SAN ANTONIO-Credit union relationships with auto dealers are being tested by bank and captive finance companies' lowball offers, and CUs are adjusting their policies and practices to keep the dealer pipeline flowing.
Credit unions are lowering rates, giving dealers greater flexibility in pricing and loan options, bumping up commissions, and in some cases simply leveraging outstanding service and a reputation as a reliable funding source.
A number of credit unions told Credit Union Journal that excellent service can be all that is needed to weather this latest onslaught from banks and auto manufacturers, as long as the credit union also has a competitive rate. Charles Goss, VP-lending for the $5.5-billion Security Service FCU, said his CU tries not to get caught up too much with rate. "If we are a little higher than someone else, I hope our relationship-how quickly we pay dealers and how well we service them-gets us the loan. Cash flow is everything to dealers. I can have the best rate in the world, but if it takes me two days to get back with an answer and I don't pay worth a darn, I will not get that loan."
Key Is Consistency
In Ontario, Calif., Tony Boutelle, president of Credit Union Direct Lending (CUDL), believes keeping dealers happy often comes down to consistent underwriting practices and policies. "If you buy in a particular range of FICO scores, you need to continue to do that month in and month out. That always helps a dealer. The last thing they want is for a credit union to buy a loan one month, but the next month they turn down the same deal."
It also comes down to being there for car sellers during the recession. "I've heard from dealers who said that if it were not for credit unions, they would have lost some stores or gone out of business," Boutelle explained. "They appreciate that credit unions have not gone away."
Yet some credit unions apparently believe that reputation is not enough to keep dealers happy, and are increasing incentives. Boutelle acknowledged that a number of CUDL credit unions have increased the standard CUDL commission of 1% of the loan amount to 1.5%, even 2%. BECU, for instance, has opted to increase its fee from 1% to 1.25%. "Most credit unions in our area are now paying 1.25% to 1.50%, said Debbie Tarbuck, indirect lending manager for the $8.6-billion BECU, Tukwila, Wash.
But others warn that strategy can go too far, including David Jacobson, president of the Hauppauge, N.Y.-based GrooveCar, an online CU car-buying and leasing service. "You have to be careful. You cannot increase your incentives to dealers. You can't give F&I departments bonuses for loan volume. Once you do it they expect it forever. One credit union in upstate New York-not one of our CUs-did that. Now they can't unwind it."
Jacobson believes that credit unions can compete by offering competitive rates and greater options. "We are behind the eight ball here, so we need to work with what we have. That means offering multiple loan products like balloons, leasing, and extended-term financing, for example." That, Jacobson added, not only provides dealers with greater flexibility to close customer deals, but forces them to use the credit union when other lenders do not have the particular product they need.
Occasional Specials
Security Service will sometimes run special discounted rate programs for selected dealers when they open a new store or have a promotion. "We also offer dealers a conversion rate-where we give them the ability to go lower than our normal rate when they are faced with a lower offer from a competing financial," Goss explained. "It's just a pass-through, but they get control of the deal and send it to us, as long as the deal falls into the ranges and parameters we have set." Goss emphasized, without disclosing pricing, that the offer is not "across-the-board" and is often based on market conditions and the relationship with the dealer.
In Sacramento, Calif., the $1.4-billion Schools Financial CU believes in giving dealers flexibility, and allows them to buy down pricing to offer 0%.
