While subprime credit woes and an anemic economy are hurting many auto lenders, a number of credit unions are finding an opportunity to throttle up their auto finance business.
Though credit unions are not immune from the market contraction, they are poised to capitalize on the capital constraints stifling captives and independent lenders.
So far this year, credit unions have increased their stake of the auto lending market to 20.8% in September from 15.8% in January, according to AutoCount data from Experian Automotive. Credit union marketshare in September 2007 was 17.8%.
While credit unions accounted for about 17% of auto loan originations nationwide last year, these nonprofit financial institutions have become the dominant players in many areas of the country. Credit unions have become the top auto lenders, and command more than one-third of the market, in Alaska, Hawaii, Oregon, Utah, and Washington.
Many credit unions, less affected by indirect delinquencies and chargeoffs than their bank counterparts, are still aggressively pursuing auto finance borrowers. And, in turn, many of these bank-burned borrowers are much more interested in seeking financing from the credit unions.
“There’s a lot of opportunity here for credit unions, [especially those] not taken in predatory or high risk lending,” said Aaron Bresko, vice chairman of the CUNA Lending Council and vice president of lending at BECU, of the nation’s largest credit unions. “For many people, credit unions are a flight to safety.”
Bresko admits that loan volume is off 20% at in Tukwila, Wash.-based BECU this year. However, while the negative equity on trade-in vehicles presents a challenge, he believes credit unions will gain marketshare over the next 12 to 18 months by providing competitive rates and focusing on prime borrowers, who are often already members.
Navy Federal Credit Union, too, is “still doing better than the market… after two years of exceptional loan volume and loan growth in 2006 and 2007,” said Jerry Turner, manager of consumer loans for the Vienna, Va.-based credit union, which has $35 billion of assets. While Navy Federal is experiencing a more than 15% decrease in auto lending so far this year, auto loans still account for about two-thirds of the credit union’s consumer loan portfolio (not including mortgages or credit cards), Turner added.
Credit unions will likely step up originations as other financial institutions cut back, said John Worthington, senior vice president for Security Service Federal Credit Union, in San Antonio, Texas. Some banks have been forced out of the auto finance business because of the recent financial climate, while captives have been crippled by their automaker parents, he said.
Cost of funds will also play a part in credit unions’ ability to capture marketshare. It costs a credit union an average 3.38% to make an auto loan, compared with 4.72% for banks and 5.12% for captive finance companies, according to data culled from the Consumer Bankers Association and the National Automotive Finance Association and compiled by Credit Union Direct Lending.
“GMAC and Ford Motor [Credit Co.] have a problem with liquidity,” Worthington said. “[Credit unions] have strong relationships with dealers in the markets we operate, which we’ve built over many years. They know we’ll be there when they need us.”
Given the current economic picture, even the credit unions that are deeply committed to sticking with and growing their auto lending business recognize that times are tough. “We’re realistic about the [auto lending] market for this year and next,” Turner said. For one thing, Navy Federal has increased its direct marketing of preapprovals to members, he added.
And, as many credit union executives see it, auto lending is more intrinsic to their organization’s mission than it is for other financial institutions. “It’s in our name,” Bresko said. “What we do best is credit, and auto loans are what we’re known for.”
—Karen Epper Hoffman