goeasy’s Executive Vice-President & Chief Risk Officer Discusses Navigating Credit Risk in a Complex Market

Rich Alterman  00:04

You're syncing up and tuning in to the lending link podcast powered by GDS Link, where the modern-day lender can dive deeper into the future of data decisioning and Credit Risk Solutions. Welcome to the show, everyone. I'm your host. Rich Alterman, today we are syncing up with Jason Appel. Jason is the Executive Vice President and Chief Risk Officer of goeasy limited, a Canadian based financial services company which has been in business for over 33 years and has been a valued partner of GDS Since 2014 Jason leverages over three decades of experience in consumer and small business lending to manage credit oversight, enterprise analytics, non-financial reporting and yield optimization for goeasy during his 10 years, goeasy has successfully achieved its target net charge off rate in each of the last 12 years, reducing its overall rate from 15% to 9% as a transformation driven leader, Jason believes that constant change and evolution are necessary for success and growth in a business environment, he inspires growth in others by challenging their intellectual curiosity to achieve breakthrough Learning. Prior to joining goeasy in 2013 Jason was senior vice president of decision management with Citigroup, and he held before that, previous positions in the mortgage and lending divisions of CIBC. Jason holds a bachelor's degree from the University of Toronto and an MBA from an MBA from the Schulich School of Business. He is a member of the Canadian lenders Association roundtable and was awarded the Risk Officer of the Year in both 2022 and 2023 quite an accomplishment. He was also the recipient of the Chairman's Award during his tenure at Citigroup. In this episode, Jason, I will be discussing some background on goeasy , the Canadian lending market techniques in relation to credit risk management and so much more. Before we dive into the interview, please head over to our LinkedIn and Twitter pages at GDS Link that's GDS L I N, K, and hit those like and follow buttons if you have not done so already. Please subscribe to our podcast on Apple podcast Spotify, or wherever you prefer to listen to your podcast. All right now, let's get synced with GDS. Welcome, Jason. I hope you're having a great week. Where are you joining us from today?

Jason Appel  02:15

I am joining you from the lovely city of Mississauga, a suburb of Toronto in warm Canada in the nice summertime. So happy to be here, and thanks for thanks for having me.

Rich Alterman  02:27

on Well, thank you for spending time with me today. And before we talk business, let's get a bit personal. You share with me that you really enjoy traveling. Of all the places you've traveled, if you had to pick a favorite one, what would it be and why?

Jason Appel  02:39

So I'm a little biased, because, as you know, I've just returned from a two week safari in Tanzania, Africa, and I would say a bias, personal bias notwithstanding, and the fact that it was, it was an adventure, an adventure to celebrate my wife and my 30/30, year anniversary together. It was outstanding and just a very humbling experience. I would characterize the trip as one that made me feel very small. And when I feel small, it reminds me how important life really is about the basics, the people you spend your time with, the things you do when you're not at work. And any trip that makes me feel small is a good trip, and this one made me feel very small.

Rich Alterman  03:18

Well, thanks for sharing. As someone who's had the opportunity to travel to South Africa and do several safaris, I certainly would recommend that everybody listening would put it on their bucket list. So maybe in line with that, Jason, I also understand you really enjoy hiking. What would you say has been the biggest challenge you've taken on in this regard, and did it teach you anything about yourself?

Jason Appel  03:39

Well, my wife and I both liked, I mean, we're outdoors people by nature, and we do like to explore. A couple years ago, we wanted to make a very large day out of hiking in and around Lake Louise, a beautiful part in southern Alberta, if you've ever been there, and they offer multiple hikes in and around the lake and quite beyond the lake, and we had made the rather presumptuous decision that we could do most of the hikes in one day, and endeavored to do that and nearly run out of water along the process. It's not like there's water fountains every five or six miles every time you walk, and we spent most of the day out and around the area, including on some really cool glaciers when we were there. And it just reinforced the need to always be prepared. You can never be prepared enough. When you go out in mother nature, it doesn't really choose favorites. So, I would say I learned a very, very important lesson along that trip, is just know your limits, stay within them, and be smart about taking risks, which may have some possible applicability’s to the job I do during the day. But it turns out that it's very relevant, very valuable. When you go out and decide to do some hiking, oh, it's definitely going to make that correlation to your day-to-day job, and I think we'll certainly see that resonate through our conversation today.

Rich Alterman  04:41

So once again, thanks for sharing that. So, let's get down to business. And as you know, I've had the opportunity to have several guests in my podcast who are or who have been in the credit risk management role for our listeners who may not be familiar with it, we're. Really means to be the chief risk officer in a lending organization. I thought we could start today off by having you describe a week in the life of Jason Appel at goeasy

Jason Appel  05:08

Well, it's a very busy week. I'll tell you that its jam packed with a lot of activities. goeasy is a pretty intense organization about how we manage the business. We're very close to it. Senior leaders are expected to understand the motivators and the KPIs that move the needle. And we're also a high growth business, even though, to your point, as you mentioned, we're 30 years, 33 years into our growth journey. We set very high and ambitious targets for ourselves, because that's knitted into our DNA. A typical week usually starts out with reviewing the week that was. We are a weekly driven in some cases, a daily driven organization. So you know, when I get into the office in a rather crisp early time in the morning, we are blessed with a plethora of really good business intelligence that we've developed that looks at both our origination activities and the week that was, as well as our lending performance, more specifically, how we are collecting. Those are the businesses we are in lending and collecting. So, we very much review those KPIs, and myself included, I want to know, how did the week go? Where did we generate our business? How were the yields on the products we generated? What was the delinquency like on the book? How are our losses trending on the week and on the month? What were our insolvencies? All of those particular details are needed through quite a level of intensity, not only relative to budget or the latest forecast, but also around what you would expect the portfolio to be doing given the amount of marketing efforts we're doing on the front end, or the amount of collections offers and incentives we're doing on the back end. So, Monday is really about setting the tone for the week. It's reviewing the week that was and making sure that the week that is about to be is going to perform as one would expect. And sometimes things don't often work the way you anticipate. So, you have to pivot. Monday is really the pivot day. It sets the tone for how things work. The rest of the week really breaks down, in my view, into really three areas, and these vary. There's no prescriptive time schedule. I'm sure people can relate. Whether you're a CRO or not, you've got a bunch of projects and deliverables you got to bring home. Some of these projects can be very short term or long term in nature. You're in meetings, constantly refining what the objectives are of those projects, how they're tracking what major key decisions have to be made. That tends to take up a lot of time, especially if those projects need to be adjusted. And the other thing I would point out in that project work is that you're not just working on the projects you've committed to doing, but you're also engaged in sequencing and triangulating and triaging work that's coming down the pipe. Because often, you know, companies are really in a static state, so they're constantly moving and dynamic, having to replan things as they come about. That is not a small order of business, and that's not the job of just one individual. And as one of a number of senior leaders in the goeasy organization. That is something we spend quite a bit of time noodling over as a given week or a given month unfolds. Third area would be very much people in development. I'm fortunate to work with a really great team of individuals across a variety of functions that we call risk and analytics. At goeasy, those people not only need but they deserve the attention to mentor, to guide, to coach, to manage, to challenge. That takes up a fairly significant portion of my time as a leader, and it should, because, as a leader, on the day in which I decide to leave goeasy, I want to make sure I leave the organization better than when I found it, which means cultivating and building the necessary bench strength and talent within the function. And then lastly, but not least, would be a lot of the work I do is cross functional. You know, risk may be critical to the lending business that goeasy, but we don't get very much done without our partners, whether that's information technology, marketing, central operations, the field collections, I could go on legal. There's lots of different groups. And whether we're leading an initiative, or we're partaking in one as a participant, we are constantly working and aligning with those groups, and that takes a lot of time to get everybody singing off the same song sheet, rowing in the same direction, call it what you like. That doesn't get done by happenstance. You have to work that part of your job to make sure that your partners in crime, if you will, that do their work to make you successful are aligned with the direction that you need to go, or which they need to go, and that doesn't happen by accident. So between those four areas, running the business, the KPIs, the strategies, working on projects, deliverables, and planning for the future, managing people and developing future talent, and then cross collaboration and Future Planning, that's a week in the life, and they ebb and flow depending on the week that comes by.

Rich Alterman  09:26

So hopefully that's great. Fact, yeah, I noticed in your annual report that there's really a lot of digging into the whole risk management strategy and how you guys’ approach that. So as for someone from the industry, it was very enlightening to read through that. And you know, as I said at the beginning, you've been around this space now for quite a long time. And when you know, reflecting on your extensive experience in the credit risk analytics space, what would you consider to be the three most significant innovations in this field over the past two decades?

Jason Appel  09:55

So, I don't know if they're necessarily innovations, but I would say three, three things that I think are. Are or have and will continue to have, you know, a significant impact on how we think about risk in the lending business. A couple of these shouldn't be a surprise. In fact, I don't think any of them are a surprise, but, but, and these aren't in any particular order, but first and foremost would be data proliferation, I think about in the credit world for the last 30 years, data has always been critical. What I've seen in the last, certainly, decade, half decade plus now is just the volume of data that's available about the customer, where they operate, how they operate, how they behave, and how we capture those activities are very much exponentially larger than they were even a decade ago. And you think about now the tools with which we have to tap those capabilities, which is the second innovation to me, is just so much larger than it was back in the 90s. Look, organizations today still build regression models to predict likelihoods and possibilities of default. They also build much more sophisticated models, but at its core, those models still rely on the power of data, and nowadays, in the 2020s the volume of data that we have access to has exploded, and the tools with which we can now manipulate and model on that data have enhanced and expanded. You couple those two things with the third piece, which has just been the incredible explosion of artificial intelligence, specifically as it relates to the areas of generative AI, as opposed to supervision, machine learning, which is what I would associate with the second one. Those three areas, for me, are transformational. What's really curious is, is the first two have been around for a while, but I would tell you that the speed with which those have expanded and exploded has only increased. You know, if I think about the kinds of analysis, which I'm sure we'll talk about as we get into the podcast, and the level of sophistication that we've built on just basic things, like collections, they didn't exist 20 to 30 years ago. The data wasn't there. The capture mechanisms weren't there, the software and the third-party platforms weren't there, and the modeling techniques weren't necessarily as well developed. All of that has exploded in the last five to 20 years. And in some respects, I don't think it's necessarily a new story. It's just the speed with which it's accelerated is the story. And for me, those have just been transformational in the past half decade, or even the last couple of years, that they continue to pave the way and require risk to be at the forefront of lending, because as your consumers become more sophisticated and discerning, your lending and your collecting have to follow suit, and if anything, they probably have to be out in front of them. Those are three areas that I'd say would be quote, unquote innovations.

Rich Alterman  12:42

Yeah, maybe might be interested in a second to touch on the data. You know, in the US, GDS, we integrate with probably about 100/3 party data bureaus, and obviously a number in Canada. But if you think about the size of Canada compared to the size of the United States and the number of data bureaus that are available here in the US, could you draw some kind of correlation? You know, what do you see in Canada as far as the availability of the number of different sources that we have here in the US? Which actually, I always laugh that when we're doing a presentation for some of our prospects, we show, show them a slide of all those connectors. Their eyes kind of pop out of their head, right? They're like, Oh my God, I didn't realize there were that many. And I'll say, Well, if we had somebody, that's all they did was go reach out to different data bureaus. That number can go from 100 to 200 easily. But I don't think that's the same case in Canada. So maybe just kind of touching on that availability in Canada, since you brought it up.

Jason Appel  13:36

I would say, just as a preface, if you asked me to pick between better modeling tools and more data. I will always choose data because I think insofar as you can still perfect your modeling with better tools, the power of incremental data sources, in my view, is far more critical to your long-term longevity in the space than having the latest, greatest modeling tool or technique. That's not meant as a criticism of modeling tools or techniques. They continue to explode, as I've mentioned before, but the richness of the data that is now available that you have, more specifically in the United States, is something that in the Canadian market we just haven't seen developed. And I think there's a couple reasons for it. One is, you know, we're limited in Canada having primarily two now a third credit bureaus. Those are traditionally your largest sources of data aggregation on credit, and both Equifax and TransUnion, who are the players in Canada, have done a pretty decent job over the years of trying to bring in alternative data sources or even Supplementary Data sources. There was a time, and I can't certainly speak to the US experience where mortgage data was not included in the Canadian reports. You can access it, and even today, it's limited data insofar as you can still see it, you just can't see the named provider of the mortgage unless you happen to be one of the largest mortgage operators in the country. And there's also been some modest improvements on more sophisticated algorithms that both credit bureaus have. Equifax and TransUnion have put out that have continuously, at least in our case, been used to further refine and enhance our data. But where we've really been hard pressed are these other third parties, many from GDS, connects within the United States that just simply don't exist in Canada or they exist but in a microcosm of the size. So, we don't have the same luxury of the same number of connectors. So when it comes to building and refining our credit models, historically and more recently, they've been based on really two sources, at least in the goeasy instance, one is continuously being a test and learn partner with the credit bureaus, which we have so we often are among the first, if not the first, to get access to new algorithms or attributes and not necessarily take them at face value, but build our own scores off of them, which is kind of interesting. And then the second thing we've been doing is making use of banking data, which I know is another area we'll talk about, but we've integrated our banking information from our customers into some of our credit models, in an effort to raise the bar, if you will, on finding better predictive indicators of default and banking data in as much as credit bureau data can be a very potent tool, if mined properly and used properly in the modeling exercise. So, in the Canadian market, we simply don't have the same breadth and depth that you have in the US, which means we just have to be a little bit more discerning and a lot more careful about how we go out and model. It also means that we're often looking for new sources of data with scale to try and see if they work within our portfolios, and us being a non-prime lender, which represents roughly about 25 to 30% of the Canadian population, it's even more challenged because you can't take all of this data across the Canadian population and expect that it will hold for the non-prime consumer, which is why we don't use generic credit scores that the bureau offer to predict risk for non-prime because they don't rank order very effectively, and they don't predict it very effectively.

Rich Alterman  16:55

Going back to our discussion on hiking, and you said that you know, one of the lessons you learned was always be prepared. And you know, learn from your mistakes. I think you've had the pleasure. And I know I shouldn't really use that word of being in the in-risk management, living through the financial crisis of 2008 and of course, the covid pandemic. You know, as you look back on this to life changing, altering events for all of us, and we're still feeling the effects certainly of a covid pandemic. What would you say are some of the key lessons that you learned about credit risk management during each of these periods, and how have these insights shaped your strategies for future economic disruptions?

Jason Appel  17:32

Yeah, that's a great question. Maybe I'll pick one lesson from each experience, and thanks for pointing out my age. I do appreciate that very much.

Rich Alterman  17:41

Several years on you so don't complain.

Jason Appel  17:43

Yeah, well, not that many, but anyway, 2008 and beyond. You know, my key lesson learned there as sort of a participant in that crisis, thankfully, not a maker of it. And I still hold this true, and it served me well, and continues to serve me well, is, is, don't, don't underestimate the power and the potency of the things you don't know. I'm going to let that just sink and set and I'll repeat it. Do not estimate the power of the things you don't know or know nothing about. And I think what I learned out of 20 2008 and beyond, was like any good and effective risk manager, credit risk analyst, you insert your appropriate title here is, you know, we pride ourselves on the things we can see, the KPIs, we can look at the ways in which we look at the business and view the business under different scenarios. I mean, when you think about risk, it's all about scenarios and testing and stress testing. But you know, we can sometimes be blinded by our own knowledge level and our own reliance on data that we have trusted for years and years out that when a black swan event like the 28 financial crisis hits us and throws most of our traditional thoughts and processes out the door, we're not often quick enough to be agile and open enough to accept the fact that a lot of those approaches don't work anymore, right? And what I learned in 2008 was you could not move fast enough to remove those thought processes to avoid calamity. To put another way is, I think the people who successfully survived that period, or maybe came away with it under less painful circumstances, were very quick to pivot, because they realized the things that they have relied upon in the past to serve as governors or indicators or trusted and tried things about how they would run their business. They didn't work anymore. And the other thing is, is, and I can remember this very much, even though it was, you know, almost two decades ago, is just how blinding that crisis was, and the kind of life and death scenarios that people were dealing with and the incrementalism that we tend to approach credit risk just got tossed out the door. We weren't dealing with keeping our loss rates within 50 basis points of an expected threshold we will we were dealing with truly existential issues about our portfolios running to levels of losses we had never seen. Seen before, or our yields dropping and our collections falling off the window, and therefore our tried and tested methods of tweaking here and adjusting there, they didn't work. And if they did, they didn't work anywhere near as effectively as they did prior to the crisis. So we had to reinvent ourselves and no longer be attached to those thoughts that we were, that we're using ourselves to guide and I think what I learned in 2008 was even though so much of my identity as a risk manager, tried and true risk manager, was built up prior to the 2008 crisis, I would have probably been better served had I discarded some of those thoughts earlier on in the crisis to avoid me going down rat holes I didn't need to go down. And I think that's a lesson that I still hold true, and it's not the lesson I'll draw on covid, but it's certainly one on 2008 is just do not be blinded by the things you think you know. It's actually to be it's actually very healthy to be highly curious about the things you don't know, because you know, notwithstanding my comments around proliferation of data and the improvements in modeling credit risk is ultimately as much about an art as it is a science. And art requires that you have to rethink things from time to time, and I think we as risk managers need to employ that. And 2008 taught me that more than anything else.

Rich Alterman  21:14

During covid, you know, in the US, the credit bureaus, we were trade lines were being reported as either in forbearance or deferment, and a lot of concerns over time came to question about the accuracy of the credit date. And I think that was an opportunity, in fact, for open banking to get used more often, because there were some doubts introduced. Did the bureaus in Canada go through the same type of methodology to place trade lines in forbearance and deferment during the covid.

Jason Appel  21:45

Yeah, there were changes. And it's funny. It's literally funny. You mentioned that because this ties into what I thought was at least my key lesson learned, or one of my key lessons learned coming into covid was, and I'm sure most, most individuals who listen to this podcast, who are managing, or partaking and managing credit risk on a book, and appreciate it is, you know, post March 2020, we were living the dream. Man, we didn't think that credit loss performance was going to perform well over the subsequent months. Hell, I don't think anyone had an idea of what the pandemic was going to look like. I remember, you know, the day before, we were leaving our offices for a period to work at home, we all took sort of straw bets on how quickly we'd be back in the office. And I think the outer bat was 90 days out, not two years plus out, at least in the Canadian experience, and we didn't know what the future was going to look like, and at least in the Canadian example, as the government started to think about a stimulus package, and as a lot of people were being supported through the federal government's activities, and as the economy shut down and people weren't spending money the way they were prior to the pandemic, began credit began to improve and began to improve noticeably, right, right. Scores all started to migrate up. Your approval rate started to bounce up, and, more importantly, your credit losses were nowhere to be found. Maybe not that extreme, but I certainly recall, you know, looking at ours and you know, some of the larger comps in the US people were seeing credit loss performance at level they'd never seen before. And it was the best of times. It was also the worst of times, depending on what you were working and living out of, but it was the best of times for credit. Now, the lesson learned from me coming out of that experience was it was the best of times for credit. So, my question was, good times don't last, right? And if it's if it's too good to be true, it's probably because it is. And along that time period in and we report on the calendar year, so by the time q2 hit, we were seeing great credit performance. Q3 was great. Q4 was great. And in the back of my mind, partly driven by the oh eight experiences, I'm thinking, yeah, the government can't bail out the consumer forever. We will at some point figure out how to cure this pandemic. It will go away. Therefore, whatever's happening in the credit markets and the personal disposal spending markets that's fueling this boom in credit performance isn't going to last. And therefore, whatever credit decisions we're making now to originate and collect those aren't going to last either, and if we don't take steps to right size the ship, we better hope and pray that our credit performs in the same way which it wouldn't. So, we started making adjustments right into the beginnings of covid, tightening our underwriting, tightening our credit, changing our affordability metrics, long before we came out of covid. And as a result, my lesson learned, coming out of that was the best time for a credit manager to plan for bad times is in good times, and covid in as much as people would think, it was a bad time, and it was for many other reasons. Let's not let's not be tried about it. It was a great time for credit, and I think we all got caught up in the fact that it was a great time for credit, and we probably should have been adjusting our thought processes a little earlier on, because a lot of what was keeping the consumer afloat was artificial in nature, being stimulated by the government and being stimulated by subsequent actions that individuals were taking and. We didn't see that pattern, or we didn't perhaps, see it as soon as we should have, because the minute that stimulus began to be revoked and the economies began to open up, guess what, everybody kind of resumed the way things were before and then some, but many people had not adjusted their credit that they probably should have to reflect it, and that's where a lot of people got caught with the pants down. And look, I'm not saying we didn't feel it. We certainly felt it, but I don't think we felt it nearly as much as many of our competitors, because we weren't lulled into a state of complacency, because we knew that when times are good, credit managers should be planning for when times are not so good, such that when you start to see those inflection points, you're ready to move, and you're now out in front of the market. You're not waiting for the market to tell market to tell you to make a change.

Rich Alterman  25:43

Well, I suspect some of the things that you talked about were the catalyst for you being the Risk Officer the year in both 2022 and 2023 so once again, congratulations on that great stuff. Let's start digging in a little bit about goeasy and the business, some of your risk management techniques, which you've certainly touched on, some of those, and operating the Canadian market so easy has had quite a stellar fiscal 2023, growing your consumer loan portfolio by a record $851 million Canadian. Finishing the year at 3.6 5 billion, or up 30% you guys operate under three key brands, easy, home, easy financial and lend care, which you guys acquired in 2021 Why don't you take a few minutes and just kind of give us a high level overall review of each of those three brands and how they're maybe similar and how they're different, sure thing.

Jason Appel  26:31

So, I'll start with an easy home. That is our leasing or lease to own or rent to own business. That is a business upon which the goeasy. Organization was founded. That is where we got our start. We didn’t get any consumer lending until 2006 so for the first near 20 years of our existence, we were strictly and only, at least, to own company effectively servicing what we call the non-prime consumer, albeit through leases to buy furniture, appliances, electronics and other matters. That business still exists today. We operate about, give or take, about 120 odd stores across the country, coast to coast in all provinces. And that business, I would say, is reached maturity. It is a business that we are continuing to manage on a on a day-by-day basis, by offering and injecting other businesses that are harmonious alongside it, most notably lending. So, our leasing stores, as an example, started lending back in 2017 as an opportunity. And that's not because the leasing business isn't a good business. It is a good business for us, but it is not a high growth business. It's reached, it's reached a state of very high maturity in the Canadian market, as I believe it has. As I believe it has in the US. And therefore we continue to rely upon that business as a grounding and as a good source of customer activity, and we continue to keep it going, but it is not growing anywhere near the lending business has, because lending is a business where we have seen the growth significantly increase, if only for the reason that the money we are lending can be used for more purposes than just leasing, right? So the applicability of that business obviously has further reach the Easy financial business, which is our direct to consumer brand, has been around since 2006 as I mentioned before, it really started to scale in the early 2010s as we built out a branch network, we have approximately 300 branches, coast to coast. Those branches do nothing but direct consumer lending. They focus principally on two forms of lending, unsecured installment lending, cash lending, if you will, loans anywhere from $500 up to almost $28,000 unsecured with rates anywhere from around the mid-20s up to the to the mid-40s. We also do some secured lending, specifically home equity lending, where we are giving customers larger loans, up to as large as $100,000 in exchange for a collateral mortgage position on their property. And typically, we are often in second position, generally coming behind a major bank. These proceeds are typically used on the secured side, on the home equity side, for debt consolidation or home repair or renovation, and on the unsecured side, the funds are principally used for bills and living expenses, some debt consolidation and a few other sundry reasons. The lend care business, by example, is our point-of-sale business, unlike the Easy financial business, which is direct to consumer, where consumers are either applying for credit online or in one of our branches and effectively getting cash which they can put toward any number of purposes. With the LEND care business, we are supplying the customer with access to cash by paying the merchant for goods at point of sale. And we call those in the in the land care parlance, various product verticals as an example, those would be things like auto, power, sports, health care, retail. These are generally large ticket purchases where the consumer. Is at a point of sale and looking to transact, i.e., buy a product, and the merchant is in a position to offer financing through our lend care subsidiary, which obviously allows the consumer to walk out with the goods in hand, if you will, and if you will pay us back for the financing that is then given to the customer to be able to walk out with the goods that lend care business. As you pointed out, we acquired in the second quarter of 2021 it's been a great addition to our business. It operates also in the non-prime to sort of prime space, with interest rates ranging from anywhere from low or sorry, high single digits all the way up to, I'd say, around the mid-20s. So again, primarily focusing on the non-prime consumer, but at what we call merchant point of sale, or POS.

Rich Alterman  30:46

So kind of going back to the Annual Report, which I reread this morning before we got on our podcast, there was something that kind of struck me, and it said that one of the things that you guys are most proud of is your ongoing commitment to executing your mission of providing everyday Canadians a path to a better tomorrow today. So why don't you kind of elaborate on that? And I also read, and you could touch on this as well, Jason, that you've helped over 200,000 customers graduate to prime credit so far, and there's no doubt we were just getting started. So, with those things in mind, can you kind of elaborate on that mission and what it what it really means to your organization as a whole?

Jason Appel  31:29

Yeah, I mean, I'm really and I'm not the only one to say this, but I'm really pleased and proud to work for an organization that has a purpose beyond profit. We are a publicly traded entity, so I don't make any bones about the fact that we are in business to service our shareholders, who have a certain expectation around a rate of return that we as a public company can deliver. So, I make no bones about the fact that we are in business to earn income, but we do that in such a way that allows us to help a fairly large segment of the population get access to something that they can't through traditional means. And that's goes back to that non-prime consumer population, which, based on 2023 data from our partners at TransUnion, numbered about 9.3 million Canadians that have about 30 odd billion roughly, that have access to or have a credit report. These people often can't get credit in large doses from a bank, often because they've had an event in their past that prevents them from qualifying. It could be bankruptcy or an insolvency. It could be a life event that they simply weren't able to accommodate and had to default or perhaps not pay down all of their debt on time, in which case they're going to be very hard pressed to acquire credit from one of the traditional Big Five or large schedule one, tier one banks in Canada, they may be able to perhaps get some of that credit with some what we call secondary or schedule two banks and credit unions, but in some cases not very often, and maybe not along the lines of what they need in order to service what Their needs are, what goeasy does, and what we live by is we service that non-prime consumer, and our mission is to try and obviously offer them the ability to get access to credit. And we do that, as I mentioned before, by relying on our proprietary credit models that take more of a holistic view of the customer that a traditional credit score can't look at. We walk the customer through their credit report, we educate them about how to think about credit, how we think about credit, and we're very mindful by using a number of factors, like affordability calculations and the like, to try and set them down a path where we provide them with an amount of money that we believe, in most instances, not all that they can reasonably afford to pay back over time without impacting or damaging their credit. In fact, if they do that consistently over time and not get out in front of their credit by borrowing specific chunks of money, as opposed to having a large opening revolving line with definitive principal and interest payments that are pre built and pre authorized, then we can set them down a path of responsible borrowing through time, and that's all part of our mission to graduate. And it sort of is a cycle that feeds on itself as these customers get, in some cases, familiar with the idea of on time, regular payments, and yes, some customers are not familiar with that concept, that benefit really starts to have an impact on our overall credit now, all of a sudden, their credit score, their generic score, starts to move. Which is good for their ability. Should they want to see credit elsewhere? But from our point of view, as they start to build that credit experience with us, we can do things that can further aid in their ability. We can offer them additional credit, and more often, we can lower their interest rate. When I first started working at goeasy. We principally operated with one rate and one size loan, and our average loan interest rate was well into the 40s, upwards of near the maximum allowable rate at the time. Today, I'm very proud to say that we brought our average interest rate below 30% and that's been able to be achieved through this graduation process. Us by helping customers responsibly borrow money through appropriate credit risk assessment and calculation tools, and by working with them through our branch and frontline staff to remind them of the importance of credit and not to look at it as a simply a one and done type of activity. It's something that if they want to maintain access to through time, you got to kind of maintain things and prioritize how you treat credit and yes, you are going to get hiccups and bumps along the way. Our customers experience it, we expect it, we plan for it, such that when that occurs, we're not knocking on their door and demanding payment at all. Else, in some cases, we have to employ unique tools and methods that might delay our ability to recoup our cash on hand but gives the customer an ability to right the ship, rather than toss them out without a life preserver. And said, hey, look, there is something that that has come out that you hadn't anticipated. We're willing to work with you under these sets of circumstances. Maybe we have to adjust your rate, maybe we have to rethink your term, because it's all about trying to get you in a position where your payment is affordable. And what I think goeasy does better than most is that that's core to our DNA. It's embedded in our frontline staff. It's embedded in the way that we go to the market, on how we adjudicate and then ultimately collect our credit. And it very much defines us beyond just the fact that we generate earnings and high levels of returns for our shareholders. Because I don't think you can do that and feel good about yourself without helping these customers progress along the spectrum. And look, the reality is, not every customer is going to get there, right? We know that we publish that like we say, like, a third of our customers graduate to prime rates within one year of borrowing, and even more so after two plus years, we also say that, you know, 60% of our customers see their generic credit score improve inside of one year. Well, 40% don't, and two thirds don't. So it's still a mission that we believe, but it's still a mission that we continuously work on, because we're not done, and I think there's still more that we can do as an organization, but the fact that that remains front and center to our DNA, makes it more valuable, makes it more important, and it takes away just the transaction value of running a lending business. It's something I personally believe to and subscribe to, and it's one of the reasons I stay in the organization, because I'm committed to the things that they're looking to do.

Rich Alterman  37:18

I was looking at your investor deck. And I know you guys offer several ancillary services, and one of them is around financial education, and you offer a product called credit optimizer that works with a company called score navigator and TransUnion. Can you just maybe quickly touch on what that's about and how it helps your consumers?

Jason Appel  37:36

Yeah, it's basically a product. It's an optional product. I should point out first, the customer does not help to take it, but it's an optional product that gives product that gives the customer the ability to effectively monitor their credit on a month to month basis and to see the impact of decisions that they make regarding how they pay down that credit and what it means to their generic scores, and in certain instances, allows the Customer to engage in simulations to understand that, hey, if they run into a situation where they can't make all of their payments, how should they think about ordering those payments to produce the best possible outcome for their credit standing in profile? And while that may not necessarily work for all creditors, you know, when a customer's caught in a pinch, their objective and their goal should be to try and put themselves in the best possible position to maintain as much of their credit as possible. Credit as possible so that their credit profile is not damaged, and a tool like the credit optimizer tool gives them that capability and doesn't treat them as I said before, the borrowing of credit, as a oh, I'll just go in, borrow $5,000 and I'll make my payments when and if I can. Well, if I'm being honest, that's not responsible credit. If that was the money you were lending out, you certainly wouldn't want your customers to think that way. So having tools like credit optimizer and the goeasy Academy, which is effectively free consumer education that you provide, helps to teach those individuals to look at credit as a dynamic tool. It's not something you can simply set it and forget it. You have to come back to it. And yes, circumstances in people's lives are going to change and have impacts on their ability to repay at times, all the more reason to be mindful of what those impacts can have and not to be caught off guard, because, as we've seen before, and our customers have told us before, they don't like to be in a position where access to credit is denied, especially if they run into a life event where the need for credit becomes paramount, and again, going back to the emotive side of the things I don't ideally want to push our customers into a situation where they have to seek more expensive forms of credit which are available, which don't make it that, which don't make it easier for the customer to come back, not just to us, but to come back to the market and be able to access credit and much more traditional and perhaps affordable means. So that product is one of a couple of tools that we offer our customers, and certainly judging by the number of customers who utilize it, which we know about, we think it's a valuable service, and we think our consumers ought and should make use of it, because it is something we think that makes. Some better borrowers by doing.

Rich Alterman  40:01

So, one of the things that you touched on, Jason was the work that you and your group have done to drive down that average APR of all the products and loans that you have on the books. So, we know that the Canadian federal government has announced that it will be moving forward with a reduction in the Criminal Code, criminal interest rate provision, which currently sits at 47.2% which I think you mentioned, driving that down to 35% this coming January. Certainly, here in the US, there's been constant talk about a national rate cap of 36% it's something that, depending on who wins this election, I think it certainly can become more probable, and maybe we might follow suit with what we're seeing in Canada. So, I know the Canadian lenders Association, of which you're part of, had commissioned a study by Ernst and Young to perform a study on the impact that the reduction the APRC only might have on the Canadian economy, unemployment rates and borrowers. If you wouldn't mind, can you maybe share some of the key takeaways from that report, because I know you are certainly involved with it on the impact that a 35% rate could have. And sometimes I think we see where best intentions don't necessarily work out to be favorable.

Jason Appel  41:12

I think that's a good point. You know that report was issued by the CLA, I think, over a year ago, and like I said, I had the privilege to be a part of the group that helped put that together. That report basically concluded that depending on where the rate cap was put, I think, based, and I'm going from memory now, at about a 35 rate, we estimated that between three and 4 million Canadians would, in some way, shape or form, lose access to credit, largely as a result of lenders having to make adjustments to their credit tolerance levels. Because I think the thing people don’t, they don't realize, is that just because you reduce the federal rate down from x toy, the credit risk of the customers that borrow from you don't change, even if you can offer them a cheaper form of borrowing. Yes, that cost goes down, but the risk of default does not change, and especially if you're in a position where you want to continue lending money, it's not as simple as, oh, well, we'll lower the rate, and therefore the same individuals who got credit before can now get credit at a 35 rate. Well, I would tell you that if you offered all of your customers under a new rate cap of 35 access to the same credit, you'd see an absolute skewing of your population that would favor more high-risk customers. Why wouldn't you expect to see that any lender that's in the business of managing credit, I think, would have to think twice about not making alterations to their credit strategies, or that situation to come about. Now you could argue whether or not the three or $4 million or three or 4 million people is correct, and some people did, but there were several studies that were actually commissioned beyond just the one that was done by the CLA which in many, in many ways, corroborated or came very close to validating the same impacts. One very, very thorough, very thorough study was commissioned and issued by the folks at EY Ernst and Young, which, while they didn't come out with the exact same number, to just keep the math simple, still identify the risk to the to the non-prime consumer population as being in the millions. So whether it's 3 million or 2 million, we can debate and be happy to debate. But this wasn't about thinking that you could simply make an adjustment in lower the rate cap and not disenfranchise a group of individuals from being having access to credit. And I think perhaps the most interesting example of what that's done to certain markets is what we've seen take place in the United Kingdom. Now. They instituted a series of adjustments to credit, not perhaps to the same degree as that which is being contemplated in Canada and also, by extension, the United States. They managed to reduce some fairly significant forms of what I'd consider to be very high-cost credit, and then the process of doing so disenfranchised about 30% of the consumers, based on some recent studies that were issued. You know, my concern about the same activity on the part of the Canadian government is, is, while I understand why they're looking to do it, who doesn't want to lower the cost of borrowing for customers, if it comes at the expense of disenfranchising a bunch of people who are already considered to be on the margin in terms of their being able to access credit. And if those creditors, or if those lenders, rather, are giving that credit out under a fairly robust regulatory regime, which I think we are, which include disclosures, then I struggle with the need of what bringing the actual rate down to 35 actually accomplishes, other than disenfranchising a whole bunch of people that need access. Now, I'm sure the people who would take the opposite side of the arm and say, Well, you're a predatory lender. You shouldn't be lending at these interest rates. Your disclosures aren't good enough. And I would say, Sure, I think we could always do better at what we do, but at least in goeasy's case, we don't lend money without affordably calculating whether or not our customers can afford the lending payment. It's not that they simply have a good enough credit score, and we think, Oh, we're going to forget all the debt that you have and just lend because you happen to have a score of X. No, that's not what. We do, or you happen to have an asset worth y at least in the goeasy example, and I don't believe we're the only creditor that our lender that lends on this basis, we calculate based on borrower credit and borrower affordability both have to work for credit decision to be positive where we are choosing to lend money, and the fact that we now have to constrain or constrict a portion of people who can now no longer get that money, I think is going to be to the detriment of these individuals, because they're going to look for other sources of borrowing, like payday loans, which are not regulated by the federal government in Canada, which are far more expensive in lending hundreds of percentages of APRs as compared to the APRs of 35 to Call it 60% that we tend to operate in now and then, worse off, they can also seek to avail themselves of other more notorious forms of lending, like pawn brokering and loan sharking, which are even more expensive and can sometimes kind of come under more costly circumstances that we just don't think are in the best interest of consumers. So while we're obviously going to comply and follow the government's mandate, which comes into effect on gen 120, 25 120, 25 I do think it's going to come to the detriment of a portion of Canadian consumers, whom we have proven that if you can manage and lend to them responsibly, a substantial group of those individuals will do right and reenter the prime borrowing space and be better borrowers, and Ultimately, we have a better and more robust economy as a result of that, but now those groups of individuals won't have that access, and I think that's unfortunate.

Rich Alterman  46:28

Well, thanks for that, and for our audience listening today, if you go back to our April podcast that we did with the CEO of Wanga in South Africa, he actually wrote an op ed called the growing divide South Africa's financial exclusion crisis. And it touches on a lot of these points that Jason made. And it's actually a good, good thing, I think, to read through and kind of tie back to some of the concerns that the CLA has raised and others about the rate cap. And the same thing will happen. We certainly read the same articles here in the US, so we'll see where that goes. But it sounds like you guys are well positioned to deal with those changes. So, keep an eye on the time here. We're getting close to the bottom of the hour, and I think Jason, you and I could go on for a lot longer, but we're not going to have that pleasure today. So let me quickly touch on some regulatory questions. You know, in the US, we have lenders that are regulated by at the national level. We have lenders that are regulated enforced at the state level. Just quickly. How do you work within both the federal construct and a provincial construct from a lending perspective?

Jason Appel  47:35

Yeah. So, in the Canadian market, the federal government, save one exception, sets the maximum of allowable interest rate, which organizations like ourselves are obligated and required to follow. It's actually better than the Canadian criminal code. So, if you actually lend above that threshold, it is a criminal offense punishable under law. The federal government sets that rate allowance. That rate cap, which is as you mentioned, is now moving down to a 35% annual percentage rate. The only province that kind of works a little differently is our good friends in the province La Belle Romans de Quebec, they have operated with a 35% rate cap for a much longer period of time, which they accompany along with a licensing regime. In other words, you cannot issue credit in the province of Quebec without complying with that rate cap at 35 which we have been doing since we've been in Quebec since 2017 so that's the only province that has actually had a different rate threshold than all of the other provinces in Canada. And now, ironically, they're, they're somewhat, if not almost completely, there will be aligned with the Canadian average, but all the other provinces sit slightly above that level, and that will be harmonized at 35 but the disclosures and the way in which we are obligated to handle credit are very much managed at the provincial level, on both secured and in unsecured lending. To take an example, our home equity business is very much managed by provincial regulation and legislation, where in some cases we require licensure. In other cases, we don't. Our disclosures vary, the way in which we go to the market, how we get customers to sign docs vary. What goes in those docs varies. It's a little different on the unsecured side, where you still have provincial regulation and licensing requirements. In Canada, we've seen a number of provinces adopt what are called high-cost credit regimes. While these don't prescribe a new rate cap, they do require lenders, such as goeasy, follow a higher level of disclosure than what would otherwise be standard in our documentation, and also, in some cases, can impact how we go to market with and sell and celery products like the credit optimizer product you mentioned before, which as well as other products like our loan Protection Plan, which is a form of creditor insurance, and our home and auto plans, which offer customers protection from a variety of areas, including roadside assistance and whatnot. So, it's very much a dual overlap response. Ability, where the federal government tends to play in the area of rate cap ownership and setting, but the provincial governments very much regulate how we go to market and how we behave. We don't have perhaps a somewhat more confusing setup that you have the United States, where depending on what kind of bank you are, what kind of charter you are, you could fall under a variety of different government institutions and regulatory authorities, both consumers driven and non-consumer driven. So, I think we might have it somewhat easier in the Canadian market than the ubiquitous setup that you have stuff on the board just from a nuanced standpoint.

Rich Alterman  50:36

Certainly here in the US, when the consumers declined for a loan, there's an obligation for the lender to disclose the reasons for that declination. Can you share what type of responsibilities that you have in Canada as far as disclosing to a declined app?

Jason Appel  50:53

Yeah, there's nowhere near the level of requirements in law, to my knowledge, which requires us to provide consumers with detailed reasons for why they are declined for credit. There is no obligatory reason for the most part. That's not, however, how we handle it goeasy, and there's a fine line here. Because as we think about reasons why you can be declined for credit, as I mentioned earlier in the podcast, really will decline credit principally for one or two reasons. Just to keep it simple, one, your score is below our minimum tolerance threshold, or your score might be great, but you've got too much debt, and giving you more money will actually make it very hard for you to pay the debts you have and pay us back over time. What we try to do at goeasy and it's tough for reasons, which I can get into if necessary, is, you know, most of our models, we provide what we call risk factors to our frontline staff, so when they get a credit decision that's automated in the in the loan origination system, outlining whether a customer is good for credit, and if so, how much and then what interest rate, if they're declined for credit, or even if they're approved for credit, we'll try and give them three or four Risk Factor indicators which will help inform them, to inform the consumer of why the credit decision was the way it was, whether it was an approval with money, an approval with no money, or a decline. And the thing we have to be mindful of is because so many of our credit models, in fact, all of them are proprietary and use customized attributes and data, you have to be very careful how you explain to customers why you've made a decision to decline them. If it's due to affordability, that's a little easier. Hey, you've got this car loan. Hey, you've got these four other unsecured loans, and based on the income you've now given to me, which I validated, you don't have any room left over to borrow. That's a very easy message to give to a consumer, but if they don't have a lot of debt, the debt that they do have is not being very well managed. Now, you have to find a way to provide that insight, but with enough tangibility that a customer can go away and say, Okay, what if? What if I could make some changes to the way in which I manage credit? What if I paid down this trade, or what if I didn't take it another trade, or reduced my open to buy on a credit roll, falling trade. Those kinds of things can and do influence, in some cases, how we adjudicate credit, and that's where we rely upon two things. One, we rely upon these risk factors that some of our models throw off to help provide our frontline employees with talking points that customers can understand in a language that they can understand. We're not going to give them attribute values and binge numbers. That's all gobbledygook to a consumer. But we can say things like, hey, we've noticed that you've acquired a number of new mortgage trades. Or, hey, the number of inquiries on your bureau is really high. You need to do these things to be in mind of how to be mindful for credit moving forward, when we can provide that along with the actual review of the credit the customer's credit report, which we do take the customer through, once we have their consent to pull that report, which is required in Canada. Now we can have a conversation with customers about how to manage credit. So even in instances where we're giving them a decline and as much as it's not the reason or the answer they want to hear, at least we can hopefully empower them to think about how to manage credit going forward. And we actually run a number of programs where, because we get the customers consent to pull their credit at the time they are adjudicated, and for a period of up to one year thereafter, we can come back and look at their credit post origination, or in this case, post decline. And in many instances, we go back to those same customers where we have seen a marked improvement in their credit, and we can preapprove them without having them go through the same degree of stress or worry. Should they be interested in borrowing at some point in the future? So that's kind of how we do it.

Rich Alterman  54:28

Oh, great. So, one of the nice things about being the host of a podcast is that you could have some selfish plugs. So GDS was honored to be named the 2023 vendor of the Year by goeasy, a wonderful recognition of our decade long partnership for all the great third party vendors that support goeasy during the course of any given year and those that are wanting to do business with you in the future, can you share some of the key attributes that you look for in the vendor partner that you work with?

Jason Appel  54:56

Oh, what a great question. I would say it's been really interesting along these 10. Bless your journey now, which we celebrated, as you kindly reminded me earlier this year in the month, I will point out that you reminded me so good on you for doing that. You know, if I think about what led us to partner with GDS at the beginning, we made the move to go to automated decisioning with GDS. At the time, we were also rebuilding our loan application management system, which we conveniently call lambs for short. And some of some of the people on your podcast may know that I had a thing for acronyms, and I tend to use them quite often. So, I'm very happy that GDS is three letters and not a long overdue I'll just point that out. But at the time we made the decision to go to GDS, we were looking for a partner that was or and could be entrepreneurial. We were a business at that time that was a lot smaller than we were now, and we were really looking for someone who was really willing to partner with us and be very creative and thoughtful and maybe even a little bit unorthodox in allowing us and enabling us to scale our business. And there weren't a lot of providers at the time in the market that we looked at that had that posturing, and that could back that posturing up with a delivery support service that we could rely on. And that's not meant as a, as a as a criticism to some of the big players who remain and are still in that business, but we were small. We were going to get the attention of a large player at the time, and we certainly weren't going to be able to afford to pay for it. So what GDS offered us at that time was a very fair price for a very interesting journey to partner and collaborate with a company that, in some way, shape and form, was still figuring out how to perfect the business of credit adjudication, and that really appealed to us at the time. So fast forward 10 years. We're not that same company, neither is GDS, and I would say, while the essence and the desire of those same attributes still hold true, you know, what we look for now has evolved. Sure, we want all those things. We still want entrepreneurialism; we still want creativity and collaboration. We certainly get that in droves with GDS, but now that we're a $4 billion portfolio based on our q2 results, we're just as mindful of protecting what we have in so far as growing what we don't have, which causes you to look at your partner relationships, I think a little differently. You still want to collaborate, you still want to partner, you still want to be creative and entrepreneurial, but you also want to have people that are good stewards and supporter and stewards of your business, and sometime that just means making sure that when the lights get on, they stay on, and if they happen to flicker, they don't flicker for very long. Because when you're a business of our scale and size, there are lots of others that are bigger than us. In the States, you don't want to be spending time having to worry about businesses, when things go wrong, when things don't work, or when things break down. And I will say with a fair amount of pride, and I think the folks at GDS should share this is, you know, we have a lot of partners that we work with and have worked with over the years, and I can count on the number of times on one hand where we have run into issues with our with our automated decisioning, with GDS, while you might argue, well, yeah, you're paying for that. That should be the expectation. It's one thing to hold that as an expectation, and it's another thing to say that, hey, in a decade, we've not had major outages or significant disruptions or issues that have caused us to have to question the integrity and the stewardship with which the partner approaches the business. I would say that when you become a multi dollar, multi-billion dollar company with global aspirations, I want to be in bed with partners like that all day long, who have the same stewardship and respect and regard for the business that we're in, that we have. And as you become bigger, I think that just takes on a much more significant importance than just the need to scale. And I think GDS has really helped us in that regard. And it's something that I now value a lot more than I did when we were a $200 million loan book. Now that we're a $4.2 billion loan book, that just becomes that much more important. And it's hard to really find partners like that, because you got to kind of go through the ups and downs, the ins and outs, and we've been through those, to be sure. But the fact that we can call that a, as a as a hallmark of our relationship with a partner like GDS is not something I take for granted. So, you know, kudos to the organization. And among other things, that's the reason why 10 years on an organization like yours rises to the top of the charts when it comes to being a partner of choice.

Rich Alterman  59:25

Thank you, and thank you again for the recognition. So, this is Rich alternate we've been syncing up with Jason Appel, Executive Vice President, Chief Risk Officer of goeasy limited. Thank you, Jason, for joining me today and providing some background on goeasy, the Canadian lending market and sharing some of your thoughts and techniques in relation to credit risk management. And thank you once again for being a great partner. We hope you've all enjoyed the podcast. Please stay connected with GDS Link and the lending link to listen to future podcasts and catch up on the ones you've missed. Thank you and make it a great day. Thanks for listening. If you've enjoyed today's episode, please be sure to subscribe on Apple, Spotify, Google. Or wherever you listen to your podcasts and be sure to leave us a review. Follow us on LinkedIn and connect with us on Twitter at GDS Link that's at GDS L I n k. Have a question for the show, or have a specific topic you want us to cover, hit the link in the description to drop us a note. Thank you for lending us part of your day. Make it a great one.