The Biggest Lending Lessons We Learned in 2025

0:07 Barry would love to get your perspective on kind of what's what's driving the Titan credit in twenty twenty five. Overall, I think just uncertainty. Right since we've had a new administration come in in January, there were threats of reductions in government workforce, which some have come to pass and some haven't. The regulatory environment has sort of been turned a little bit upside down. The CFPB doesn't seem to have as much maybe forward influence as an expectation than maybe what they had in the past. But then just in the economy, we've been waiting for a recession hasn't come, been waiting for rates to reduce, hasn't come, been waiting for unemployment to climb, hasn't necessarily I mean, it's come up a little bit, but the labor mark is still really strong. So all the sort of fundamental economic conditions that would normally pre predate a credit crunch haven't necessarily come to pass. So it's been more about our expectation or worry that's coming. And that's actually a prudent approach in the face of uncertainty. May not necessarily be the time to take on a whole lot of risk.

1:17 Although I'll argue with myself a little bit on this. The counterpoint is, if everyone else is pulling back, isn't that a really good time for you to pull forward in an aggressive but in somewhat measured fashion. When I say measured meaning more about the quality of risk, you know, maybe that's something that where some credit unions and banks could win on. You said, Q four is the crystal ball. We're going into twenty six and we want to do X y Z from a lending perspective, and then things shifting Q one Are they shifting? Q two? Being able to have these tools at your fingertips allows you to reallocate your portfolio.

1:57 Let's say you were heavily weighted in he lock, maybe second waited in the auto, and then personal loans, credit cards, on and so forth. And as things changed in the macro, as delinquencies rise, if there's margin compression, and you know the asset backed type of loans, you can reallocate your your strategy because you kind of know what's going on in real time or maybe with a three month lag. So I think it definitely helps in doing that because I remember back in my day, we would set budget and we would manage to budget for that full year, and we really didn't know what was going to change right away. So you got to the end of the year and you're like, up, we either hit budget or we were a little bit off, and the board's wondering why were we off or why were we over? So I think having those tools definitely helps kind of the real time decisions that the executives were making cross the lending ecosystem.

2:42 Yeah, like think back Q one of twenty three when there was a liquidity crunch. You know, think of your lending partners, the credit unison banks you talked to across the country, those that had the ability to sort of course correct quickly or had already had the foresight to think of the sort of uh uh uh uh scenarios where you may need to course correct. I mean, they were able to move pretty fast, and they were able to get deposit products out there and and rates out there that that would quickly allow them to get a little more liquidy. And I did talk unfortunately some lending partners who were sort of stuck with well, now, what you know, where do we go from here? And and almost some inertia because of that, maybe because they they didn't take the time to sort of run those alternate scenarios where they didn't have the tools at their disposal or didn't know how to use those tools. So those executives on the sharper edge of the curve, with those tools available and the ability to use them, I think we're able to sort of uh to manipulate their their balance sheet and and their offerings out to their their consumers faster and be able to sort of mitigate any any sort of risks of that liquidated crunch that others had to experience, you know.

3:58 As they think about like technology innovation AI, whether it's you know, the type of AI we use to do our underwriting and risk assessments or things like generative AI, the role of a fair lending officer or a fair responsible banking officer is getting more complex and you really, you know, it was already a very complex area, but now taking those rules and kind of applying them to rapidly changing new technology, Like how do you think about staying on top of technology developments and taking kind of the crux of the regulation which hasn't changed, and then measuring with new technologies like AI. That's a big light, lightweight question.

4:40 I mean it really is, and especially coming from an online BAK where we do everything digitally to start with you, really we are becoming more and more involved in the process of AI machine learning in our institutions than ever before. And it's really based on the expectation of the regulators. They want us to make sure we're aware of what are in our models, What are the variables in there, Is there any potential risk of discrimination and if so, how are you controlling for it? Are you changing the variables that are in there? Are you requiring different standards around it. So we're keeping in touch with our models across our across our organization as well as across the industry.

5:21 And that's we're again having a platform like CBA where we can come together and talk about my regulators looking for this within examinations or how we're looking for oversight versus a different crudential regulator that might have a different focus. We know last year there was the CFEB sent out a questionnaire to multiple organizations to gather more information on what are they doing for models and oversight internally. So as we're trying to figure it out, the regulators are trying to figure it out. As well, how do we. Get regulators comfortable with partnering with FinTechs and those FinTechs specifically that we be leveraging AI based under models thinking of the regulatory environment that we're dealing with today.

6:09 Yeah, it's a good question, and I think it's a shifting regulatory environment on a day to day basis. I think all of us have certainly watched the changes with the various financial regulators this year and then now some court challenges to the leadership and who's on the board and who's not on the board, and what the rules are. So I would recommend for a credit union or really any lending institution, like just focus on the fundamentals. You may not know exactly what the rules are, You may not know exactly what the rules will be, but you do know that you should understand how models work. You should understand who owns which part of the decision. You should do your due diligence on any vendors that you partner with in a traditional way where you're looking at compliance risk, financial health, reputational risk, like even though those things are may not be explicitly called out anymore. Like reputational risk, as an example, that doesn't mean that you don't want to do that for your business. So think about from a core business standpoint, what do you care about?

7:17 What do you think the key areas are that you should be able to both understand and document uh And then how can you up level your organization to really be confident in understanding and monitoring AI models? And I think that's a very big challenge. And I think similar to a lot of conversations we've had about different sized organizations, Like there's choices of partnering. There are many vendors, there are many consultants who help in this space today. So you may not be able to hire deep AI experts internally you don't need to, but can you find trusted partners that can help you do that evaluation and help and opportunities for your team to become to kind of deepen their subject matter expertise as it relates to AI and new and more innovative ways of evaluating risk and lending.

8:05 Yeah, and that's a good like having a good general high level knowledge base of all things AI. I mean, it's the topic at hand most often anymore, right, but digging even deeper. So if you are partnered with some type of institution that is driving AI and some metric. How can you get more knowledge base into your internal teams on this company, does X, Y and Z. We kind of understand the full rails of it. Maybe we don't understand all of it, but we have confidence in going into a regulatory exam or speaking to regulators of why we're comfortable with this approach and having that for every single vendor that you have that leverages AI, so you have the high level knowledge base and then you have all the double clicks into everything else you're using it for. In the auto space right now, there's more new vehicles that are being purchased at dealerships. It's no longer kind of this used versus new type of mentality.

9:02 If you think about though, people that got into a car such as there they bought their daughter a vehicle or so, the rates that they were offered back then were decent in a sense, probably somewhere between the high sixes mid eights, depending upon credit quality, things of that nature. But the newer vehicles that they're now selling are much higher trim packages, higher payments at aprs right now that are still fairly high. What do you think moves the needle for people to go back to purchasing new vehicles or refinance their existing and how many basis points does the FED reducing Does it make sense for them to go into a comfortable payment if they were to buy a useder versus new. Yeah, I mean in a refin deal if there's no other sort of fees associated with it, and typically there aren't.

9:48 If I can reduce my payment by twenty five dollars, why wouldn't I do that? You know, if I'm able to even stretch out the term a little bit. You know, cars are lasting a lot longer now too, right, So what's the average age of vehicles on the road right now? It's over ten years, just because quality, I think is way better than it was a generation to go. So maybe I'm willing to extend that term out a little bit in order to get a little bit of a lower payment, even if my rate isn't necessarily all that different. Well, I certainly know. I know on one of our prior episodes, we had some of the folks from Experience on who specifically lead their auto market in the credit report and credit scoring area, and they're seeing a lot more of that, like those longer terms that people are taking a longer term now, whether or not they hold that car for very long, they're willing to take a longer term in exchange for a lower payment, and I think that is a big focus at payment versus rate is still for most people the biggest number that they look at, even though the rate long term can mean more, but it depends how long they're going to keep that car, or if they're going to trade it in in three years or they plan to actually.

11:00 Pay it off. Our credit uns even did ninety six month loans for new vehicles, and we could even charge a little bit of a premium for that ninety six month loan and make a little more yield off it. So and what's stopping you from doing that? In the refine market, you can do the same sort of pricing approach and take a few more basis points to make that to improve the profitability. Of the plant. All of our listeners, I'm sure in both of you that there's this idea and true in a lot of ways, I think founded by a lot of reality that indirect lending does not lead to long term members and that that's a kind of a transaction. And then it's hard if not impossible to build that. And according to a Pinwhill study earlier this year, seventy percent of newly open accounts go inactive in the first ninety days, so seventy percent.

11:54 So you're spending the time and money and you know KYC to open up that account and then it goes inactive with kind of an anchor option. And I think part of that is the difficulty of doing things like switching direct deposit, switching bill pay and that just inertia that people have a lot to do and that's kind of the last thing on their list. So how do you think about that? How do you think about this kind of indirect lending. Get this new consumer, get this new member, and drive it to become even if not maybe like the full wallet share like part of that and getting a meaningful part that makes that a more economically attractive new member. I've heard that very I'm sure you've heard that same concept of getting an indirect member to become a core member or a primary financial institution is something that just can't happen. And I'm going to disagree with that, and reason because is you have multiple credit unions that play in the indirect space, they're very good at driving automobile loans to their balance sheet, right and they're getting a member.

12:53 But the consumer at the time of being at a dealership cares about one thing, and it's driving the vehicle off the line that day, and at most times probably not favorable conditions as it relates to APR for probably the payments a little bit out of their general sense of what they wanted to do there. But what happens on the back end, I think is what separates this actually coming to fruition without naming names. We have a lending partner that we partner with here at Upstart that is seeing about a ten to fifteen percent conversion rate on their indirect side because of the amount of touches they're doing after the auto loan comes onto their balance sheet. And I don't know if that's a secret sauce of on the day, three, day, seven, day fifteen. And then another thing that is attractive is you have to incent them just because the institution provides an apy of X or you're able to use your debit card at wherever you want for free. If you have some form of an incentive, then bringing in those members to become core members and not having them close their account out within ninety ninety days that you alluded to, you're going to see higher conversion.

14:00 Yeah, I think incentive incentives are really important, and I like if you would look at my personal wallet, I have more probably a higher number of credit cards than you would think I would because I love incentives. I've got an Amazon Prime one, I use my American Express for travel. I have very fit for purpose cards that I use for very specific things. Or maybe I get a six month no interest on this and then I'll pay it off before that time. So like those things are for people who want to use those rewards, those can be super beatingful. Sorry you mentioned about onboarding. So multiple touch points through probably multiple different methods, right, Some might be an email, some might be a text, some might be you know, an actual letter that shows up in someone's mail. It might be a phone call, depending on.

14:43 All the above. And then to take it even a step further is just because Linn walks into a dealership and buys a specific type of vehicle and Barry walks into a different dealership, there's different personas everyone's at a different stage in their life. You have to take it a deep step further and have different campaigns, different touch points, different touch points, But what is your incentive offering to the person at that point in time in their life. And there's so much data that's at your fingertips that you're able to create the messaging around that point in their life, whether it's through looking through their credit reporting agency, you're able to see the income kind of based on everything that's come through from underwriting perspective to tailor your messaging to become or to get people to become more core members.

15:27 I'm going to take your seventy percent stat and I'll turn it around, say, how about thirty percent actually don't close their account or aren't inactive in the first ninety days anyone go fishing before? I mean, if you got thirty percent of your cast had some sort of a bite, you'd be out there every day. Right. I quit my job just to be a full time fishing So you know, there's an opportunity there that I think is somewhat lost. We tend to focus on the negatives of it. Of all, ninety percent are never going to be well, what about that ten or twenty or thirty, you know, ten to fifteen percent? It is a lot. It really is and can be meaningful. So part of that is the cost of doing business. You know, you're going to cast out and you're not going to get any bites at all.

16:10 One of the things you said before, and I think you may have shared this at the client summit with many of our clients and potential clients, is that servicing is really just underwriting with an operational twist. What did you mean by that? Yeah, you know, as you as you mentioned, I have been at Upstart for I guess seven years last Saturday, so just just past the seven year mark. And of course I had spent the first five years working, you know, very deeply in upstarts core business that is predicting who will default and then pricing them correctly, our our underwriting business.

16:50 And so when I joined servicing a little over two years ago, I really tried to think quite a lot about what it meant for us to take our our core competency and to apply those skills to this relatively new space. And I guess the way that I would say is that in underwriting, your job is to take maybe all of these applicants. You're taking applicants, you're sort of lining them up in riskiness. You're spacing them not correctly, and then you're determining generally what risk based price is associated with the level of risk that you see for each applicant. And I think in many ways you really want to do the same kind of thing with servicing. You want to maybe take all of these loans, you want to line them up from least risky to most risky.

17:35 But in underwriting you have this sort of unfair advantage that is that you can maybe take any person whose risk is too high, and if you don't like how risky they are, well you just don't offer them alone. And in servicing we actually have a little bit more operational complexity. We are forced to maintain our relationships with these customers, and so instead of being able to maybe just say, oh, this person is too risky and we're not going to work with them at all, we instead have to maybe look only at the range of operational levers that we have to change their riskiness today to move from how risky they are today to how risky they might be tomorrow. And I think of this as a really really powerful part of our overall opportunity at Upstart, because it allows us to move from just predicting who will default to actually shaping the whole default.

18:34 You shared how Great Lakes has you know, helped members with thinner credit files start building credit and rebuilding their you know, their financial confidence. I'd love to hear about how you went about doing that and how has it served as a real alternative to UH to pay day lending. Yes, great question, Drew. Thanks. So if we look back at GLCU, we're a low income designated credit union, a community development credit union, so we really start those of modest means, So over fifty one percent of our membership is low income. We serve a very diverse population just because of where we sit in the Chicago suburbs. Have branches in the city and in suburbia. So when we look at serving those members, especially those that are more challenged from a credit perspective, we need to make sure that we have products and services that are going to benefit them and add that value. And one thing that we realized is we just can't have a standard suite of lending products that we say really fit all demographics, because as you and I know, they don't. So we've been very diligent in our efforts to have products and services that are going to help our members improve their lifestyle. Right, some of it is changing their behavior, some is just giving them an opportunity to get back into what we would consider more traditional banking. So couple examples that we've utilized at Great Links Credit Union. One is our credit builder loan. We're very proud of this loan. It's simply

20:09 one thousand dollars. We don't charge an application fee, there's zero percent, and it's set up on a repayment plan. And the idea is that we're reporting that back to the credit bureau because they are making payments on it, we hold that thousand dollars, so in essence, there's never any delinquency right or a charge off, and it rebuilds their file and it gives them that ability then to use that in their credit file to look at other opportunities for lending in the future. And so I would say it's been somewhat popular. We have about forty loans on file right now, and those that have utilized it have graduated then into other lending products such as getting a credit card or getting a small personal And so when we look at the members that utilize that, they've understood that they either have no credit file or they need that second chance opportunity. Right, we try to tie into the best of our ability financial literacy and education as well, because we do need to change that behavior or that pattern that they've fallen into. So those that do take that seriously will work with our consulors on developing kind of what that needs to look like, how important it is to make those payments timely, and then to utilize that right as that next stepping stone, and that has worked well for those members. We've had that

21:39 product for a couple of years now and so slowly over time. Right, we want to make sure that we're offering it to the right member that's going to use it in the right way. How can credit unions go to keep that momentum going after the event wraps, like, keep these ideas fresh, keep that kind of roadmap moving forward, even if they can't tackle everything today. From personal experience being at these conferences, you come back and your energize it's like, oh, we could do this, we could do this, we could do this, and there's all great ideas and then life gets in the way, your your normal business gets in the way, or now there's a problem that I've got to I've got to drop everything to solve and you know, next thing, you know, it's two weeks, it's two months after, and you know that all those ideas are still there, but nothing's really been operationalized. So it is critically important to actually you've got to schedule time for yourself to actually get these ideas down on paper, to engage with those in your credit union who can help you push these ideas forward to actually be able to take meaningful steps towards making the change that you want to make. But you've got to You've got to create that time for yourself. Otherwise it just gets soaked up with the day to day that that tends to sort of permeate everything that we do.

22:57 And if you can build a team around it, right, if you have a team that is dedicated to conference strategy, are there specific check ins? How often are those check ins? Going back to the QBR type of sense. If they're able to kind of run the whole strategy of what conferences bring for value to a credit union and you're doing monthly check ins there, then it doesn't go on the shelf, right sure? True? I think something maybe the credit unions could also pick up on that we tend to do at tech companies like upstart. Is this idea of hack weeek id you know where you have like little teams that maybe you can't allocate resources fully to say an innovation team or more of an R and D team, but can you have like kind of competitions between different teams. Do see what you can do in small little bite see what the people who are doing the work can come up with using the tools that they have.

23:46 Hack week is a perfect metaphor here because I know some credit unies do have some sort of a hack week type of event, not many of them, but really all credit UNEs should in some respects because think of it from upstarched perspective. How many new innovations have we come up with? There are new ways of thinking have we come up with in terms of approaching a problem from hack Week. We've even created solutions to problems we didn't even know we had through hack week. And think about taking that same concept at the crediting space. It could be very very powerful to again move your company forward the way you want. Even if it's not Hack Week or whatever you want to classified as it's not that much time in essence to build long term short term strategy. As it relates to this, even if you were to set aside a day or two days, if there was a dedicated timeframe of being able to do this, then to Bury's point, you'd be able to get more out of the scope of what you're trying to accomplish.

24:44 And I think from an employee development and engagement too, if people feel like they have a voice and they're not just being kind of told what innovation looks like and what to do like, you may come up with some great ideas that aren't visible except for somebody who's kind of doing that.