Credit Unions Jockey for Marketshare

As used-car financing gains popularity and banks shy away from new-car loans, credit unions are jockeying for marketshare, partnering with service providers and teaming with other lenders
to spark auto loan interest.

“[Banks are] making a lot of moves that are making it easy for us,” Chris Whittaker, director of lending services at Oregon Community Credit Union, told Auto Finance News. “You’ve had big players that have pulled out and placed their capital elsewhere, the reduction of new-car sales, and you’re seeing [lenders] scaling back production overall.”

For instance, Wells Fargo Auto posted a 14.3% decline in its auto portfolio last year — to $53.4 billion, its lowest level since 2013. As a result, the bank fell three spots to No. 8 in the Big Wheels Auto Finance Data 2018 ranking of the nation’s top 100 car lenders and lessors. Ally Financial Inc. dropped one spot to No. 2, on the heels of a 0.6% portfolio decline. Another 17 lenders posted portfolio decreases last year, according to Big Wheels, and credit unions have capitalized on those declines.

Credit unions have grown their share of the auto finance market faster than any other segment. In 2017, credit union portfolios grew 15.1%, compared with 12.9% at independent finance companies, 5.9% at captives, and 0.5% at banks, according to Big Wheels. In fact, by institution type, the number of credit unions rose to its highest level — 51 of 100 — while the number of banks dropped to its lowest level — 29 — since 2011.

“We are seeing a year-over-year increase in originations,” Joe Pendergast, vice president of consumer lending at Navy Federal Credit Union, told AFN. “We are going to increase auto originations by probably 11% this year. The last couple of years we have seen double-digit increases.”

One method Navy Federal has used to scout new customers was to form a six-month pilot with CarFax back in January, which allows credit union members to obtain as many as 10 free CarFax reports a month for six months. “Usually it’s $39.99 per report, but they can get it for free,” Pendergast said. Already, nearly 50,000 reports have been pulled, generating 500 loans — some $8.3 million of originations.

America’s First Credit Union posted record volume last year, driven, in part, by a pass-through program that enabled it to buy deeper than its normal credit tier. “While we do not specifically target new or used financing, we have strong relationships in our indirect program that has provided a record year in auto lending,” said Bob Jaffe, indirect lending manager at
the Birmingham, Ala.-based credit union. “This program has provided competitive financing to our community that may not have qualified for our standard program,” he said, declining to name the pass-through partner.

Additional volume has been spurred by a partnership with an “after-hours underwriting source that allows our dealer-partners to receive decisions 24/7,” he said.

Navy Federal credits technology initiatives with boosting growth, specifically citing the credit union’s mobile app. “You can get approved in minutes and sign electronically,” Pendergast said. “Our customers want convenience.” The app was launched in October 2016 and currently accounts for 33% of all auto loan applications completed.

A Shifting Mix

As a group, credit unions have increased originations 25% since the first quarter of 2015, according to Experian’s 2017 State of Credit Unions report. Specifically, credit unions originated 1.9 million loans in the first quarter of 2017, compared with 1.5 million loans two years prior. But with new-car sales volume slipping last year for the first time since 2009, some credit unions are adjusting their loan mix.

“After many years of record-setting auto sales, fewer consumers are heading to dealers to purchase a vehicle, leading to a decline in the need for a loan for their purchase,” said Mark Coburn, senior vice president of lending development at State Employees’ Credit Union in North Carolina (SECU). And while, for some, this preference has reduced new-car financing portfolios, it has also bolstered used-car volume.

At America’s First Credit Union, used-car financing accounted for 49% of the 2017 portfolio, compared with 48% in 2016. On a unit basis, the number of used vehicles financed increased 21%, Jaffe said.

“We will continue to attract used auto financing through our indirect channel and various promotions throughout the year to attract [refinancing] opportunities,” he said.

Consumers are leaning more toward used vehicles because relatively high inventory levels have pushed down pricing, especially relative to new cars. The average new-car price was $35,285 in March, up $703 year over year, according to Kelley Blue Book.

“The more supply, the lower the prices are going to be, and that’s what we are seeing, and our members are taking advantage of that,” Navy’s Pendergast said. “Dealerships are helping with that through CPO programs, free maintenance, and plenty of advantages of buying a used car. I am not going to pay a lot per month, it’s going to be gently used, and there’s roadside assistance.”

Off-lease vehicles are an attractive option for vehicle purchasing, SECU’s Coburn said. There were 3.6 million off-lease vehicles returned last year, up 8.1% from 2016 according to Cox Automotive; this year, that figure is expected to rise another 7.4% to 3.9 million.

“We are starting to see that shift from new to used, and that will continue to play out, we think, in 2018; more people are leasing today because a lot of consumers can’t afford a $50,000 or $60,000 new car,” Pendergast said, adding that Navy Federal members are taking advantage of the dealership offerings that come with used vehicles right now.

Navy Federal Credit Union’s used-car mix increased to 56% of its overall portfolio in April, compared with 46% in the prior-year period.

“Our members primarily finance used vehicles and are looking for ones that are in good condition with low miles,” he said. “Most off-lease vehicles typically meet these requirements.”

Navy is “bullish” this year about U.S. auto sales, Pendergast said, expecting another year close to 17 million new-car sales. “There’s lot of opportunities and choices for our members to find a nice car,” he added.

Still, some credit unions are cautious about actively pushing used-car finance penetration. Oregon Community Credit Union’s portfolio is split between used and new vehicles, with no specific plans to change its strategy.

Meanwhile, Navy plans to let things happen more “organically,” Pendergast said, because there’s a natural course the market is taking. “We want to increase our total vehicle financing in 2018, specifically focusing on new vehicles, as we have seen more of a decline in this type of financing than that of used vehicles,” Coburn said, specifying that SECU’s used-vehicle loan origination fell to 20% from 25% in 2016.

“Our challenge, like that of our fellow lenders, is how to counteract this decline when consumers are not purchasing cars as readily as they were a few years ago.”