Clay Finck (01:45):

Now David, you have extensive knowledge and background in the banking industry, specifically with credit unions. Could you talk to us about what’s been happening with the real estate market. Everyone’s talking about rising rates, this is going to impact monthly payments for people especially, and you’re in California. So, you’re seeing maybe some of those bigger movements in the real estate market. So, talk to us about what you’re seeing overall with real estate.

David Tuyo II (02:11):

Yeah, so over the past year in the United States, we’ve seen the average home prices go from 320 plus thousand to up to 326 to 375,000. So, just in real estate values alone, you’re seeing obviously tremendous jump in values, but then also taking account, we’ve also seen mortgage rates go from 2.65, 2.85, depending on what time of the year you were lucky enough to lock in, to now today, where in some cases depending on the structure of the loan, it might be mid five and a half percent. And so when you look at the cost of real estate and then the cost of the debt on the particular real estate taken on, you’re not just going up by 320, 370,000. They’re not going up by 10%, 15%, 20% there, but then also you have the costs of debt increasing as well.

David Tuyo II (02:53):

So, when we look at monthly payments, we’re seeing some variations across the country compared to last year, where the monthly cost to the consumer, the borrower, the homeowner is now as much as 50% more expensive today than it was a year ago. And so obviously, that’s slowing things down. We’re starting to see some inventories build and it’s not much, but we are seeing a little bit more, we’re going from seven days of inventory now we’re going to 14 days of inventory. And so, these are good things for the market. Hopefully we see a soft [inaudible 00:03:19], historically we haven’t seen that, but it would be nice to at least hope for it. We’re very aware where things are going and some markets are still fairly valued. Some markets are overvalued. We look at, from a real estate perspective, we try to track what the affordability index is. So, obviously in California, where you see typically over time, higher salaries, higher wages, you see higher real estate values, but we look at the affordability index to try to figure out is this overheated, is it becoming a problem where real estate values are now out of reach, based on people’s incomes?

David Tuyo II (03:47):

And so, of course we’ve seen incomes rise historical levels, at least for my career, the past couple years, average increases across the board of as a country, five and a half, 5.6%. But when you break it down by industry or by position, some are seeing, 8%, 10%, 12% jumps year over year. And so obviously, that is correlated with some huge increases in asset values that we’re seeing in real estate market. So, I’m not going to be too much long-winded on this question, but again, when it comes to the real estate market is a very complex answer because we’re always looking at these ratios and comparative values, not just, Oh hey, here, this is what real estate’s doing.

Clay Finck (04:21):

It’s interesting you mentioned that affordability index. It makes sense you’d look at something like that. It’s an index I haven’t actually heard about. I’m curious if the affordability piece is going to hurt a market like California, with continued higher rates because for many people, housing in that state is already out of reach. So, if rates go up and payments are going up even more, is that market more susceptible to a price shock, some sort of draw down, or how do you think about those price year markets?

David Tuyo II (04:54):

So typically, you have seen greater volatility in these markets. The sand states in general, so that would be Florida, Arizona, California, California being [inaudible 00:05:02] volatile. It really is depending and going back to affordability, if we see higher unemployment, which we’re not seeing today, we have 11 million job openings. We have four and a half million people for those 11 million job openings. So, until that gets right-sized, more balanced, we’re probably going to continue to see some asset values continue to increase inflation still to be a bit of a problem.

David Tuyo II (05:18):

But for us, one of the tips or tricks I would recommend to the listeners is there’s a new industry that’s being created. It’s bubbling up now, it’s growing at a very rapid rate. It’s just equity lending. So what these new companies are doing, they’re taking a equity position, so they’re going to do down payment assistance.

David Tuyo II (05:35):

So traditionally, you might do an 80/10/10 on a real estate mortgage. You have 80% mortgage, 10% down payment, and 10% piggyback home equity line of credit, that then gets you into your house. You avoid PMI, those kinds of things. But what these new companies are doing is they’ll actually give you the 10% down payment and then they take a 10% equity portion in the house. And then over a 15 year timeframe for some companies, some companies it’s 10 year, they will have a call back. So, if you sell the house and then they participate in the equity portion of the home. So, if it goes up, they get 10% of whatever value it goes up. If value goes down, they get 10% of whatever the value goes down. And of course they have their own appraisal process and so on and so forth.

David Tuyo II (06:13):

I bring that up, not to talk about that specifically, but when you look at the industry and you just pay attention to the websites, you pay attention what markets they’re in, it indicates what markets are going to be stable, what markets they find as attractive. And then when they’re avoiding markets, it gives you an idea of, “Hey, you know what? They’re staying away from those markets. Maybe that’s a good indication that market’s a bit overheated and maybe I should stay away from that market too.” Or maybe you look at, hey, there’s going to be some volatility. You keep some dry powder back for an opportunity that might present itself in the future. So, some pretty neat things out there, tremendous amount of more information than we’ve ever had in the real estate markets that I think is going to allow both the investor and the future homeowner or current homeowner to make better decisions, smarter decisions than in the past.

Clay Finck (06:58):

Just hearing from the people I’ve been in contact with, it seems like today’s real estate market really isn’t comparable to what we saw in ’08, ’09, a lot has changed since then. Would you agree with that? And if so, why is it that today’s market is just so much stronger and more robust than what we had then?

David Tuyo II (07:18):

Yeah. Many people are going to start twitching and have different body reactions after the great recession. It was a difficult time. It is probably the most difficult economic times I’ve ever seen in my career of over 25 plus years, especially in the real estate market. It is very different than what we saw in the great recession as we were seeing today, mainly because of the fact that there were so many issues, the underwriting, over-extending the borrower, there were a lot of bad actors that were happening, a lot of fraud that was happening. Back then, if you remember, we had the SISA loans and the NINJA loans. So, the state income state asset, the no income, no job, no asset, type of loans where money was just being handed out left and right. And now, through regulation, also just better practices, because obviously businesses are incented to not lose money, and so whether it’s banks or credit union.

David Tuyo II (08:03):

And so, I think that today’s real estate market stands on much stronger foundation than ever before. If we see volatility, it’s going to be minor and the thing that concerns me most are these corporate investor pools. I don’t think that the individual homeowner, the individual investor that has a few rental properties or is looking to invest in rental properties is going be hurt, but I am concerned about how this new commercial pools that we’ve never seen before that are buying up real estate across the United States, I’m curious about how that’s going to affect things both from a rental perspective, affordability perspective, and also how are they going to generate the returns going forward. So, are they over leveraged, what does that look like? And so, these are things where it may not be directly involved with real estate financing or real estate, but it may be the adjacencies that we’re unaware of, happening in the shadows right now that may cause problems for the real estate market going forward.

Clay Finck (08:52):

I’m curious, how will rising rates affect the banking industry as a whole? I know many banks, they own mortgages, they own bonds on their balance sheets. So, rising rates might not be great for that portfolio, but on the other hand, they can get more for their money when they lend out new loans. So, I’m curious if rising rates will be a tailwind or a headwind for just the banking industry as a whole?

David Tuyo II (09:15):

So yes and no, over the years, when it comes to interest rate risk, it’s probably the single risk that all banks, all credit union are the most adept, the most successful at managing this particular point of risk. We’ve seen it for decades, mainly because of the savings and loan crisis back in the early ’90s. This is why credit unions and banks are so good at industry risk management today. There is something that every financial institution looks, at it’s called net interest, income volatility. There’s also something else called net economic value volatility. And what that basically is, net interest income is where you’re just looking at what happens to your interest income in different scenarios, up, down 100, 200, 300 different types of twists in the curve. So, butterfly twists as far as the term [inaudible 00:10:01] interest rates go.

David Tuyo II (10:02):

And so you see these things, whether it’s four different shapes you might run and figure out, okay, if these happen, what are our plans to manage that? Yes, there’s going to be pressure on earnings eventually, right now what you see is increases in the asset side of things and really no increase in the liability costs at this point in time, but that’s going to happen. And so, as deposit pressure and deposit pricing continues to become more competitive, that’s when we’ll see net interest margin compression at banks and credit unions. And that’s when we’ll start seeing some challenges about how are they going to scale, how are they going to be able to address those particular downfalls to their income? Do they just slow their growth? Maybe from economic perspective we see a slower growing economy, so then that matches where they’re going to be at, at that point in time.

David Tuyo II (10:41):

Net economic value for those that don’t know it is a pretty simple concept. All we do is we take at the present value of our liabilities and the present value of our assets and we look at what the difference is, and that gives you an economic value. There’s a tons of assumptions, and that’s where the complexity comes in. But with that being said, we run these different models and then we figure out, okay, look, from a long term risk perspective what is this change in interest going to do for us in these different interest scenarios? How is it going to affect the value of our assets and liabilities on our balance sheet? And we’re required to do fair value reporting every quarter, so then we have to make sure we present that out there and show our members and for the banks, their investors, what situation they’re in.

David Tuyo II (11:17):

A lot of people will look at something called duration differential. And so I’m not going to get too nerdy on this, but the duration is not a measure of time as many people think, it is a measure of end straight volatility. And so, duration is nothing more than the first derivative of the price yield function, meaning that as prices go up, yields go down. As yields go up, prices go down and vice versa. As you mentioned, bonds and fixed income is going to … instruments are going to be affected very heavily by rate volatility and duration’s a great measure of that.

David Tuyo II (11:45):

There’s a secondary measure called convexity. Convexity is the second derivative of the price yield function. Again, I’m not going to get too nerdy on this, but basically, duration measures small measures in volatility. Convexity then makes up the error term on larger measures of volatility. And so, by putting those two measures together, you can get what kind of price volatility we can get on the balance sheet.

David Tuyo II (12:04):

So, if you’re holding a 30 year fixed rate mortgage, let’s say and rates go up 300 basis points, the value of that instrument, whether it be a mortgage or a bond, that value could go down to depend how it’s structured, 24%. That’s significant and so if the banker creating has a need for liquidity and they need to sell assets, obviously that’s going to put tremendous pressure on how to do that. And so, there’s other instruments that you can use to hedge that risk and a variety of things that are probably beyond the call but with that being said, absolutely, rising rates will affect the balance sheet. It will affect income state of banks and credit unions. However, keep in mind, heavily regulated both at the federal and state level and this is a primary risk that everybody looks at, both internally and externally, and in my opinions, that’s the single best managed risk of any financial institution has.

Clay Finck (12:51):

In the previous question, you mentioned the increased level of commercial activity or just investors coming into the market. I’ve seen headlines of things like state government in California getting involved with things like rent controls or rent limits on rent increases. So, if more of the real estate market is owned by investors, that’ll force people to need to have to rent, if the new houses aren’t being built to accommodate them. So, I’m curious what sort of activity we might see from governments going forward, if there’s just an overall higher share of the market owned by these institutions or commercial investors.

David Tuyo II (13:31):

Yeah, no, it’s a great point and this is where when the government acts as a governing body, it can be tremendous in the impact in managing the overall economy. When the government acts as a solution, that’s typically where we can have some situation, because then if they’re acting a solution who governs the governor? So, that’s the issue here and so our state has been tremendous over the past couple years in the pandemic and working with all financial institutions to come up with common solutions to the issues that we were facing from the pandemic.

David Tuyo II (13:58):

I also saw that when I was in Florida as well. I mean, I can’t speak enough about how our government has worked through the pandemic, even prior to that, through other recessions and academic times, partnering with private industry, to making sure that we have a stable environment. I think that one of the things in the future, you’re going to see a lot more migration. We’re seeing it already at our company. Prior to the pandemic, we had 100% of our team members in California. Now, we have close to half of our employees have moved or we’ve hired outside of California. We now have employees in 11 different states. It’s very different for us, but the work from anywhere environment is also, I think a big boon for this question, because when you start thinking about if we are all just concentrated in LA yes, all those issues that you’re bringing up would need to be solved. But now we’re seeing more of a, I mean, I’d like to say global market, we’re not quite there yet, but definitely from a coast to coast market where our team members can choose, like one of my contacts and reps.

David Tuyo II (14:48):

And again, we pay very well, but it in LA it would be challenging to become a homeowner. She said, “Hey, I want to move to Texas and can I go? I can buy a house there.” I’m like, “Absolutely, you’re fantastic. If that’s your best version of your life, we’d love to help you do that. And in your position you can easily work remote.” And so she did that. She moved to Texas, bought a home, enjoying life and she sent us some pictures and talking about how she’s enjoying actually a very nice home in Texas. So, I think the work from anywhere environment is going to change that. We’re seeing people figure out, “This is the best life for me. This is the kind of life I want to live. And maybe I don’t get to go up to corporate ladder the way I want, but I’m going to live my best life. And because I want to be on a farm in Wisconsin, or I want to be in Washington DC, or I want to be in Virginia, or our family has concentrated and everybody’s relocating to a central area. And so we want to be in that area.” Whether it’s in Florida, or Idaho, or Oregon, or whatever it might be.

David Tuyo II (15:40):

So, when you look at, for us, just even in adjacent market in Vegas from LA, it’s only a few hour drive and it’s a 58% reduction in cost of living, that’s a significant … and we’re still paying LA wages. So we’re not reducing based on geography, we pay by the job. The job is the job, the job didn’t change. I shouldn’t lower your pay because you changed locations. And so, we’ve seen a lot of people relocate to the Vegas area. I think Henderson just outside of Vegas has now become a little LA because there’s been such migration. I believe the last stat I saw from the LA Times is something like 75% of the population in Henderson, Nevada came from California.

Clay Finck (16:14):

Man, that’s fascinating. And I love how so many companies have just changed their perspective, like a total 180 on remote work ever since COVID, because COVID forced a lot of these companies hands where they had to go remote for a certain period of time. And then they’re like, “Okay, a lot of these roles, it makes sense that they can go remote. The employees are happier and the companies still get the work they need done.”

David Tuyo II (16:38):

Yeah. I mean, we’ve seen our satisfaction levels jump. We’re at nearly 90%, some months we’re in the 90s as far as employee satisfaction goes, that’s tremendous. The average in industry, based on the surveys that we use is 56%. And we always ran in higher than that. We’re in the 60s, the 70s, sometimes in the 80s. But then when we went to WFA over the past couple years, I mean, we are again 89, 93, 92, it’s every month there because people are happier, absolutely more productive. There’s no doubt about that. I think they’re more appreciative to our business. We are seeing less turnover than other companies in our industry are seeing because we’re so employee first, so employee focused and making sure that they have the tools and resources to be successful, but then also we want everyone to live their best life. And to be able to say that in leadership at our organization, it’s a real blessing. I can’t say more about our board, our executive team that makes that happen each and every day.

Clay Finck (17:27):

I’d like to chat with you a little bit about credit. One of the key aspects of getting a loan is having good enough credit to be able to qualify. It seems like sometimes it’s probably not talked about as much as it should be. What are some best practices or tips we should keep in mind to ensure that we have good credit?

David Tuyo II (17:47):

As much education that’s out there today, whether it’s on your local financial institution’s website, on our website, or just random Googling and YouTubing, there’s still so much misinformation around credit scoring. And the worst thing I hear is, typically I hear somebody, and these are well educated people that are going out there and, “Oh, I heard at this cocktail party this is what I should do. And so I did that.” And it wasn’t too long ago, I was talking to a member and she was in Washington DC area, just outside DC. And she was trying to refinance her condo. Her credit score was just outside of where most institutions would underwrite, so sub 640 and so she was trying to get … Her credit score at the time was like 600.

David Tuyo II (18:24):

And so she was trying to get back up and it wasn’t a bad situation. It was just the way that the numbers are calculated, she wasn’t getting credit for how she was really doing. She was actually doing very well, but it just how she was leveraging her credit and it made a difference in her scoring. And so we started talking, then she started telling me this whole story. And she said, “Well, I was at this cocktail party. And this guy who was really smart in finance told me I need to go out there and raise my credit score just a couple points. I just needed to open up a bunch of store credit cards and then spend some money, buy some new outfits, get some discounts. And then all of a sudden I would have my score would jump and I would be able to refinance my condo.” So when I met her and we pulled her credit, you want to take a guess where her credit score was? 480, 480 was her credit score and change, like 45, 43, something like that.

David Tuyo II (19:07):

And at that time, I couldn’t believe it, because she was not delinquent on anything. To have a score that low, typically you would have to have charge off delinquencies and probably some judgments to get that. And what happened was she went and she opened up 18 store credit cards, all were like $300, $500 limits maxed out every one of them. And now her credit score was diminished. So, the five factors of the credit score that most lenders are going to use, so 99% of lenders out there are going to use. First one is going to be capacity, that’s like 35% of their credit score. Then there’s going to be history, that’s around 30% of the credit score. And then you’re going to have length, which is the average time of your trade lines. And then you’re going to have mix and a new credit.

David Tuyo II (19:45):

And so your new credit’s going to be what we call accumulation. So, it’s going to be inquiries and new accounts. And so obviously, she was affecting her capacity because she maxed out her credit lines. She was affecting her new credit because she’s out there opening a bunch of new credit lines, that was affecting both inquiries and new accounts. Her payment history was good because she’s making all of her payments. So that was better, but it wasn’t long enough. But then this is a curious part. This is where a lot of people get it wrong. If you have one credit card that was 20 years old and then you go out there and you open up a second trade account, your average length of credit now is no longer 20 years, now it’s 10. But what if you go out there and you open up nine new credit lines? Now you go from 20 years to two years, it’s significantly affecting your credit score.

David Tuyo II (20:24):

So, these are things that we see all the time that happen with credit scores. And if I had any advice to give to anyone, it would be, if you have debt that’s going to last longer than a month or three months, don’t use a credit card because that affects your capacity. Your capacity is the percent available on your credit lines. So, if you have an old credit card from 10 years ago, you only have a thousand dollars limit, get the limit increased. If you don’t need it, get the limit increased, get higher limits. Because then when you do put $500 in that card, even it’s for a month or two months, you know what? Now, instead of being 50% utilized, now it’s only going to be 25% utilized, it’s not going to affect your score as much. And then, by taking your unsecured, revolving debt, your credit card debt, and moving that to an installment loan, you automatically increase your capacity, which automatically jumps your credit score.

David Tuyo II (21:09):

So, if you had a bunch of credit card debt, moved it to an installment loan, your credit score would go up immediately. Within 30 to 60 days, your credit score goes up. And then also at the same time, you’re managing your debt better because typically a personal installment loan might be 24, 36, 48 or 60 months. Typically, that’s all you ever see. And so the payment usually is going to be very close to what you make with your credit card, but the way that things are charged and the way that it revolves, if you just make the minimum payment on the credit card, if you look at your statement on the back of the first page, you’re going to see, “Oh my goodness, this is going to take me 36 years to pay this off, making the payment. It’s going to take me 14 years.” The average time, by the way, making minimum payment of to pay off credit cards, 19.2 years, that’s 228 months. That’s an amazing time and we’re talking about making a similar payment and getting out of debt in 48 months, you just do a simple math. Let’s say the minimum payment was a hundred dollars and your loan payment was a hundred dollars. You’re going to save somewhere in the neighborhood of $18,000 by moving it to an installment loan versus keeping it on credit cards.

David Tuyo II (22:02):

I’m using credit union rates at that point in time, but it would work with virtually anything. And then at the same time, your credit score goes up. So, when your credit score goes up and let’s say you were a tier two or tier three borrower, so you’re in the 600s and now you move into the 700s, you’re going to pay less. So, you refinance that installment loan again, now you go from a higher rate to a much lower rate and you pay it off even faster.

David Tuyo II (22:21):

And so there’s a tremendous amount of way of just being smart about how you utilize and manage your debt can make a huge difference, both in your credit score and how much you pay. And these are simple things that everybody can do. I would not get caught up in all the sophistication that could happen.

David Tuyo II (22:36):

Consumers need to understand you’re running a balance sheet based on a single source of income. I see a lot of people try to manage their balance sheets at a consumer level, individual level, thinking about it they do like corporate finance. Well a corporation, we have thousands of sources of revenue, much different than an individual. And so I think you need to take that into account. Yes, first tolerance is another piece you need to think about, but again, just taking these simple, common sense approach to managing your debt will help you pay less and also increase your credit score. And I think that’s a win-win across the board.

Clay Finck (23:09):

You mentioned someone taking out multiple credit cards to try and increase their score. Are there any other common mistakes or other misconceptions that people have in building good credit or is it as simple as making your payments on time and those other five categories you mentioned?

David Tuyo II (23:27):

Yeah. I mean, when you think about it, it used to be … a lot of things have changed over time. So, you need to update your thought process and some of the old days there was the idea of using an authorized user to help build credit, that no longer applies in the same way. There’s some individuals that they’re using family money to get loans and borrow. That’s awesome. Obviously very cost effective and I wish I had that choice when I was moving up through the ranks. But in this regard, I think you do need to get some form of credit. You got to get in the game some way and then you don’t have to always use it or leverage it, but you do have to make sure you have it available.

David Tuyo II (24:00):

So for instance, getting a credit card, start establishing credit, even with a small balance, put gas on it, paid off every month. Don’t let the balance get over 30% of the available line. Those are common sense ways to get started. You’re not going to get hurt. You’re going to get gas either way. Although the gas is much higher today than back then, and you get some rewards at the same time. I think those are some common sense ways to get started.

David Tuyo II (24:22):

The biggest piece in my mind is making sure that if you have debt, don’t leave it on a credit card. If you get in trouble, you lose your job or something, the lender wants to work with you. Every bank, every credit union wants to work with you. If you’re going through tough times, everyone has a plan. Everyone has a department that is specialized. They go through special training certifications to help structure or restructure things that are happening, to match what’s happening in your life.

David Tuyo II (24:48):

So, reach out. I know it’s a difficult time, both emotionally, it affects our self-esteem, it affects our relationships. It’s a horrible time, we understand that. Let us help you get through it. We can get through it together. Don’t sit there and wait till things mount up to a point where other bad things have to happen, like going to court and those kinds of things. Just reach out, your financial institution wants to work with you. We’re trained to work with you and that’s really the secret sauce. You know what I mean? For our organization, people … when things are going well, no one really knows the power of our being a member of our shop. But when you are going through tough times, that’s when we can really show you how we can help you. And we did that through the pandemic, we did that before the pandemic, and we’re going to do that with whatever our members are going to face going forward because often, that’s what we’re here to do. I mean, we’re just people helping people.

Clay Finck (25:32):

I like to chat a little bit about getting a loan. In relation to credit scores, how does that affect the terms on a loan? Does credit score have a big impact on the interest rate that’s offered, or what sort of terms are offered, or how does that work?

David Tuyo II (25:48):

I mean, when you look at whether it’s secured or unsecured debt, it’s going to affect the rate and it could be substantial. When you look at somebody that has a high 700 or 800 credit score, they’re going to be paying for their unsecured loan today, maybe 4.99, 5.99 independent institution. And you take somebody that is got very low credit in the 500s, low 500s, they’re going to be paying 17.99. And in some cases at some lenders, I’ve seen rates in the 100 percentile, so the payday lenders, those kinds of things. So, 380%.

David Tuyo II (26:18):

So of course, some institutions like credit unions, have a cap. They can’t charge more than 18%. But then in that case, they might get turned down or they might just be limited in terms. So, so the second piece of that is they might only … if you have a lower credit where you might be limited to 12 or 24 months or shorter term loan, versus if you have a higher credit score, you can spread your payments off a longer term. You might be able to get a 36 month or 60 month loan. And so yes, to your point, it affects things tremendously. Not just on your loans too, though. Think about how credit scores can affect your insurance. We’ve had things affected at hospitals. So I mean, people don’t think about this, but hospitals want to make sure that you’re financially stable because there’s things there that have street value that you might have some fraud. It does happen from time to time.

David Tuyo II (26:56):

Also we’ve seen that affect top secret clearances, where in the military, they have their top secret clearance. All of a sudden, they started having some financial stress for a variety of different reasons and different scenarios that I can … that’s very entertaining, that may be a different call for a different time. But with that being said, it affected their top secret clearance, where they had to actually leave their position, address their credit issues, and then they could go back and then get their top secret clearance restored. It’s much bigger than just lending when it comes to the credit score and it’s affecting things throughout our lives.

David Tuyo II (27:23):

At our organization, any financial institution, if you want to work there, you have to be insurable and bondable. And if you have a low credit score, you’re not going to qualify in that bucket. In which case, you’re not going to be able to pursue your dreams, your aspirations, your passions around helping others in financial services. But again, there’s tons of resources out there, whether it’s online, or whether it’s working with a financial coach, or someone at your local credit union or bank, there’s more resources than ever before to make sure that you don’t get in a bad situation.

Clay Finck (27:51):

Yeah, that definitely makes sense. It’s also fascinating to me, you see increased technology, increase artificial intelligence and things like that. So it’ll be interesting to see maybe how credit scores change over time, how they’re being calculated, how they’re perceiving the risk. I think the possibilities are just endless with where this could go and what makes someone actually creditworthy?

David Tuyo II (28:15):

I think that the interesting thing, great point, I mean, we’re actually leveraging four different AI tools today across our organization, to speak to your point, looking at alternative data, looking at the ways … finding other ways that we can say yes, finding other ways that we can better understand and manage the risk and then help our member owners ultimately achieve their needs, wants and desires. With that being said, also, the tools haven’t grown long enough to really go through a full economic cycle.

David Tuyo II (28:40):

So, many times, oh, we’re working with AI partners, we’re talking about different models and data points, but we just don’t know how it really performs in a down market. And so there come to us like, “Oh well, you get a certain lift and a certain decrease in delinquencies and certain decrease in charge offs and our models are doing this,” and yada, yada, yada, but I’m still very concerned about, how does these different data points perform in a down market?

David Tuyo II (29:02):

And we know how they perform relative down market and they are an improvement. And the question is, what does it look like on the flip side? Understandably, predictably, looking at history, there’s a lot of look backs, but again, we know that history doesn’t necessarily repeat itself. It sure does rhyme. I’m somewhat concerned. I’m not skeptical at all, I think the tools are fantastic, but I think we’re going to have to make some adjustments to continue to fine tune these going forward. But to your point, it is going to increase tremendous amounts of access that haven’t been moved forward, going to see upward mobility in certain demographics and marginalized populations that credit unions have always done that others have avoided.

David Tuyo II (29:32):

Also, I think there’s still bias. So, we’re seeing the bias happen with some of the AI tools because being programmed by individuals who led to the bias in the first place, or whether it’s cultural bias. So, these are things that are happening and we saw that with various credit card providers that were out there, where there was particular, in this case, it was gender marginally discrimination that was happening and disparate treatment, where somebody they came in and applied, it was a female and somebody that came applied was a male. The male would be approved and the female wasn’t getting approved. That wasn’t us, it was a different financial provider, somebody much larger than us. But I’m not going to say that we won’t have those same issues, but we sure are looking at and measuring that. We’re looking at the models, making sure that doesn’t happen on our watch, but again, we’re learning from others. But I think there’s going to be some fine tuning, but ultimately it is a great win for us across the board, whether it’s our organization, or industry, or for the consumer.

Clay Finck (30:21):

Something that’s bothered me is that someone with a W2 job can oftentimes qualify for a loan much easier than someone who is self-employed. Even if it seems obvious that the person that’s self-employed has more credit, where they might have all these assets on their balance sheet, or they might have a solid income stream, they just don’t have the history of earning that income. My question is, will this ever change?

David Tuyo II (30:46):

I think for many lenders, it’s already changed. For us, it’s already changed. We actually partner with different FinTechs to help aggregate and validate gig work. And so, we wanted to not just look at self-employed because that we’ve solved for that already. But you look at some research, some research says that all jobs that exist today, 70% of them will either be fully automated or gig work by 2030. And so, we want to be ahead of that transition. And you know, when somebody says 2030, that means like 2025.

David Tuyo II (31:12):

And so, we want to be ahead of the schedule there. So, we’re trying to figure this out. How do we validate gig work? How do we validate part-time work? There may be somebody that does 15 different jobs and does really well from a living perspective, but we can’t really get that full picture. And so again, those are things that we’re working to solve today and we’re having some success already. But to your point, historically speaking, I have heard that before. I can tell you specific examples. There was someone that had a couple that we did the real estate loan for, I can be very specific about this one. She was a personal trainer, independent contractor. He had his own landscaping business. And let’s just say the ratios didn’t work out like normal because they ran a lot of expenses through the business. The business covered a lot of different things like normal. And so you have to adjust your ratios. A lot of the rules that we have in place from a business logic perspective really does apply to more the W2 employee, to your point, than it does to the 1099 business owner, self-employed contractor.

David Tuyo II (32:04):

And so for us, we already made those adjustments. We were very aware of that, but yeah, historically that person would’ve got turned down and didn’t look at the full picture, didn’t understand the story. And so, these are things where a lot of the tools that we have today, make it easier to say yes to that individual, that type of worker, than we’ve seen in the past, but still a lot of work to be done. The gig working perspective, I think is very exciting. You think about individuals that are working a full-time job, or maybe a part-time job. They’re doing Uber, they’re doing a variety of other types of things. There’s lots of crowd sourcing that’s going on around programming. You can do some part-time programming, make a really good part-time income if you want to do that and trying to capture again, those sources are important and then actually have them validated as required. If you’re looking at a government program for a mortgage or something like that, there’s certain requirements that have to be done. And so, we’re using these new tools that weren’t available to us years ago, to help make sure that individually qualified for these various programs.

Clay Finck (32:56):

Another question related to debt, I often struggle with the idea of, should I have zero debt or should I have any debt at all? Should I pay off my debt? I try and personally minimize the debt if I can, unless it’s a really low interest rate. And right now, inflation’s running hot. So, it puts you in a pretty good position if you have a loan with a really low interest rate. With that, we live in a society that’s just based on credit and based on debt. And for the majority of people, debt’s just a part of life. So, I’m curious what your opinion is on how we can live a life with manageable debt?

David Tuyo II (33:32):

A lot of people talk about this whole concept of good debt, bad debt, smart debt, manageable debt, it’s all debt. I think that you have to look at what your goals are. You have to look at risk tolerance is. You have to look at your source of income, the stability of the income, all these things play a role in how you should manage your debt. If your level of income is tremendously volatile and you don’t have a source of savings as a rainy day fund, then you should try to get your debt levels as low as you possibly can. If your risk tolerance, and you lose sleep at night, when you have debt, then you should pay it down as much as you can. Everybody’s built differently. The answer is different for each individual. There is no one answer for everyone. And so for some individuals, I mean, even my family, there’s some individuals that are debt-free and there’s some that are highly leveraged just based on their risk tolerance and what they’re trying to accomplish. One’s a small business owner, so there’s levels where there’s periods of high debt and then there’s periods of no debt. And so, everybody’s lifestyle’s going to be a little bit different.

David Tuyo II (34:26):

But I will say, being smart about how you manage your debt, like we talked about earlier, is the best possible thing. Rates go down, refinance your debt. You know what I mean? Make sure that you make it as affordable as possible. Be responsible with your consumer finances. Be responsible with your business finances if you’re a small business owner. Quantify everything, understand your numbers. Because if you don’t know the numbers, you don’t know what’s going on. I would just stay focused on that piece of it. But I would stay away from this concept of, I only have mortgage debt because I get a tax deduction. It’s always bothered me that people do that. This is a personal philosophy so it’s no reflection on my company, but there are reasons why people have debt because they can’t afford to pay cash for a house, or maybe they have different methodologies and perspectives and that’s awesome. There’s diversity there, cognitive diversity, that everyone’s right in their own position based on their risk tolerances and what they’re trying to achieve in life.

David Tuyo II (35:12):

But to say that you’re going to pay, I don’t know, I’m making up numbers now, but say you’re going to pay $20,000 in payments so you can get an $8,000 tax deduction, doesn’t make a lot of sense. You know what I mean? Don’t justify it because of that. There’s debt, there’s a reason for it. Now, as you get into later in life, and we’re going start talking about retirement and those kinds of things, I would highly encourage individuals to look at limiting their debt, even going to a zero debt proposition in retirement. It does lead to a much higher level of quality of life. When you talk about the financial metrics and how to use leverage and those kinds of things, but when you’re retired and you’re living off source of savings, you’re living off source of pension, or other types of income that you’ve got coming in.

David Tuyo II (35:50):

Not having that debt does increase your quality life to be able to have the freedom to go do what you want and have to worry about, “Oh well, if something goes down in the market or something else, I’m not having money to make my payment.” Instead you’re thinking about, “Okay look, I’ve got some volatility in my savings account, on my retirement fund. Okay look, maybe instead of not worrying about my house payment, I’m worried about, okay look, maybe I’m going to change from going out to eat at Ruth’s Chris.” To saying, “Okay look, I’m going to go have a Habit burger and a shake instead. So these are just kind of things that I would urge as you get later into the cycle, what you might look at and plan for that.

Clay Finck (36:20):

You’ve worked with credit unions for many years and earlier you mentioned how your company’s adapted to the trend of remote work. So I’m curious, are there any ways that you’re seeing businesses, banks, or credit unions in general evolve with the ever-changing world we live in, rising rates, millennials coming in to be the top home buyers now, which is probably a much different consumer than what you saw when you first entered the industry. So, what are your general thoughts on some things credit unions are doing in a changing industry?

David Tuyo II (36:54):

Yeah, it’s a really good point. Banks and credit unions, a really exciting time to be at, it’s an exciting time to work and be in this space. Either directly or indirectly from a supplier partner, FinTech, or directly with a bank or credit union. It’s probably one of the most exciting times next to the great recession. The great recession was again, a horrible time, but also a great time to be in this business from a education perspective, growth perspective, and understanding the business.

David Tuyo II (37:17):

If you think about millennials, I mean they’re turning 42, I mean, this year. And so now we have … People still say millennials, they think about somebody that’s in their 20s, living at home. No, that’s not the case at all. Cliches are horrible. I mean, I think half of my leadership team, my executive team qualify as millennials. And then you start looking at, the average home buyer in California with our high home price is 47. So, millennials are approaching that age. They’re going to be dominant in real estate space amongst other things. And you start thinking about the generation after them. Talking about gen Z at this point, I’m not sure what the next generation is going to be after that. But a lot of different things that are happening across the board.

David Tuyo II (37:54):

With work from anywhere environment, we’re fortunate enough the way that we’re built, to be able to be in a WFA world. Many other banks and credit unions are taking a different approach. We have seen friends of mine and competitors, are going to hybrid approaches where they’re spending three days in, two days out. Some are doing rotations where half the team comes in two days, so the other half of the team takes two days and then everybody’s remote one day a week. And so, a variety of different things that are going on.

David Tuyo II (38:18):

We’ve been looking at this market since before the pandemic. So, we were looking at this strategy and back then, we were working from white paper that was generated from Deloitte around back then it was called distributed workforce. Some banks are going full back in person, and I don’t think that’s a bad solution either. Everybody’s going to have a different model and it’s going to give individuals the choice. How do you want to work? Work from anywhere is not for everyone. Working from anywhere takes a lot of discipline. You know this, it takes a lot of discipline. You have to have certain types of management, certain types of leadership in place, but for the right organization, culturally it can be tremendous.

David Tuyo II (38:55):

But then for others, having that in-person collaboration, there’s just certain things about these ad hoc meetings and hallway conversations that happen. Whereas if you work remote, you have to figure out how to generate that kind of random or spontaneous interaction that would happen. People are going to have a choice. Just depending on the individual, I think most companies are going to get there eventually, even as some start to pivot back to hybrid, some are going back full time. But again, it’s great that we’re going to have choices. And I think it can be a better time if you’re getting the workforce, you’re joining a bank or credit union, you can choose to be a programmer from home, or you can be a programmer in the office and work from a skyscraper, whatever your preference is.

Clay Finck (39:29):

We cover Bitcoin quite a bit on the show and it’s gradually made its way into the financial industry. In 2017, to pick on Jamie Dimon, he called it a fraud. He’s the CEO of J.P. Morgan. And now, I just recently saw a headline from J.P. Morgan that they’re bullish on Bitcoin and giving clients access to invest in it. So, I’m curious what you’re seeing in the industry for local banks. Is it something they’re interested in or is it something that many are just taking a wait and see type approach?

David Tuyo II (40:01):

You know, it’s interesting in today’s world, we spend a lot of time on these soundbites and marketing narratives and we all know that our attention span now is, whatever, six seconds. We have to get people’s attention in six seconds or less, and to your point about Jamie Dimon, by the way, huge fan of his, I think he’s done an amazing job. Love the story from back in the day at Bank One and moving on. But Bitcoin is interesting. We have over 17,000 coins. Last count I had like 17,800 or something. So, just a tremendous amount opportunity out there. We’re seeing community banks and credit unions across the country get involved in the space. Going back to my comment about these soundbites, I just think it’s a little shallow as far as how we’re getting into the space.

David Tuyo II (40:37):

Many are only looking at just buying and selling one or two coins, is all they’re really opening up. And then obviously being able to the advantage the value proposition of course, the ease of moving back and forth, of course, from fiat to crypto, and back and forth and in a very safe way with your financial institution, which is great. However, there’s a tremendous opportunity in my opinion, to be able to get involved in the space and support cross-wallet transactions, coins back and forth, then also transactions, also lending also opportunities, in my opinion, around staking, facilitating the staking of the crypto. And so, a variety of ways that we can get involved. We haven’t gotten to that point. I can tell you, our organization will have a solution live within the next six to 12 months, probably closer to six. Very excited, it’s going to do exactly that I just described.

David Tuyo II (41:19):

But I think it’s something that we’re bullish on too. I think crypto’s here to stay. I don’t know how large it’s going to get. Originally, I thought that we’d start seeing the central bank digital currency start to come up and this conversation start to come up. I was worried about how that would affect Bitcoin. How would that affect the crypto industry in general? Not just Bitcoin, of course, the 17,000 plus coins that are out there today. And my concerns shifted. I thought it was going to be good for banks and bad for the crypto industry. And yeah, I think it’s actually vice versa. I think it’s going to be bad for banks and good for crypto.

David Tuyo II (41:50):

It’s a couple different reasons why. I don’t think the central bank is going to come out with a digital currency anytime soon. But right now, it’s being set up where it’s a liability of the federal reserve. And so, it’s on the federal reserve’s balance sheet. So, if that deposit of crypto is now at the federal reserve, it’s not at the bank or the credit union, what funds are the bank or credit union going to use for lending. And so, if the deposits go down, lending activity go down, economic activity will go down, the money multiplier goes down, all these things affect our economy across the board. And so, that problem’s going to have to be solved for. I think it has to be a way where the digital currency resides at the institution level and not at the federal reserve. So that way, we still can have the economy based on its tenets today, without affecting things negatively, like I talked about and then facilitating this move into a digital currency, some things that concern me.

David Tuyo II (42:39):

But again, because of that, you still have this … At the federal reserve level, this still can’t get around the anonymity. There’s still going to be the requirements of the PATRIOT Act, we have anti-money laundering, Bank Secrecy Act, those kinds of things are still going to have to kick in. And so I think this is going to be … which will be good for crypto. So, it’s still very positive on that side of things. But I think banks and credit unions do have a role to play.

David Tuyo II (42:58):

I think crypto lending has tremendous opportunity, especially for individuals that have appreciated large amounts of coin, where they’re sitting on a massive gain that would be a significant tax consequence. Having that as collateral to lend on, to buy other things where they don’t have to sell and take that consequence of the taxes, that tax liability exist is a tremendous opportunity and is something that we’re looking at and will be looking into over the next few months,

Clay Finck (43:23):

Very interesting, the cryptocurrency side, I’ve seen both ends of it. I’ve seen some smaller local banks start to offer just custody services. You can just buy Bitcoin or Ethereum through them and they’ll custody it for you. You know, many people that might not be as tech savvy, I can see definitely the use case for that. They’re not comfortable going out and setting up their own account with … they have to figure out which exchange or broker they want to go to. So, it’s just much easier to just do it with your local bank. They already have your money and your checking account, and you can just easily transfer that over. But then I’ve seen the other side of the coin, where other smaller banks are just like, “Yeah, we’re out of this for now, but if it becomes a bigger part of the economy, then we’ll happily maybe be a late-comer.”

David Tuyo II (44:05):

Again, just like everything else. As a heavily regulated entity, we have not been given permission to enter into the space directly. And so everything that we do, we have to go through a third party because the regulator is not allowing us to participate in the market directly and so, that is a big piece to this. Also to your point, some friends of mine are like, “Well, if you don’t own the keys … ” talking about custody at the bank and the bank, having the keys, then you don’t own the coin. That’s the big thing. You don’t own the keys. You don’t own the coin. Well, again to your point, there are certain people, based on risk tolerances, based on knowledge, based on time, they don’t want to have to manage across do I have the token via the USB file, but if I lose that, I lose all my coin. If I don’t remember my pass phrase and I’m going to lose my coin and it’s lost forever.

David Tuyo II (44:46):

And now, I have people that are trying to hack and find these lost coins that are out there. And whereas if it’s custody, it’s at your bank or credit union, it’s not going to happen. And so, there’s definitely a use case for it for some. And there’d be some that just say, “Hey, you know what? I want to be on my own. I’m going to do this direct.” And that’s great too. That’s part of what makes this great.

David Tuyo II (45:01):

Again, I think we’re looking at … Last I heard, I believe the number is only 25% of Americans have bought, sold or transacted in crypto. And so, there’s still a tremendous upside here. There’s obviously a reason why 75% of Americans haven’t gotten into the space. If that means that going through a financial institution opens up and increases use, if we increase use, we increase liquidity, we increase the liquidity, we increase the safety. If increase the safety against higher adoption rates, there’s a better opportunity in this space. It’s probably what Jamie Dimon’s thinking too, I’m guessing. Him and I don’t talk much, but if he ever calls me, I’d love to have a conversation. But in the meantime, I like to see how … I agree with his flip on this particular topic.

Clay Finck (45:41):

Awesome. Well, David, I really enjoyed this conversation. I’m really glad you took the time to share just so much knowledge with our audience over the past hour. Before I close out the episode, I want to give you the opportunity to give any closing thoughts and let the audience know where they can get connected with you.

David Tuyo II (45:59):

Yeah. I mean, obviously I’m on LinkedIn. Please feel free to reach out, love to learn more about you and help and support your endeavors any way possible. Also, our credit union is University Credit Union. You can find us at ucu.org, ucu.org, it’s probably the best way to get us. And again, lots of knowledge out there, lots of opportunity to learn. Make sure you know, your numbers, make sure you know and understand everything before you move forward and University’s here to help any way possible. But again, I appreciate the opportunity to be here today. Awesome conversation, and really was an honor to be part of this.

Clay Finck (46:30):

Awesome. Thank you so much, David

David Tuyo II (46:31):

Have good day.

Clay Finck (46:33):

All right, I hope you enjoyed today’s episode. Please go ahead and follow us on your favorite podcast app so you can get these episodes delivered automatically. If you’ve been enjoying the podcast, we would really appreciate it if you left us a rating or review on the podcast app you’re on. This will really help us in the search algorithm, so others can discover the show as well. And if you haven’t already done so, be sure to check out our website, theinvestorspodcast.com. There you’ll find all of our episodes, some educational resources, as well as our TIP finance tool that Robert and I use to manage our own stock portfolios. And with that, we’ll see you again next time.

Outro (47:09):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts, or courses go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.