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Big banks — recently JPMorgan Chase, U.S. Bank and Wells Fargo — are tightening standards for mortgage and home equity loans. Wells Fargo is only allowing customers with at least $250,000 in liquid assets to refinance; JPMorgan JPM, +2.69% is requiring 20% down and a credit score of over 700.
They’re worried, apparently, that Main Street Americans can’t be trusted with credit. I beg to differ: In the Great Recession of 2008, big banks closed their doors on many middle-class Americans. Credit unions did not. The one I run — PenFed Credit Union, which is the nation’s second-largest federal credit union by members and open to everyone — did not. But we didn’t see higher loan defaults. Instead, we did better than ever.
Today, as our membership of 1.9 million Americans continues to grow, we aren’t turning our backs on those who need us. PenFed’s conforming conventional mortgage loans allow for a minimum credit score of 620, a low down payment, and liquid asset requirements are based on individual member credit profiles. Other credit unions across the country share the same approach, even if the details vary.
In 2009, delinquency for mortgage loans with credit unions peaked at 1.61%, compared to 8.86% at banks. Between 2008 and 2012, credit unions saw a much lower percentage of liquidations or mergers than FDIC-insured banks. And credit union membership grew year over year — from 89.3 million people and $884.7 billion in assets in 2009 to 119.6 million members and $1.54 trillion in assets in 2019.
During the Great Recession, credit unions continued lending and worked with members facing financial challenges. It wasn’t just the right ethical move; it also turned out to be the right financial move.
It turns out Main Street Americans are trustworthy after all.
This is something financial institutions should remember during these challenging times. It seems that as the world has moved online, many have forgotten that once upon a time, financial services happened between people who knew each other. A shop owner — let’s call him Joe — used to go into his local bank or credit union to deposit his paycheck, where he would see his neighbor, Sam, behind the desk. Joe knew Sam wouldn’t steal his money or give him bad advice; Sam knew Joe was careful with his money and always paid his debts. In fact, their kids played together after school.
Banking used to be an interaction of mutual trust; today, that’s not always the case. In small-town America, especially in local credit unions, these kinds of interactions still take place. But they’re the exception, not the norm. Americans have become numbers instead of faces to many financial institutions. Algorithms determine if we’re “good risks” or “bad risks.” There’s little gray area. And Americans, in turn, are evaluating financial institutions from rates on a screen, instead of from trustworthiness, service and word of mouth.
Read:Your bank could lower your credit-card limit — what to do if that happens
Now more than ever, we need a “people helping people” financial model. An emergency-room nurse in Ohio may have painstakingly built $50,000 in liquid assets and paid every bill in her life on time. She’s risking her life every day on the frontlines helping others, but banks like Wells Fargo WFC, +3.91% would deny her the opportunity to refinance, as she doesn’t have $250,000 in liquid assets. Seriously?
In contrast, PenFed’s mortgage division set new records this past quarter — volumes, approvals and closed loans were up over 300% over 2019’s first quarter. I’m also proud that we’ve been able to hire over 150 new employees in the past month and a half. This isn’t because we’re recklessly handing out loans to make ourselves richer (credit unions are nonprofits, which means profits go back to members instead of shareholders). It’s because we’re offering loans to financially responsible Americans — not just wealthy Americans. More and more Americans are opening their eyes to credit unions for their personal service and their market leading rates.
This model of accessibility and reliability is the model our country’s financial system should be turning to right now — not a model of exclusivity. The Federal Reserve has been boosting liquidity for banks to encourage them to lend more; instead, they’re lending less. How is this supposed to help our economy rebuild? How does it help Main Street Americans in their time of need?
We may not run into our neighbors at the bank on Saturdays anymore, but that doesn’t mean we can’t operate on the same honorable principles. This means helping all responsible Americans buy homes, no matter what their tax bracket is.
Now read:The No. 1 mistake to avoid if you’re skipping your mortgage payments
James R. Schenck is president and CEO of PenFed Credit Union and CEO of the PenFed Foundation.
