AUSTIN, Texas -
Bruce Callen, president of Teres Solutions, a provider of lending origination software based here, told the Credit Union Journal his credit union clients are most worried about a decrease in creditworthiness they are seeing among applicants.
"They are looking at the same number of loan applications, but funding fewer of them," said Callen, whose company works with 150 lenders in the U.S., 148 of which are CUs. "The cost is the same whether a loan is funded or not-fees, credit reports, time spent by loan processors - so if a credit union is funding fewer loans, costs stay the same but revenue decreases. Especially in indirect lending."
Callen closely monitors economic trends and forecasts, and while he does not expect a recession soon, he foresees a continued decline in interest rates through 2008 and into the first quarter of 2009.
According to Callen, the percentage of auto loans funded by CUs reached the highest it has ever been in August 2005: 20%, following a large spurt of growth in indirect lending. Around the beginning of 2006, he said, the spread between paying depositors and income from loans started getting squeezed.
"This caused some credit unions to pull back from indirect lending, which impacted all automotive lending," observed Callen, who said as of October, the percentage of loans funded by CUs has dropped to 15%.
"Our customers have deliberately pulled out of the market a little bit, and have shifted to other forms of lending. Last year, we saw more home equity lending. Lately, there has been more mortgage lending thanks to the fallout from subprime mortgage lending. Credit unions are more competitive in mortgages now."
Tony Boutelle, CEO of Rancho Cucamonga, Calif.-based CUDL, said the auto market today is "very tough." He told the Credit Union Journal what used to be known as the Big Three automakers-General Motors, Ford and Chrysler-has been replaced by Toyota, Honda and Nissan.
"Other makers are hurting bad, but Toyota just had its best sales ever in a month," he said. "The Japanese cars are surpassing the domestic models, and they have aggressive financing programs. Toyota Financial Services this year will originate more auto loans than any other lender."
New Auto Sales Down? Try Targeting The Shift To Used
One possible answer is for credit unions to look to used car loans, Boutelle continued. But he acknowledged a problem with used vehicle sales is many are done through independent dealers, which carry more risk than dealers affiliated with automakers.
"CUDL is rolling out a program in January that will guarantee title will get to the credit union, which should help," he said. "We are seeing more partnering with local auto dealers. CUDL is working with our member credit unions and dealers to facilitate this."
Katrin O'Connor, staff economist for the National Association of Federal Credit Unions, offered economic evidence that targeting used auto loans may be the way to go.
"As in the past, credit unions are offering more favorable interest rates than banks for both their new vehicle and their used vehicle loans," O'Connor said via e-mail.
According to the daily loan and savings rates as of Nov. 30, presented by NAFCU in cooperation with DataTrac Corp., O'Connor said interest rates for 48-month new vehicle loans at credit unions were, on average, 1.29% lower than those of banks, while interest rates for 48-month used car loans for two-year-old vehicles were, on average, 1.68% lower than at banks.
For all federally-insured credit unions, the number of new vehicle loans during the first nine months of 2007 still is rising by an annualized 2%, but at a slower rate than from 2005 to 2006 (7.35%) according to NCUA Call Report data, O'Connor continued. On the other hand, the number of used vehicle loans expanded at an annualized 0.53% after declining by 0.3% during 2006.
"This suggests that credit union members are indeed still buying vehicles, but with a strong shift towards used vehicles instead of new vehicles," O'Connor explained. "This trend also suggests that credit unions are more successful in promoting their used vehicles loans, as credit unions have to compete with aggressive financing and incentives from vehicle makers with regard to new vehicles."
CUDL's Boutelle said he expects just 16 million cars to be sold in the U.S. this year, with 2008 sales projected to be off another 10%.
"Keep in mind, though, that 85% of those sales have a loan attached to them," he said. "There are probably about 40 million used car sales done each year, and only 50% of those have a loan attached. People do need vehicles, and if they don't buy a new car they might buy a used car, so there is an opportunity for credit unions there."
Indirect Lending: It's Not Just For New Members Anymore
Boutelle said CUDL has developed the capability to track auto loans by new versus existing members. This year, 40% of the 600,000-plus loans CUDL has handled have been taken by existing members of credit unions, which is the highest Boutelle has seen.
"Indirect lending sometimes gets tainted with the brush that it brings new members that won't be good members, but this shows that if credit unions concentrate on capturing their existing members at auto dealers, it can have an impact."
From an indirect lending perspective, it is "important for credit unions to stay in the market and keep up with dealers," Boutelle continued.
"Credit unions need to stay in the auto lending product line at the point of sale, because 80% of auto loans that are completed are done at the dealership. If they don't stay there, it will make it difficult to sustain auto loan portfolios."
Boutelle said CUs must become an auto purchase resource for their members. He said credit unions should teach members how to shop for a car, how to negotiate the best price, then let them know which dealers are part of the CUDL network.
"We are trying to help credit unions stay in the game. It is not a whole lot different from in the past, but perhaps auto loans came a little easier in the past than today or in the future," Boutelle observed.
Credit unions have done a "great job" of capturing e-mail addresses of their members, which Boutelle said is very important going forward.
"We think the Internet is going to be very critical. Credit unions must be as proactive as possible in marketing to their members and let them know how easy it is to get a loan. The more people can negotiate online with the dealers before they go to the lot, the happier members will be their credit union gave them that tool. Consumers are not just using the Internet to research cars, but to locate cars."
Auto Loans Are Decreasing, But The Spread Is Inching Up
Callen of Teres Solutions said one consequence of the Federal Reserve cutting interest rates in recent months is the rates paid by online depositors such as ING have been declining steadily, lowering the amount CUs have to pay on CDs to compete. At the same time, loan rates by credit unions have stayed flat. Therefore, there has been an improvement in the spread.
"Credit unions were not as competitive, by choice, in auto loans over the last two years," Callen said. "Going into next year, based on the Fed, there will be decreases in interest rates-possibly another 25 basis point decrease by the end of this year. Credit unions will be more competitive in the mortgage market, which they haven't been in the past."
Callen also sees CUs pulling out of indirect lending "a little bit," while they pursue growth in other forms of indirect lending besides auto. He said small-ticket finance, such as furniture, home theater, stereos, TVs, orthodontics and other forms of relationship-based lending, will flourish.
"Credit unions have become more diversified in reacting to the environment around them. Credit unions are stronger and more easily able to react to these changes," Callen said.
One of the strengths credit unions brought into indirect lending was local relationships, Callen continued. He said San Antonio is a great credit union market-as evidenced by the fact CUs control 60% of indirect auto lending there. He said San Antonio is a large military city with many bases and military families, and military people tend to be involved with credit unions. Another factor: several credit unions in San Antonio are large-over $1 billion in assets, making it somewhat unique.
"Here in Austin, we also have a strong credit union presence. The credit unions here do not have 60% of indirect lending, but they get a 20% share, which is above the nationwide average of 15%," Callen said.
The reason CUs have room to grow all forms of indirect lending, according to Callen: "Credit unions work with local car dealers to form relationships. A nationwide bank cannot do that. Take that model to a local furniture store, and get the CEO of the credit union to have a one-to-one relationship with the owner of the store. They contribute to the same charities and help the community. This is something credit unions can do incredibly well," Callen said.
