Auto Sales Strong, But Views Differ On How CUs Can Capture Loans
COLORADO SPRINGS, Colo.-Strong auto sales in 2011 may not be the tonic to cure lending ills at credit unions, as much of the financing is being scooped up by banks and captives.
There is guarded optimism among some CUs, but they have found that to compete for the new car business they are being forced to drop rates below 3% and, sometimes, even 2%. Even a rate below 3% may not be enough, as the $15-billion Pentagon FCU attests-it is throwing in $4,000 off MSRP through its new car-buying site (see related story).
The big concern, however, is that such rate cuts have left margins too thin to make the move worthwhile, while others are worried over what higher gas prices will mean (see related story).
"I have never seen the level of rate competition that I am seeing now," said Bill Vogeney, SVP at the $3.1-billion Ent FCU, who observed that competition is very stiff from manufacturers offering 0% and no rebate option, and from banks and credit unions dangling rates in the 2.99% range with 60-month terms.
But cutting rate can't fight many of the manufacturers 0% deals, advised Vogeney. "You could compete on rate when manufacturers offered a rebate option for the buyer. But without it ..."
Smart Car-Size Margins
What's also hurting CUs on the indirect side are banks paying dealers up to 3% on a flat fee, a number of sources reported. "That is not leaving you a whole lot of margin," Vogeney reminded. By dropping rate significantly and paying dealers higher flat fees, Vogeney contended that a credit union can wind up "competing against itself. You lower the rate and lower the rate and you find there is just not a whole lot of business to be found, especially with 0% out there."
Ent is at 3.75% for 60 months on new cars.
But at the $4-billion Teachers FCU in Farmingville, N.Y., a 1.99% 60-month rate on new cars for A-plus paper has significantly increased volume. "From January to November of 2010 we funded about 600 auto loans," explained Nancy J. Orlando, SVP of credit. "From Dec. 1 through February we have funded 408. I think there is business to be had all around."
Prior to its sub-2% offer, Teachers charged 3.74% for 60 months. "We are in a very competitive environment in which the captives and other financials are aggressively looking for this business."
Gayle Rust Gustafson, VP-financial services at the $488-million Rivermark Community CU, Beaverton, Ore., has a different view. "It's going to be bad. It will be very poor for indirect because the competition has found new ways to take deals from us. The big bank dealer-paper buyers are offering huge incentives, letting dealers earn up to a 2.5% fee. You can't compete with that."
Rust Gustafson said Rivermark will not increase dealer incentives, particularly since CU charge-offs are always higher for indirect than direct. "I think our greatest opportunity is refis, and unfortunately that sometimes means credit unions stealing loans from other credit unions. We hope to steal the loans from the big banks."
Rivermark has begun offering a 1.99% refinance rate for 36-month terms.
Focusing On Sustainability
At the $4.5-billion CEFCU in Peoria, Ill., Keith Reynolds, community president of CEFCU San Jose (Calif.), is frustrated not only with banks paying large dealer flat fees, but with the subprime lenders coming back, like AmeriCredit and Wells Fargo's subprime division.
"We have always focused on a sustainable business model and we don't let competitors dictate what we do. My biggest fear is that from an industry standpoint credit unions try to go head-to-head with these current offers. You don't compete with stupid."
At press time CEFCU charged 2.74% for 60 months on new cars. Reynolds is confident in CEFCU's relationship with dealers, as the credit union remained consistent with its lending policies and stayed in the market throughout the recession.
The Ontario-Calif.-based Credit Union Direct Lending (CUDL), while assessing the current CU auto lending market as flat, has seen signs of improvement, according to CEO Tony Boutelle. "We are starting to see some of the big credit unions that slipped out of our top 50 start creeping back. But I still don't think as an industry we are getting the share we used to."