Will the Credit Union Bonanza End?
Credit unions have handily captured volume in recent months while banks and captives cut back auto lending operations. Ypsilanti, Mich.-based Community Driven Credit Union, for instance, has originated $10.5 million of auto loans this year, up from its norm of $3 million. And Peoria, Ill.-based Citizens Equity First Credit Union accounted for 22% of the auto loans in a 15-county area in central Illinois — more than the next five lenders combined. Multiply those figures by 8,000 credit unions nationwide, and the numbers start to add up.
Put simply, credit unions gradually gained marketshare primarily because they had money to lend at a time when others didn’t. According to third-quarter data from Experian Automotive, auto loan outstandings at credit unions grew 3.4% from 3Q08, while they fell 22.7% and 5.4% at finance companies and captives, respectively. Bank volume remained steady, with a 0.4% increase.
The tide is changing, though, as capital is slowly restored to banks and captives. What remains to be seen is whether the credit union relationships that have strengthened in the past 12 to 18 months will hold tight. Will consumers who financed purchases with their credit unions a year ago turn to the same institutions the next time they need loans, or will those customers once again be lured by the low rates offered by other financiers? Will the credit union gains start to erode?
I remember e-Trade bank and HSBC offering rates around 4.5% a couple of years ago. Would they be able to do that today?
It will be interesting to see how the portfolios of the credit unions perform, and if they priced their loans to cover the risk of their non-prime paper.
Over the past 18 months, credit unions have had an opportunity to step into the auto finance arena and provide a product to dealers at time when more traditional lenders pulled back. That contraction also gave credit unions the opportunity to build working relationships with dealers that could contribute to their sustainability.
Outside of subvention, dealers drive a large portion of ‘finance institution’ decisions for consumers. So beyond the question of whether customers will be lured by lower rates is whether or not dealers and credit unions have forged relationships that will continue forward even as other financiers return: will F&I people be able to make enough money that they continue to push business to the credit unions.
Credit unions responded to the dearth of credit available in the consumer credit markets by offering financing for automobiles when banks and finance companies were running away from dealerships like a herd of deer being chased by hungry bears. When GM and Chrysler were on financial life support in bankruptcy awaiting a transfusion (or injection) of money from the US Government, credit unions were providing financing to consumers with low interest loans through dealers to keep the auto industry sales moving and the industry from collapsing. It will be very interesting to see if the auto industry and the dealership community will remember the credit unions that were there when things were tough and continue to build and sustain the relationships that were forged during the credit crisis. Credit unions still have the spirit and liquidity to lend, so let’s see how much the dealers will continue to support those credit unions now that the credit freeze is beginning to thaw and more banks and finance companies enter into the indirect lending markets.
This is a great opportunity for the Credit Unions. They were there when other institutions were not. Considering that now they have increased their memberships these members are typically fiercely loyal to their membership. I believe that you are going to have more savvy consumers on the market and the dealers are not going to have much choice with these particular customers in the future. The market is not going to be rectified overnight and the Credit Unions will continue to eat up this market share.
I agree with Laurie. It will be very interesting to see how the lease portfolios perform. Not only are they upside down on the residuals they bought quite deep. I estimate they will have significant losses on all lease portfolios.
Curtis — Is leasing common among credit unions? I thought they focused more on loans.