MEDLEY, Fla. — Besides the usual measures of requiring a down payment, adjusting the interest up, and staying on top of collections, Compass Financial Federal Credit Union uses a few other tactics that focus less on interest rates and credit scores to keep delinquencies in check, and more on the vehicles being financed themselves.
On every subprime vehicle the credit union finances, it has a technician install a GPS tracker, which is a device that uses satellite telemetry to pinpoint a vehicle's precise location.
"The borrower signs an acknowledgement that they have it and it becomes a psychological barrier," said Leo Acosta, president and CEO of the $23 million credit union. His shop's lending portfolio is 80% auto loans, half of which are subprime. "If they're not paying on time and they're not contacting us to try to work something out, the GPS is very effective," he noted.
Draconian Measures?
It might seem draconian, but rarely does Compass resort to using it, according to Acosta. "We have very limited and controlled access. The only time we would go in there is really with the collections department, because they have a default situation where they have not been able to contact a member," he added.
There is one exception: Compass helped a member recover a stolen vehicle by giving police access to the GPS tracking data. "He contacted his loan officer and the vehicle was recovered within a couple of hours," Acosta said. "The police hopped on it because it had a GPS."
As Credit Union Journal reported this summer, some CUs are going even further than GPS tracking systems by installing starter interrupters that prevent a vehicle from starting if the loan is delinquent. And at least one institution — First Castle FCU in Covington, La. — has reported significant improvement in loan performance among their subprime auto loans by using this device. (See "When Stop-And-Go (Lending) Traffic Is Actually A Good Thing," July 3, 2014)
After starting to install the GPS trackers on subprime financed vehicles three years ago, Compass' delinquency rates have dropped from around 0.80% to 0.11%.
Other Contributors
There were other contributors too: rather than creating an adversarial relationship with subprime borrowers, Compass creates a positive rapport from the start by charging interest rates that are typically half that of the industry norm. This has made a big impact on reducing delinquencies, according to Acosta (see related article on page 14).
Other ways the credit union mitigates auto-lending risk include running AutoCheck reports to verify vehicle history and steering clear of vehicles that are expensive to maintain and repair. "Our niche is that middle class, so we try to stay away from the European vehicles, because many of them have higher maintenance and repair costs. We stick to the Toyotas, the Chevys," Acosta said.
And Compass goes a step further by encouraging subprime borrowers to purchase a zero-deductible, extended warranty, which typically runs around $1,200 for five years or 100,000 miles of coverage on the types of vehicles subprime borrowers typically finance.
"That market is basically one paycheck away from a tragedy," Acosta noted, "so this is something that if they have a $1,200 repair, it's not going to do them over."
