OLYMPIA. Wash.-While auto lending is showing positive signs for credit unions-new car sales are up as are CU loans-credit unions are having to scrap harder for each deal, dig deeper into credit tiers, drop rates and even extend terms.
That has led to several analysts to raise questions over how beneficial it can be for CUs to take on more risk and less profit from each loan in an effort to compete (Credit Union Journal, March 25, April 1). Now, what they see adding to their concerns is a hike in the fees financial institutions are paying dealers, making it imperative CUs think strategically and long term about what such developments can mean. Credit unions also have to be particularly careful extending term and LTV to get more loans, especially in light of the used car market softening (
While it used to be competition from banks and captives frustrating credit unions, Keith Troup, VP-Lending/CLO at the $1.9-billion Washington State ECU, now says CUs must keep their eyes on other credit unions. "There is hyper-competition in our market, especially among credit unions. Dealer flats on our indirect loans have doubled over the last 18 months due to CU competitors," said Troup, who noted his credit union is having good successes with auto recapture.
This year overall auto lending is up at the $1.4-billion American Eagle FCU, East Hartford, Conn., with the CU going as low as 1.99% APR for 60 months. But Ed Fox, SVP and chief lending officer, said indirect has been a tough lug nut to turn due to the rising flat fees. He said AEFCU is looking at a way to afford to pay the dealers a little more, possibly instituting a tiered structure that could boost the CU's 1% flat fee to up to 2% if the dealership provides the required volume.
"In our market we have actually seen flats from some lenders, not credit unions, over 5%," said Fox. "I don't see how anyone can make money doing that. It must be a volume play, hoping to bring in the business now, and then eventually lower the flats and still keep the spigot flowing.
CFPB Making Competition Even Tougher
Bill Vogeney, EVP/CLO at Ent FCU in Colorado Springs, Colo., believes the brutally tough competition for indirect is coming, in part, because the Consumer Financial Protection Bureau is zeroing in on buy-rate financing.
The new consumer agency made it clear last month it is looking into the practice of dealers marking up the interest rate on loans-known as buy rate, dealer reserve and dealer mark-up. The CFPB warned four large banks of potential lawsuits for alleged discriminatory lending under the Equal Credit Opportunity Act, according to published reports (Credit Union Journal, March 25).
If buy rate goes away, Vogeney, chair of the CUNA Lending Council, said that could "send flat fees way up, rates down and usher in a whole new level of competition.
"If dealers don't get their buy-rate financing this may drive a further surge in rate competitiveness," he said. "Lenders have to get the attention of the dealer-do they lower rates to get the dealers' attentions, or keep rates where they are and increase their flat fee, which has the impact of lowering net yield. The rate competition in the short term could get even more fierce."
The Need for Speed
Tony Boutelle, president and CEO of CU Direct, Ontario, Calif., has similar concerns. Boutelle said the higher flats tend to be around 2%, sometimes 2.5%. But he thinks credit unions can compete even if they are not among the lowest rates and are not handing out huge dealer money. "For dealers, speed of approval and funding, and making it easy to do business with you is just as important. That will get you a lot more loans than paying someone a little more for a loan."
Mark Chatfield, CCO for CO-OP Member Center, Dallas, part of CO-OP Financial Services, Rancho Cucamonga, Calif., sees indirect portfolios rising among the 200-plus CUs using CO-OP's ExpressLink indirect underwriting service. "The biggest thing is responsiveness," agreed Chatfield. "Dealers are pushing loans to multiple lenders at once. If the credit union can't respond quickly, it is at risk that loan walk to another FI or captive. We see 15 to 20 minutes as the time needed for approval, initial underwriting and status of the loan decision."
