A recent study TransUnion paints a worrying picture for certain sectors of the auto lending industry. The research by the credit information giant found that increased loan terms coincide with more risk and delinquency.
In the study, Chicago-based TransUnion found that subprime auto loans in the 84-month term category have a delinquency rate of 30.7%. While this is not an area normally captured by the CU industry, the numbers are still growing for the longer-term loans in the prime and super prime risk categories.
"Some people have talked about possibility of a bubble in the auto arena," said Mike Schenk, vice president of economics and statistics at CUNA, "[It] may be true in the broad marketplace, the loans we see CUs originating are high quality loans and are being paid off in a timely manner."
The delinquency rate for 60-month super prime loans is 0.4%, according to TransUnion, and this number more than doubles to 0.9% when the loan term is increased one year to 72 months; when the loan term is increased to 84 months the delinquency rate doubles to 1.8%.
The compounding is not as dramatic for prime loans though the trend is still present. Delinquency rates were 3.4% for 60-month terms, 5.0% for 72-month terms, and 7.1% for 84-month terms, according to the study.
Jason Laky, SVP of automotive & consumer lending at TransUnion, said that 70% of new auto loans involved terms greater than 60 months, while only five years earlier, 50% of loans had terms longer than 60 months. Industry experts agree, telling Credit Union Journal they have also seen loan term averages increase around a month every year.
The study also found that the average term for new auto loans rose from 62 months in 2010 to 67 months last year. In the third quarter of 2015, seven out of 10 new loans had terms longer than 60 months. In 2010, only half of all loans had terms longer than 60 months.
And despite the proliferation of longer loan terms, auto loan duration—the length of time a consumer keeps a loan and such loan remains in a lender's portfolio—has declined.
For auto loans originated in 2012, the average spread between term and duration has grown by almost a month compared with loans originated in 2010. (The study explored loans in this period to provide sufficient time for the loans to mature to payoff.)
"In recent years, longer-term auto loans have grown in popularity as consumers aim to keep monthly payments at a certain threshold," said Laky. "However, our study found that consumers are keeping their loans for a shorter period – a likely result of the low interest environment that has allowed more borrowers to refinance their loans."
CU Auto Lending
CUNA's Schenk noted that CU loan portfolios have been growing extremely quickly. "What's driving that growth overall? -- Automobile loans, no question about it," he added.
According to Schenk, new automobile loans by CUs grew by 13% in 2013; 21% in 2014; and 16% in 2015. Used numbers were slightly less with 11% in 2013; 13% in 2014; and 12.7% in 2015.
Indeed, credit unions have been on the blitz with auto lending. According to CU Direct, a CUSO based in Ontario, Calif., CUs now capture 1-out-of-4 auto originations in the market; $154 billion of a $620 billion industry according to 2015 reports.
Credit unions have also been encroaching on an increasing share of the auto lending market during the past few years. According to Experian data, overall loan balance held by CUs grew by 18.1% from Q1 '14-'15 and 15.8% from Q1 '15-'16. Banks' market share in that same time period has only grown by 9.6% and 7.8%.
"Part of the reason we are seeing such healthy growth in these portfolios is that CU pricing has been historically very favorable from a consumer perspective," CUNA's Schenk said.
Even though the numbers have been impressive, Curt Long, chief economist at the National Association of Federal Credit Unions, believes the industry might be hitting a plateau, "the momentum hasn't really been sustained…– we have gotten back to a saturation point," he said. Long, who also serves as director of research, notes that the market may have reached its peak and the demand, which was high before and after the crisis, has died down.
CUNA's Schenk thinks there is still a substantial amount of pent up demand left to be addressed by the market, mainly because purchases have been put off while consumers and members get back on their feet recovering from the financial crisis, he says.
New Lease on Autos
Hauppauge, NY-based GrooveCar, which has provided assistance to nearly 200 CUs growing their auto lending and leasing approach since 1999, said they have observed the lease market growing as the preferred method of acquiring a new car.
According to CUNA's Schenk, more than 3 million leases will be made in the coming year, "I haven't seen a tremendous growth in [the leasing] arena…but I wouldn't be surprised to see it. Discussions with CUs seem to be heating up a bit."
Robert O'Hara, VP of strategic services at GrooveCar, said they added 50 CUs to their program in the last two months. O'Hara believes there are new opportunities in the leasing market – which may be a result of a lower average monthly payment of $100 compared to new cars.
Furthermore, leasing markets that were once non-existent have grown significantly in demand. "About 29% of new cars sold are leased," O'Hara said, "a few years back it was closer to 25%, every year you see that increase."
Automatic Auto Lending
Credit unions and financial institutions alike use some form of risk assessment when providing auto loans to their members -- questions arise as to whether or not the assessments are savvy enough to spot red flags for increased loan terms.
GrooveCar's O'Hara said CUs need to, "get to that world of automatic decision making," adding that an automobile loan specific score can help lenders when assessing a member for a long term auto loan. Seeing how a member has performed on auto loans in the past can give insight into their payment habits for that type of loan.
Boeing Employees Credit Union's Vice-President of Credit Risk Management Tim Bates says that the $15 billion CU uses an automated underwriting system when considering an auto loan. "Deals that don't meet full automation guidelines are then reviewed by the underwriters," he said.
The Tukwila, Wash.-based institution, which serves nearly one million members in the Pacific Northwest, has 122,473 auto loans on their books totaling $1.9 billion. BECU told Credit Union Journal they update their underwriting system on a rolling basis throughout the year, "We also do monthly calibration sessions, we look at loans that are edge cases based on our guidelines and make periodic refinements to the credit guidelines two or three times a year."
BECU noted that that their "robust" monitoring program examines loan quality metrics and delinquency performance. "We complement this with loan-level reviews to make sure we're comfortable with the loans we're putting on the books," Bates said.
TransUnion recommends that institutions utilize what they call Aggregate Excess Payment, a form of discretionary spending calculation for lenders assessing the risk of a potential loan.
O'Hara agrees, suggesting that discretionary spending calculation is an important tool, especially for longer-term loans. Consumers are more inclined to seek a longer-term loan because of the lower monthly payment – a sign that their situation may not be suited for an auto loan.
