Before the great recession, credit unions never offered much in the way of competition to the national lenders in the indirect auto space. Vehicle loans were available only as a “defensive measure” to maintain credit union membership, said Michael Cochrum, vice president of analytics at CU Direct.
But that all started to change as the larger national lenders started to pull out from dealerships in the wake of the recession back in 2009.
“That’s when credit unions woke up and said, ‘Hey, there is an opportunity here,’” Cochrum told Auto Finance News. “That’s when they really started to entrench themselves in the business.”
Lenders of all types, shapes, and sizes have grown since the recession, culminating in the second consecutive year of $1 trillion of auto loans outstanding in 2016. However, first quarter year-over-year origination declines from earnings reports show that the pullback has begun: Chase Auto Finance’s originations were down 16.6%, Santander Consumer USA saw declines of 21%, and Wells Fargo Dealer Services saw the largest dip: 29%.
“We’ve got decreases in volume because we’re holding the line on all the structural elements we think are appropriate for long-term success,” Santander Chief Executive Jason Kulas told AFN, citing increased delinquencies and losses as a reason for the pullback. “We want to be in every part of the credit spectrum, but we’ve just gone through a period where in many parts of that credit spectrum things have just been really competitive. We’ve had to watch more than we like, but we’re more than willing to do that when it’s the right answer.”
Yet, one bank’s pullback is a credit union’s gain.
“It’s a matter of opportunities that were not there before, but are there now, and we’re going to capitalize on it,” said Michael Williams, director of consumer lending at American First Credit Union.
Credit union marketshare in the auto finance space grew to 24% in the first quarter, compared with 21.3% during the same period last year, according to CU Direct’s State of the Credit Union Auto Lending Market report. Furthermore, credit unions grew 4% in marketshare quarter-over-quarter, while banks fell 5% and captives grew 14%.
“We’ve had a great start to the year, six months through the year now, and our origination volume is doing much better than we originally budgeted,” said Joseph Pendergast, vice president of consumer lending at Navy Federal Credit Union. “We’re not too surprised by that. We’ve seen this trend for the past several years.”
Navy Federal continued its streak as the largest credit union in the U.S. with $11.5 billion of auto outstandings in 2016, up from $10.9 billion the year prior, according to Big Wheels Auto Finance 2017. Other regional lenders, such as The Golden 1 Credit Union, saw gains of more than $1 billion in outstandings year-over-year to reach a portfolio size of $3.8 billion in 2016.
Low Delinquencies, Low Yields
There is a reason the big banks are pulling back. Many started to feel they had extended credit criteria out too far — longer loan terms, lower Fico scores, and higher loan-to-value ratios — which has resulted in record-high subprime delinquency rates on the secondary market and rising losses and delinquencies across the board in first-quarter earnings.
That leads to the question: Are credit unions doing the same?
“From my perspective, we’re not seeing rising delinquencies,” Jade Beckman, vice president of consumer loans at Mountain America Federal Credit Union, told AFN. “If anything, when our delinquencies are as low as they are, it makes us question if we’re taking sufficient risk.”
Credit unions collectively have the lowest delinquency rates in the industry, at 1.21% of loans and leases 30 days past due, compared with the industry average of 1.96%, according to Experian’s latest State of the Automotive Finance Market report. Credit unions don’t report public earnings, but every company AFN spoke with agreed delinquencies remain historically low.
Balances at Salt Lake City-based Mountain America are comprised of about 80% prime and super-prime loans, despite the lender striving to be a full-spectrum provider, Beckman said. That’s consistent with industry data that shows credit unions have the highest average Fico scores, according to CU Direct. However, low delinquencies and banks pulling out of all credit tiers have prompted some to venture down the credit spectrum.
“We feel if we’re too top-heavy, then there is a certain segment of our members that we’re not serving appropriately, and, of course, we have to manage risk and be smarter about it,” Beckman said. “The pressure to keep rates super-low puts pressure on your [profit] yield, and if we’re too top-heavy it’s a double whammy as yield goes.”
Those market pressures to keep rates low aren’t coming from banks though. Other credit unions comprise a majority — close to 60% — of the Utah market, he added.
However, Navy Federal and Space Coast Federal Credit Union said they don’t intend to expand down the spectrum, in part because there’s less incentive for credit unions to chase riskier high-yield loans. “The big banks have shareholders to answer to, and we have our members to answer to,” Navy Federal’s Pendergast said. “We put it back out to our membership with better products, better service, and lower rates, that’s what the credit union culture is all about — giving back to the membership.”
Melbourne, Fla.-based Space Coast Federal has grown its portfolio to $4 billion this year by maintaining consistency, even when the potential profits were tempting, said Gary Prager, vice president of consumer sales and investment services.
“Sure, the getting probably was good for the last couple of years, and maybe our yields didn’t look as good as the rest of our competitors,” Prager said. “Well now, guess what? They are having to move back, and we’re staying as steady as a rock. That’s always been our approach. We’re not going out for the big cash grab when it’s there because we know what it leads to; it’s short-term success and not a long-term vision.”
Of course, there are still areas of strain to watch for — namely extended loan terms and LTVs.
The rise of leasing and its attractive monthly rates have caused many credit unions to extend terms to create a “lease-like product,” CU Direct’s Cochrum said. However, with delinquencies as low as they are among credit unions, he believes this risk is manageable.
Many credit unions actually have lower loss percentages for terms over 72 months than they do for terms between 60 and 72 months, he said. “That’s primarily because the underwriting terms are more restrictive for the extended terms, so as long as credit unions maintain a more restrictive longer term program, they should be OK.”
Every credit union AFN spoke with extended loan terms to at least 84 months — Navy Federal includes a 96-month product — but all were on a limited basis. Mountain America’s Beckman said 84-month loans make up 10% of its portfolio.
“We’re doing well as far as performance goes, and it all comes down to how confident you are in your underwriting parameters, and we’re very confident that we’re underwriting the right loans,” Navy Federal’s Pendergast said.
One area of stress that has not been given enough attention is LTVs, Cochrum said. “Credit unions have not traditionally priced and decisioned their loans off of the LTV,” he said. “Primarily they have done it off of the risk score. When we look at losses — not necessarily defaults or delinquencies — we look at actual losses, we know that the LTV plays a significant role. Since credit unions haven’t been pricing for that additional risk, we’ve been encouraging them to do so.”
Since credit unions skew heavily into the used-vehicle market — 72% of originations, according to CU Direct — many lenders are expecting even greater marketshare as consumers turn toward off-lease vehicles that are flooding the market and depreciating prices.
Even without all these market forces working in favor of credit unions right now, Space Coast’s Prager believes regional lending arms like his have become robust competitors in the auto lending space and will only continue to grow, with or without pullback from the banks.
Prager has heard the idea floated that credit unions will grow to fill the void left by banks pulling back and said, “I actually think it’s a little bit insulting to credit unions. We’ve been growing without banks pulling out, and we’ve been competitive for quite some time.”Like This Post