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Loans: Based on Numbers, Character, or Both? (EP.212)
10th March 2020 • Take 10 with Will Luden • Will Luden
00:00:00 00:08:23

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I received my first bank loan when I had no credit history to speak of, no credit cards and no idea what a credit rating was. Oh, and no collateral. The banker, from National State Bank in Boulder, CO, came to my 2-bedroom cabin west of Boulder, saw a few loudspeakers I had built, interviewed me, and decided I was a good credit risk. Assuming that he wanted at least some form of security, I eagerly offered him the title to my ‘66 VW bus, which I had purchased used for $600 a few years prior. “No thanks.”, he said, “We are lending you the money personally.”

The banker was white, as am I. As was just about everyone in Boulder. Would he have lent me the money if I was black? Would that have tilted his view of my character and prospects? To avoid even having to address such questions, the lending industry has turned to an all-numbers approach to lending. Must that be the end of giving consideration to character, drive and potential in lending money, or in business decisions in general? In our diverse world, can we be trusted to make decisions based on things like trust and character?

That is the subject of today’s 10-minute episode. 


There was no credit check involved in my first loan. No loan portfolio filled with numbers about income, net worth, credit history, collateral or a business plan. The banker liked what he saw, and lent me the $5K I needed to get my business off the ground. And in 1971, that was real money. From that meager start, with a believing banker, my company grew to be the 2nd largest independent audio/video chain in the Rocky Mountains.

The banker used his subjective judgment, and made a ton of money for his bank over the years of doing business with my growing company. More importantly, an entrepreneur, me, was given an opportunity he would never have had if the bank had been forced to go purely by the numbers.

We have many other instances where loans are made without regard to numbers-based creditworthiness. Student loans come immediately to mind. The student–or a parent–can sign for as many and for as much as they’d like. No questions asked. About work history, credit history, wage prospects after graduating with that degree from that college, etc. Nothing. Sign and get the money. And there is no trust test here. In the end, the taxpayers will pick up a trillion plus dollar tab, either from mounting individual defaults, or government forgiveness.

Another example was exposed in the aftermath of the 2008 financial crisis. The Federal government had been putting pressure on lenders to make home mortgage loans to people who were simply unqualified. The lenders responded by making tens of thousands of bad loans–loans that could not be repaid. Wall Street added to the mess by consolidating these bad loans into bundles with other, better backed mortgages, and sold these bundles off as mainly good loans. When the bundled loan buyer realized he had been had, he looked for the “greater fool” and re-sold the package. Inevitably, this house of cards crashed, and the financial markets crashed with it, bringing on what was called the Great Recession of ‘08. (Does this remind anyone of Robet Louis Stevenson’s “The Bottle Imp?”) Again, there was no trust test here, and the taxpayers have already picked up this tab.

One of America’s favorite movies is, “It’s a Wonderful Life.” The protagonist, George Bailey, played by Jimmy Stewart, is the head of the Bailey Savings and Loan Company. Sacrificing his dreams for a larger life outside of the fictional small town of Bedford Falls, George dedicates himself to the Savings and Loan. And he makes that sacrifice because he is committed to fulfilling other people’s dreams, specifically the dream of owning their own homes. When Bailey’s S&L lends money, it is clear they know and trust the borrower. Trust. That’s the core of their lending philosophy. But it is clear that with the sole exception of the evil Mr. Potter, they are all in it together, supporting one another. Yes, the whole town of Bedford Falls is white. But again don’t tell me that we can’t do that in our racially and ethnically diverse society. The intersectional players, the Mr. and Mrs. Potter in our modern story, are working hard to keep us at each other’s throats–for their benefit. The last thing the “Potter Intersectionalists” can stand is for us to trust each other. But trust we must.

The lending practice of redlining involved literally drawing red lines around geographies where lenders would refuse to grant loans. At its best, redlining was a shorthand way of not having to pay to process loan applications from areas where only a tiny percentage of applicants would qualify. At its worst, redlining was the refusal to lend to people in a defined area because of race or ethnicity, regardless of their creditworthiness. That would be idiocy in addition to being racist, because this practice would leave significant profits on the table.

The legal cure for redlining was to prohibit it, forcing lenders to look at applicants individually–and to look at the numbers only. Decisions based on trust–outside the numbers–are prohibited. All of these decisions must be objective–not subjective. In other words, computers can make all of the lending decisions for us. Humans are out of the loop. This takes us back to the question at the beginning of this podcast. “Must this be the end of giving consideration to character, drive and potential in lending money, or in business decisions in general? In our diverse world, can we be trusted to make decisions based on things like trust and character?”

The intersectionalists drive wedges, tring to make sure that trust is impossible–even illegal. We must defeat them, as we must defeat the parts in ourselves that can be inclined not to trust our ability to make decisions based on character. To paraphrase Dr. King, “I have a dream that we will one day live in a nation where we will not be financially judged entirely by the green color of our wallets, but by the content of our character”. 

Today’s Key Point: We are more than numbers, more than statistics. We are humans. We must be free to act that way.


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Will Luden, coming to you from 7,200’ in Colorado Springs.