AUBURN HILLS, Mich. - A decision by one major auto manufacturer’s financial arm to cease vehicle leasing could open up opportunities for credit unions to recapture lost market share in the auto loan sector.
In another sign that the credit crunch has spread far beyond the real estate market, Chrysler Corp shut down its leasing business at the end of July and two major banks–JPMorgan Chase and Wells Fargo–also started backing away with the former stopping applications on Chrysler vehicles and the latter getting out of the game entirely. Ford and General Motors also posted huge losses from their leased vehicles, and U.S. Bank recently announced that it was no longer accepting used vehicle leases.
“They are looking for ways, desperately, to improve their situation to survive,” NAFCU economist Katrin O’Connor said of both the automakers and the big banks. “I think it definitely could mean an opportunity for credit unions.”
“Anytime someone gets out, it creates an opportunity for somebody else,” agreed Rex Johnson, founder of Lending Solutions. “But the real question is if it is a good business to be in, why are they getting out? You have to ask yourself that question, too.”
Not only have high fuel prices destroyed demand for new SUVs, but they have also triggered a cascade effect on such vehicles that are already out on the road. When lessees return their big trucks, the dealerships are finding themselves stuck with vehicles that are only worth a quarter of the original MSRP, far less than first anticipated.
“(Automakers) cannot predict the residual values of these vehicles given that gas prices have killed the values of trucks,” said CUDL President and CEO Tony Boutelle.
Credit unions that are involved in the leasing business should not panic, insisted CULA vice president of business development, Greg Gandolfo, pointing out that CULA’s portfolio is well-diversified and has its greatest share in automakers like Honda, Hyundai and Toyota, all of which have done well in the current fuel crisis.
“Auto loans have been a staple of virtually all credit union loan portfolios for decades,” Gandolfo continued in a statement. “The banks and finance companies that offer lease financing have also relied on the income tax benefits that a depreciating lease portfolio affords. The banks and finance companies have offered lower than market interest rates to attract more lease transactions to gain higher tax benefits, which allow them to offer lower interest rates an the loop continues. With credit unions’ exempt tax status, our partners do not have to play the loop game.”
Another issue car manufacturers, dealers and financers have to deal with is the general economic slowdown. After a brief bump spurred by tax rebates earlier in the year, consumer spending has been tepid of late, leading to an overall drop in auto sales.
“A lot of people are just fixing the cars that they have. People are just staying in their cars and trying to wait this thing out,” said Boutelle, insisting that now is the time for credit unions to try to grab a bigger share of the financing. “There are fewer of them, but we should be able to take some of the market share.”
About 55% of all vehicles are sold through traditional financing, Boutelle said, but that number should jump much higher as the lease share of the pie, about 20%, plummets and the cash sales decrease as well. Many cash sales are financed through home equity lines of credit, which are obviously becoming exceedingly difficult to obtain thanks to the housing crisis.
“The equity (consumers) had in their homes is gone pretty much, so they have no way to borrow there, so they have to go with a traditional loan,” Boutelle noted, adding that CUs could capitalize on that development by making the public more aware of their presence. “If there is a brand that credit unions are known for, it is auto loans.”
Boutelle believes that up to 70% of new and 90% of used cars will be purchased with traditional financing in the coming quarters–and with major lenders, including captive financers becoming ever more wary of handing over money, credit unions could have a unique window of opportunity. The CUDL CEO encouraged CUs to step up indirect lending efforts by establishing a greater presence at the points of sale.
“If you are going to make more loans, you need to have a relationship with the dealerships,” said Boutelle.
“Just by putting themselves out there and showing their competitive rates, that’s already a big step forward,” added O’Connor.
Johnson sees the next two years as being absolutely critical to credit unions as many of their members can no longer afford the gas-devouring vehicles they own or lease. Obtaining indirect loans is not difficult, he noted, but making money on that enterprise is exceedingly difficult.
“Now if they can re-price it in a way that they can make money and bring in more members, then it is a wonderful deal,” Johnson said.
With more and more members turning in their keys and accepting a repossession on their records, Johnson suggested credit unions come up with creative financing measures that delay payments or restructure them to stretch out as much as ten years to make it through this transitional period where consumers move from SUVs to sedans and compacts.
“Over the next couple of years we are going to help our members get out from under the gas guzzlers but let them buy a new, economical car,” said Johnson. “You’re going to have to offer special financing, and you’re going to have to stretch out the terms. I think there is a huge opportunity now if you’re willing to take the risk.”(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com http://www.sourcemedia.com
