Auto lending has been a boon to Puerto Rican credit unions in the aftermath of Hurricane Maria but that could be coming to an end.
Maria, which was a Category 5 storm, brought record rainfall to the U.S. territory with a population of 3.4 million. It is believed that more than 20 inches of rain fell over a majority of the island, inundating streets and causing $90 billion worth of damage to businesses, homes, automobiles and more.
Overall, credit unions with operations in Puerto Rico have reported limited lending opportunities, except in the area of auto lending, in the months after the disaster struck. But that streak seems to be faltering now.
“Lending in general has been down in Puerto Rico because of the economic crisis and Maria, but auto loans [have been up] because so many cars were damaged. People are afraid of [using] those cars,” said Pablo DeFilippi, senior vice president of membership and network engagement. “If your car was damaged due to the storm or was totaled and uninsured, there's definitely demands to replace those damaged vehicles.”
JetStream Federal Credit Union is one institution that got a boost to its auto lending after Maria ravaged the island in September 2017. The Miami Lakes, Fla.-based institution, which maintained its operations using a generator and didn’t see power restored until four months after the hurricane made landfall, initially saw a dip in its lending. The credit union had $611,770 in loan volume in August 2017, but that number teetered downward by 150%, to $89,318, in September after Maria struck.
The institution did not amend its underwriting as a result of the storm, though it incurred about $230,000 in losses related to Hurricane Maria. Jeanne Kucey, president and CEO of the $202 million-asset institution, described those losses as minimal and lower than expected.
“We were concerned because we had $23 million [in] loans in Puerto Rico,” Kucey said. “We were very concerned that we had such a large volume of auto loans — there were streets with cars in them, and the streets looked like rivers.”
But within a year, JetStream’s loan volume rebounded. Its auto loan production in Puerto Rico rose by 56%, to $9.6 million in 2018, from a year earlier. The credit union said it was able to capitalize on Pentagon Federal Credit Union raising its rates.
Rick Perez, chief lending officer of JetStream, believes the credit union’s preparedness helped it continue to serve members throughout the storm and ride the recovery afterwards.
“I think the bottom line was preparedness, execution, service that we provided our members and word of mouth,” Perez said. “We were open while the other financial institutions were closed and the dealers were aware, so they started referring to us.”
Management at PenFed in McLean, Va., said it raised interest rates on auto loans in Puerto Rico given the losses that lenders suffered and uncertain market conditions experienced on the island. After Hurricane Maria, PenFed experienced higher rates of delinquency in the territory compared to other parts of the country, which “impacts how we layer on any risk premium in Puerto Rico in regards to our pricing,” said Ivan McBride, the $24.4 billion-asset credit union’s vice president of automotive lending products.
“I think there’s some concerns about loss potential; I think the island exposes itself a little bit to some of those conditions like the hurricanes and things like that and the general loss history in Puerto Rico supports a little bit more of a premium in our pricing,” McBride said.
Despite charging more in interest, PenFed still experienced an increase in its auto lending in Puerto Rico after Hurricane Maria. Its auto originations totaled $17.2 million in December 2017, up almost 40% from September 2017.
Still, it seems as if the boost to auto originations could be tapering off.
From January through April, PenFed reported two months – January and March – with auto lending totals lower than a year earlier. However, the credit union was hopeful that its auto lending in the territory would tick up from roughly its current $15 million to $17 million to $17 million to $20 million in monthly originations.
That would still be far below the more than $30 million in loans a month PenFed was frequently booking prior to Hurricane Maria.
"I think some of it may be that application volume is down [and] I think we've seen a couple more of competitors come in the market post Maria,” McBride said. “We were a very competitive rate pre-Maria, but I think there's been some rate adjustment post Maria because some of the losses that some lenders have taken in Puerto Rico."
JetStream’s auto loans in April fell by 34%, to $663,188, from a year earlier. That’s because there are now fewer borrowers looking to replace cars that were destroyed during the storm, Kucey said.
The declining demand for cars in Puerto Rico also follows broader trends seen in the rest of the U.S.
Overall vehicle sales in the U.S. have plummeted to their lowest level since October 2014, according to Druv Singh, a research assistant with the National Association of Federally-Insured Credit Unions. Singh attributed this decline to lower tax refunds, reduced affordability and consumer preferences for used cars.
“Consumers are still in a good position with fairly low debt levels and rising real wages, and the Fed is playing its part in backing off of plans for more rate hikes,” Singh wrote in a research report. “But the headwinds are prevailing, and NAFCU expects a modest decline in sales volume this year.”
