When Good Rates Go Bad
When Good Rates Go Bad
Have you asked yourself, "Is a low rate too good to be true?" Have you often wondered what happens when rates go bad? Unfortunately, not all lenders are alike. These are important questions that, as a church leader, you cannot afford to ignore.
What about these financial institutions offering these loans? Often, we don't consider the ramifications when choosing a lender, and it is a cause for grief later for the church, its leaders, its congregation and the community. Who is at risk and what's at stake? These questions often can be complex and overwhelming.
What Is the Responsibility as a Depositor/Investor?
When consumers deposit funds into a savings, checking, or investments, they look for value. Rates above market returns means there is additional risk associated with the higher yield. Consumers should understand this in order to make prudent investment decisions.
Some questions to consider include: Are the funds insured? Does the risk outweigh the reward? Am I comfortable with the level of risk I am taking with this investment? How much can I afford to lose? If you don't have all the answers, we recommend consulting an accredited investment advisor that can help you understand the risks and evaluate the return alternatives.
Another basic rule is, if you are not consulting an expert and you don't understand the investment, then don't make it. The old saying, "It's too good to be true" has merit. Ask your financial institution for information on their risk management practices. Do not invest in something you don't understand.
What Is the Borrower's Responsibility?
The financial crisis resulted in major bank and financial institution failures, wiped out billions of dollars in savings and retirement funds, and cost tax payers billions. Risk management provides safeguards and protections for investors with both their loans and deposits. Appropriate risk management has costs associated with it.
Doing business with a lender is not always about the lowest rate it is also about selecting a partner that provides long-term value and safe and sound operations, along with wise advice.
How do we measure value? Do borrowers have a duty to borrow from a prudent lender? The current financial crisis was created by poor lending practices. These practices allowed borrowers to make improper decisions with loans that shouldn't have been funded, which translated into losses for investors/depositors.
During the savings and loan crisis, improper risk taking resulted in the collapse and bailout of the industry. Lenders with inadequate risk management end up making poor decisions, which result in greater risk of loss.
Taking your loan to a lender with inadequate risk management may lower your payment below a competitive market rate, but at what cost? Below market lending rates create system risk, which is fueled by investors taking risks they don't clearly understand. Poor risk management places investments/deposits at risk.
For these reasons, borrowers have a duty to ensure the institution providing their loan has appropriate safeguards and risk management practices. After completing your assessment of the lender, ask yourself one simple question, "Would you deposit a material amount of your funds in that institution based on their risk management practices?" If the answer is "no," it fails the prudent investor rule and, in our opinion, should not be used as a lender.
Governance, Regulatory Oversight and Insurance
Understand how your financial partners are governed and regulated. A lender/depository institution may have lower rates on loans and higher rates on deposits, coupled with limited risk management.
A strong comprehensive risk management process includes:
Management and Board approved policies
Annual independently audited financial statements
Internal audit reviews
Disaster Recovery/Business Continuity Planning
Liquidity, concentration, credit, and interest risk measurement and mitigation
Semi-annual third party independent interest rate risk measurement and reporting
Board, Supervisory Committee and regulatory oversight by the NCUA, FDIC or State Agency
Periodic examinations by the federal government deposit insurance (same as above)
Management errors and omissions liability policy
What You Need to Know About Your Financial Institution
Knowing the financial institution you are entrusting your deposits and loans with is an important part of stewardship.
At America's Christian Credit Union, we offer safety, stability, and a shared mission. Our accountability is first and foremost to the Lord, then to our members, the Board and Supervisory Committee, State and Federal Examiners, our independent auditors (public accounting firm), and finally internally among the management team, which provides for controls and checks and balances for safe and sound operations.
ACCU is federally insured by the NCUA, and we are held and regulated to a high level and standard in all financial aspects. As we approach our 55th year in ministry, we're both humbled and in awe of the "few loaves and fishes" God has placed in our stewardship and multiplied for His kingdom.
We rejoice at the Kingdom building efforts we share with our members. Whether it's a church refinancing to save money so they can reinvest back into ministry or a Christian family welcoming a child into a forever home made possible by our Adoption Loan Program, we see God's work firsthand. We are so grateful to work alongside you in advancing Kingdom purposes.
Call us at 1-800-343-6328 to see how we can partner with you, or visit our Web site at www.AmericasChristianCU.com.
If you are hearing about us for the first time, a company overview is available at www.StewardshipInAction.com/accu. With a full-range of lending and investment solutions, call us at 1-800-343-6328 to see how we can partner with you.
By wisdom is a house built, and through understanding it is established, and through knowledge its rooms are filled with rare and beautiful treasures. Proverbs 24: 3-4