Navigating risk: Lending in tough times

Inflation, rising interest rates and the end of financial stimulus mean that no topic is more top of mind for credit union leaders than potential turbulence in the macroeconomic environment. While these conditions have led to rising uncertainty for credit unions, traditional approaches to market turbulence such as tightening credit standards and increasing interest rates have proven to be ineffective approximations compared to the more targeted approaches lenders could be taking with AI and machine learning models.

Traditional approaches to macroeconomic stress typically involve two things:

  • Tightening of the credit box: This usually involves increasing credit standards, raising credit score minimums and lowering debt-to-income thresholds to limit risk.
  • Increasing pricing and interest rates: This is due to increased perception of risk or the rising rate environment.

Steps Toward a More Targeted Approach to Macroeconomic Stress

In truth, these methods are ineffective and poorly targeted approximations, and credit unions can take a more holistic approach to macroeconomic stress with the following:

  • Adjust risk assessment to include a macroeconomic model

With AI and machine learning models, credit unions can achieve a more targeted approach to risk on the individual applicant level. By leveraging both a general model and a macroeconomic model that looks at current rates of unemployment and other factors, lenders can understand where there is increased risk, allowing them to change their overall risk tolerance.

  • Change risk tolerance

In more stable times, credit scores serve as an imperfect correlation to risk, and this holds true in turbulent times. A more targeted approach enables lenders to go beyond simply tightening their credit standards in generalized ways such as raising their minimum credit scores.

When credit unions are empowered with a targeted assessment that changes based on macroeconomic conditions, they can more precisely target which borrowers are within their risk tolerance, whether it’s the same tolerance as before macroeconomic downturn or a tighter tolerance.

  • Focus on returns rather than pricing

Often, credit unions turn to increased pricing during turbulent times when they should truly be focusing on increasing their returns. In other words, credit union leaders must ask, “given the same level of risk, does the return need to be higher during this time?”

This choice is up to the individual credit union, but needs to be decided in a targeted way – credit unions need to understand where they are taking on more risk and how they are being compensated.

Leveraging an AI Lending Partner

Upstart supplies its credit union partners with the information they need to make their own decisions about their risk tolerance and reward in the current environment. While Upstart gives its partners information about the general market, average return yields and more, it is ultimately up to the individual credit union to make their own decision.

While no model can precisely predict the future, having a credit approach that clearly separates risk prediction and assessment from tolerance and pricing combined with targeted macro-driven adjustments will enable credit unions to best serve their members and stay profitable during turbulent times.

If you’d like to learn more about how Upstart’s models factor in macroeconomic conditions, download the free COVID whitepaper today.



[1] Loans subject to the borrower hardship program were put into forbearance and not classified as delinquent through the duration of the hardship plan.
[2] Upstart impairment rates in May 2020

Jeff Keltner

Jeff Keltner

Jeff Keltner is the SVP Business Development at Upstart. Details