SAN JOSE, Calif.-For CUs to get their share of loans from rising new car sales, they must rethink how they approach new car lending.
That's the take of several CU lenders and auto market experts who agree the challenges brought on by intense competition from all sides-captives, banks, and credit unions themselves-demand that CUs be even savvier about how they go after this market. What worked in the past, before the recession pulled millions of new car buyers off the market, may not today.
"New car sales are coming back. But to think you can just fall back on the methods you used before new car sales fell off in 2008 is not wise," said Keith Reynolds, community president of CEFCU West. "It's a much different landscape now."
The seasonally adjusted annual rate (SAAR) for new car sales hit 15 million in February and has remained above 14 million, markedly above the 12.7 million units where the U.S. auto market finished last year.
Rate's Not Great
CUs can't compete simply on rate, they have to develop unique promotions, like a Black Saturday loan sale (Credit Union Journal, July 2) or a sweeps for a new Jeep (Credit Union Journal, July 16). When it comes to pricing, sources say CUs must closely monitor local lenders to adjust offers-not only rate, but to learn where the competition is cutting off FICO scores in credit tiers to find niche business.
Credit unions, too, should consider offering a number of different products, such as leasing and balloon loans, to battle low rates by giving members more options to lower monthly payment. Younger borrowers can't be the primary focus, with many older Americans now needing to borrow due to the recession shrinking savings and pushing retirement years down the road (see related story).
Indirect lending, which has been on the rise for CUs, needs to be attended to as well, with bank lowball offers chipping away at the loyalty credit unions built among dealers during the economic downturn, and manufacturers heavily pressuring dealers to use captive financing (see related story).
Two things that are really adding to the competitive pressures are the fact auto loans may be the best answer to liquidity issues, and rock-bottom loan rates, often below 2%, make it easy for captives to buy down to zero.
"You're getting 35 to 40 basis points for two-year investments. You're better off putting the money into an auto loan, which everyone realizes," said Reynolds. "There is also the issue of legislation, regulation, and laws that have put pressure on non-interest and fee income. There are concerns, too, about holding onto excessive levels of long-term fixed rate mortgages. There is a perfect storm creating this competitive environment for auto."
To get their share of A paper, CUs will have to drop below 2%, insisted said David Jacobson, president of GrooveCar, Hauppauge, N.Y. He also said that to compete across the board on new, CUs will have to become "full-service" lenders and offer a greater range of products, including leasing.
Stepping Into The Rate War
Jacobson reminded that below 2% the CU steps into a rate war, and Bill Vogeney from the $3.6-billion ENT FCU in Colorado Spring, Colo., does not disagree. The EVP/chief lending officer noted that rates keep falling across the board. "The national average for A-plus new car, 60-month auto loans is approaching 2.5%, driven by excessive liquidity among depository lenders and the demand for auto securitizations. Investors are looking for yield, and with Treasury rates so low and auto loan performance being fairly strong, the rates investors are looking for on a securitization are very low, allowing the captives and other finance companies who originate and sell to offer very low rates."
Vogeney, too, has noticed spreads between A-plus and B are growing even narrower. "Based on rates published by Informa Research Group in Auto Finance News, rates on A-plus new car for 60 months have fallen 80 basis points. On B new car, they have fallen 93 basis points. The average spread now is 158 points nationwide, and is less than 100 basis points in the northeast part of the country. The issue here is, in a search for yield, as A-plus rates stink, lenders want B business and have lowered rates so much that I believe this block of business at these rates will be highly unprofitable in the future."
Joe Greenwald, CU Direct's SVP of CU solutions, predicts the new car market will heat up even more, or cool off a bit in the next quarter-but it won't stay the same. "Car sales are decent and trending up. We are seeing good loan volume and apps coming through our system. But recently we have not had any big event to change things. I think we will see some type of change next quarter, after we have gotten through the presidential election and Congress addresses the big issues facing Americans, such as the repeal of the tax cuts and deficit issues. Watch out for these intangibles, because consumer confidence is such a driver of everything."
Still Not Getting Fair Share
But Bill Hampel, CUNA's chief economist and SVP of research and policy analysis, has hope for CUs this year, coming off his recent position that despite the jump in new car sales, CUs were not getting their share. "Things now may be improving. Previously, the news about the first half year had been totally dismal, a dramatic decline in credit union new car loans. But we may have turned a corner according to more recent numbers. For the first six months of this year credit union auto lending is up about $5 billion, $1 billion of that in new. So for the first time in over two years we have seen an increase in new car loans at credit unions.
"I am not saying that the worst is behind us and we have the problem licked, and that credit unions are getting their share of the increased consumer interest in new cars," continued Hampel. "But at least they are getting some share."
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