From a clever dealer compensation matrix that drives high-dollar loans, to a $2,500 sweeps, to an RV program that accounts for 60% of net auto loan growth, credit unions are taking on the tough auto loan competition from all angles.
Credit Union Journal reached out to institutions that are doing well with auto lending post-recession, asking executives for insights into what's working and how they are going about building their portfolios amid rock-bottom market deals.
Some prefer to open members' eyes with leasing or low rates and longer terms that keep monthly payments down. Others emphasize new indirect strategies, while one credit union prefers simplicity. Just in time for New Year's resolutions, pick from seven strategies that are solving the serious auto loan competition.
Incentives Drive High-Dollar Deals
Hudson Valley FCU tweaked its dealer incentive matrix last year, getting rid of incentives for low-dollar loans and directing that money toward more expensive vehicles. The move has increased funded volume and the average loan size has jumped 10%.
It's been a good move, according to Director of Loan Origination David Brand, who said the $3.8 billion CU determined it was not making much money on loans below $10,000.
"We adjusted our sliding scale we use to pay dealerships. We got rid of the incentive on loans below $10,000 and are now using that money to pay more for loans at our top incentive tiers."
The Poughkeepsie, N.Y., credit union pays dealer fees that range from 2.5% to 3% of the loan amount based on a matrix with levels that break at various points from $10,000 to $30,000. Brand declined to share specific details.
"We now incent dealers to give us larger loans, and we are stealing those loans away from competitors," said Brand. "Dealers know to give us a good look on vehicles priced around $25,000 to $30,000."
Dealers understand, as well, that the low-dollar loans won't help them pick up a monthly $250-per-loan bonus when they deliver a certain dollar volume to Hudson Valley, since the small loans don't count toward the incentive, said Brand. "Dealers always have a carrot hanging in front of them."
The credit union has also found a market niche that is adding to business. Hudson Valley helps members with damaged credit, providing loans based on a co-borrower's credit score. "A lot of banks don't do this," noted Brand.
The deal benefits the member and the credit union, since the borrower avoids a subprime rate and Hudson Valley often gets an A-credit co-borrower paying B-score rates. "We cap these loans at the B tier," noted Brand.
Hudson Valley offers members rates as low as 2.99% for terms up to 66 months.
RVs Make Up 60% Of WSECU Net Auto Growth
Recreational vehicle loans are doing a lot for Washington State Employees CU these days. The deals are bringing in more dollars per loan, getting a higher rate and staying on the books longer.
"They also cost us less to acquire," said Keith Troup, VP of lending and chief lending officer, emphasizing that the flat fee the Olympia, Wash.-based CU pays RV dealers is 1%, compared with 2% for standard vehicles.
Several years ago the credit union started making RV loans and the business quickly grew. Troup got the idea to add RVs to the portfolio while he was driving. "I kept seeing so many RVs - the ones people drive and pull behind. People in Washington like to be outdoors."
It was the right decision, as RVs will account this year for 60% of net growth within the entire auto loan portfolio.
"The credit union still makes many more loans for cars and trucks, but that is a very seasoned portfolio with a lot of runoff - $8 to $10 million dollars a month. We will do about $240 million in new auto originations this year and about $130 million in RV."
Troup said RV loans tend to stay on the books for six years, compared with two years for standard vehicles.
While the credit union does a lot more used than new car and truck deals - about a 90% to 10% mix - it is seeing 50% new with RVs. Troup added that the loss ratio is about 75 basis points higher on RVs than standard vehicles (100 BPs).
"Our members purchase a lot of RVs, and our research showed that before we entered this market," said Troup. "RV lending may not be for everyone. If a credit union is interested in making a lot of RV loans, I'd say do some research first. Find out how many of your members have loans for RVs, and where they are getting the vehicles from."
Finding out where members purchase their RVs helps WSECU target the right dealerships and focus resources, added Troup.
In addition to standard marketing - the credit union's website and in-branch signage - WSECU sponsors the region's RV shows, which take place four times a year.
"Those shows really drive in the volume," said Troup.
Leasing To Avoid Higher Car Prices
In Hauppauge, N.Y., leasing is taking off for Teachers FCU, not only because the credit union is right in the middle of a large Long Island commuter population, but also because it keeps the monthly payment down.
Nancy Orlando, SVP of credit, said the $4.8 billion CU has noticed a noticeable spike in leasing during the last year.
"We are seeing a tremendous response to leasing," said Orlando. "Through late November we have funded about $19 million via our indirect channel, with $15 million coming through leasing. A year ago we did a little more than $12 million in the month and only $6 million came from leasing."
That's a clear sign members are seeking a lower payment to battle higher car prices, according to Orlando, noting that borrowers are turning to leasing for all car segments, not just high-end.
But she shared advice for credit unions looking into leasing for the first time. Teachers FCU does well with leasing because it closely monitors manufacturer incentives and only offers leasing on models that carmakers are not promoting.
"We cannot go head-to-head with manufacturer leasing programs. We look for niches," said Orlando, whose credit union works with GrooveCar, a national CU car-buying service. "But we do write loans for a wide range of vehicles, except the very high-end cars end like Mercedes and BMW. We don't compete there."
Dropping Buy-Rate Financing, Raising Flat Fee Doubles Biz
Dropping buy-rate financing and giving dealers a higher flat fee instead has doubled the indirect auto business at I C FCU in Fitchburg, Mass.
"We saw an immediate impact," said Bruce Mathieu, VP of consumer lending, noting the Consumer Financial Protection Bureau's concerns about buy rate - the practice of dealers marking up the interest rate on loans is known as buy rate, dealer reserve and dealer mark-up.
"As soon as we no longer allowed dealers to mark up the rate and gave them an enhanced flat fee our volume doubled," Mathieu said.
With buy rate, dealers could make about $800 on a loan of $30,000 to $35,000 by marking up the rate 50 basis points, according to Mathieu "We used to pay a $400 flat fee, so they could double that amount with the mark-up. Now we just give them an $800 flat fee on that loan amount."
Dealers like the new arrangement, which Mathieu recognized costs the $505 million institution more per loan. "We are giving away more money to get the business - and we have to in this environment," explained Mathieu, who said the credit union is making that up with more volume and more profitable loans.
"As I said, we are getting a lot more business. But the key is we are getting more of a dealership's overall business - the B and C paper as well, not just the A credit that is less profitable. Overall we are getting a higher yield now on our portfolio."
The higher flat fee is also building stronger relationships with dealers, said Mathieu, who is concerned that as the CFPB's focus on buy rate sends more FIs to higher flats, a flat-fee war is on the horizon.
"It's pretty tough right now. Dealer fees can't go much higher or no lender will be making any money," he said.
I C FCU is offering rates as low as 2.24% for up to six years.
Offering Lower Rates On Loans With Longer Terms
Cutting rates and extending terms has helped Pennsylvania State Employees CU in Harrisburg, Pa., keep the indirect pipeline flowing this year.
The $4.2 billion-asset credit union has seen its indirect portfolio climb steadily, increasing from $212 million in 2011 and $233 million in 2012 to $240 million through late November this year.
"We just had our busiest month this year, booking over $35 million in indirect in November," said Bill Zysk, VP of lending.
The strong year and month would not have happened, said Zysk, had PSECU not made rate and term adjustments. Rates for six- and seven-year terms were cut this year to 2.99% APR from 4.99%. Five years and less fell to 2.45% from 2.99%.
"We got aggressive this year because people are trying to keep their payments below $500, which is hard to do with the average car price around $32,000," said Zysk. "It's been a very good move - it puts us smack in the middle of the market and we are getting a lot of loans for six to seven year terms, with the majority for six years."
Lending Basics Drive 15% Growth
While some credit unions choose eye-catching promotions or a sharp rate drop to bring in auto loans, GTE Financial prefers doing the "basics" well.
"We focus on underwriting, pricing, dealer compensation - and not making crazy decisions," said Aaron Bresko, SVP/COO of the Tampa, Fla.-based institution. "The credit union is in this for the long haul."
GTE has applied that thinking to the direct and indirect side of its business, growing auto loans in 2013 by 15% year over year.
"Last year we averaged $10 million a month and now we are bringing in $12 to $14 million a month, with 60% coming from indirect," Bresko said.
The credit union offers a rate as low as $1.74%, based on members' relationships.
GTE had to rebuild its indirect program just over two years ago because it had exited that business for a few years. According to Bresko, being consistent with pricing and approvals helped build trust and repeat business through the channel.
Bresko explained that in rebuilding the indirect program the credit union paid a great deal of attention to not changing dealer comp. The $1.7 billion CU pays a competitive 2% flat fee, said Bresko. "You see some financial institutions going up and down, paying 2.5% and even and 3%, often when they need to drive more volume. We prefer not to change things around with our dealers. They like consistency."
0.99% And $2,500 In Holiday Cash
Pentagon FCU is touting a sub 1% APR and the chance to win some cash to cover holiday expenses to drive year-end auto loan business.
The $16.5 billion CU has introduced the "PenFed Car Buying Service $2,500 VISA Gift Card Sweepstakes" that gives any shopper who uses the credit union's car-buying service from Nov. 29 through Dec. 31, and takes delivery of a car, the chance to win a $2,500 Visa gift card. One winner will be selected via a random drawing in mid-January.
The Alexandria, Va.-based PenFed is also offering "limited time" 0.99% financing for new and used vehicles up to 48 months when members use the car buying service and apply online. Earlier this year the credit union offered even better rates for online shoppers, as low as 0.49%.
TrueCar, which backs PenFed's car buying service, buys down the low rates. Last year Pentagon also offered 0% via a buy-down deal through Enterprise.
EVP James Schenck said the current offer comes at the perfect time - when members are searching for the best holiday deals. "Not only did we want to create awareness with auto shoppers about the benefits of using the PenFed Car Buying Service, but we wanted to encourage folks to take a closer look at the auto financing opportunities PenFed extends to its membership."
PenFed's Car Buying Service emphasizes "hassle-free" shopping and allows buyers to research new and used vehicles, get safety information, see photos and videos of vehicles, read reviews and receive negotiated price quotes on vehicles from dealers in their area.
"The car buying service has been very well received by those who have used it," said Schenck. "Since we began offering it in 2011, we have seen a continued increase in member adoption, year after year."
