serving as volunteers all across the state. Until recently, some members would serve on what were called "loan review committees" that would hear appeals from members who were denied loans, and they could even overturn a loan officer. Or they could impose special conditions, say, you know, go, do XYZ, come back in six months, and we'll reconsider your application. So it was really unusual. There was this foundation associated with SECU. At least one of the new board members served on that board. And then there are also these advisory committees at branches, which are spread across all 100 counties in the state. So there's this huge group of people that have a real commitment to SECU and kind of a role in its operation. These new board members come from that group of people.
And their criticism was strongest on this point about risk-based lending. They feel like it's unfair to charge members differential rates. They think all members are equal, they have an equal ownership in the organization, so they should have the same terms on all of the products. They're also critical of just how the board handled the decision-making and the rollout. They were surprised to learn about these changes and felt like that was not really acceptable, given these volunteer roles that they had. So they've been asking for more transparency and communication. They've also said that in their current roles, they didn't have access to all of the financial information that the current board members have, and that they're open to listening.
Terry: Now elections like these rarely get much attention and turnout is low — like really low — 13,000 members cast a ballot out of about 2.7 million members. But you report despite that, this election had the eyes of the industry, right?
Brosseau: Yeah, it had a lot of attention. And the reason is that most of the time these elections are much less participatory than this one. There has to be an annual meeting for credit union members. And if you're very involved in the credit union, you might go to that meeting, and then you might vote there. Historically at SECU, which is one of the largest credit unions, that would be about 1,000 people. So 13,000 compared to 1,000 is a big increase. However, as you note, it's just a small fraction of the total membership. But there's this debate within the industry about how democratic it is and could be, and whether there is an advantage to providing online voting to increase the engagement of your members — and hopefully allow the credit unions, the whole industry to flourish, because right now it's really shrinking.
Terry: So what happens now? The credit union implemented this change to its lending policy earlier this year. Is it possible that will be reversed now, with these new members on the board?
Brosseau: I don't think it's really clear yet. I know there will be further discussions about it. Currently this type of lending — tier-based lending — is applied to auto loans at SECU, but they're planning to expand that to other types of consumer loans. That will take place in the next year. It seems that the plan is to roll out many of those new products in November. So that might be sooner than these board members can really influence. So we'll see. I don't really know yet.
