At least one of the major banks appears to be pulling back from auto lending, and credit unions may be well poised to pick up the slack.
According to a recent report, Wells Fargo has eased off the gas pedal in auto lending, as concerns about weakening industry-wide credit standards continue to spread.
The San Francisco bank originated $6.7 billion in auto loans during the fourth quarter, which was down 1% from the same period a year earlier, according to results released in January. Earlier in 2014, Wells reported growth in auto loan originations that ranged from 9%-15% on a year-over-year basis.
Wells Chief Financial Officer John Shrewsberry that the bank's declining loan volume is the result of more competition in the auto finance market.
Regarding loans to borrowers with top-notch credit scores, he said: "We'll feel the pinch there, where people are just willing to go below us in price terms. And so be it."
On subprime auto loans, Shrewsberry said: "If someone else will accept a lower risk-adjusted return, then we miss it." He also noted that Wells declines to bid on some of the subprime auto loans being arranged by car dealers.
That may be where some CUs are poised to pick up marketshare, since credit unions often lend to lower credit tiers than the big banks.
"There's a tremendous opportunity there," said Steve Klees, SVP of specialty channels at EFG. "Take a look at the younger buyers, first-time buyers or those who have stumbled in their credit. There's always going to be — and probably more so today than ever — an opportunity o buy some of that near-prime paper. And there's multiple ways of doing that... it's viewing what the maximum term is you're willing to lend on from a risk standpoint to be competitive with monthly payment."
But Klees also cautioned that just because one bank is tightening its standards, that shouldn't be taken as a sign that more will follow.
"If I were in a credit union right now, I wouldn't view this as a sign that all banks are going to tighten up or that there's going to be a general tightening of credit," he said. "I'd look at it as how am I going to pick up marketshare as they're looking to cull the herd and get their dealers down to a reasonable level."
The one thing credit unions shouldn't do, he emphasized, is pull back.
"This is an opportunity for credit unions to make contacts with dealers in their existing market areas and talk about how they can actually pick up what Wells or a large primary source is not buying. I'm bullish on the opportunity for credit unions to go on that tack."
Changing Credit Standards, Loan Terms
One credit union CEO, however, said he doesn't share Wells Fargo's concerns about weakening credit standards—and in fact believes that conditions are still on the upswing.
"The economy is improving in general, unemployment is down, the general economic mood is up, housing prices have recovered a great deal, and that just seems to have led to more consumer confidence. That's all good signs for auto lending," said Lloyd Gill, CEO at We Florida Financial CU, formerly City County CU. "I don't see anything that would indicate a problem looming on the horizon that we have to contend with. I'd qualify that that you have to stick to underwriting standards; you don't increase lending by loosening underwriting standards."
Gill should know. In addition to 25 years running lending operations in the bank and credit union space, he also helped found South Florida Acceptance Corp., an indirect auto lending CUSO. He noted that one trend which may be coming down the line is a lengthening of terms beyond the traditional 60 months or even 72 months — but only for those with the highest credit scores. But beyond A+ paper, he said, "it's "not going to be a widespread norm."
Regardless of Wells Fargo's reasons for pulling back, Gill reminded that Wells sees loans on a vastly different scale than most credit unions.
"At a dealer level, if somebody is taking an application for Wells Fargo, it's an entirely different animal," he said. "We're talking about a place that probably processes tens of thousands of applications per month. The scale of it is so big that you can't really [lend in the same personal manner that many CUs do]. At a credit union where you're doing a couple hundred deals perm month, you can give them the attention that they need."
The Bigger Picture
During the third quarter of 2014, Wells Fargo was the nation's largest lender in the used-car market, and the second largest retail auto lender overall, behind Ally Financial, according to Experian Automotive.
Other banks began to cede market share in auto lending before Wells did, according to data from Experian. In the third quarter,
U.S. auto loans outstanding stood at $944 billion in the third quarter, the latest period for which data was available from the Federal Reserve Board. That was up from $866 billion a year earlier.
Across the auto-finance sector, late payments have been on the rise. As of the third quarter, 2.66% of all loans were 30 days delinquent, up from 2.56% a year earlier, according to Experian. Loans that were 60 days delinquent rose to 0.74% from 0.68%.
Wells Fargo reported in January that 2.52% of its auto loans arranged through dealers were 30 days or more past due in the fourth quarter, up from 2.13% a year earlier.
