Making Indirect Car Loans Stirs Controversy in Texas

A civil was has broken out among some Texas credit unions.

In San Antonio, one of the city's biggest is scooping up lucrative car loans - and antagonizing smaller credit unions whose members are flocking to borrow from the bigger institutions.

San Antonio Federal Credit Union, which has 150,000 members, is signing up about 2,500 new members a month, largely because of its auto loan business, said Joe Pape, the credit union's executive vice president.

Loans Are Indirect

The thrift, with $612 million in assets, is luring the members because it is one of the few in the state that indirectly finances car purchases through dealers. As a result, San Antonio Federal is booking what is by credit union standards an amazing $10 million of car loans a month.

Many smaller competitors are seeing red.

"We are losing loans left and right to these other credit unions," complained Leon Ewing, who is president of San Antonio Teachers Credit Union. The institution has 35,000 members, $145 million in assets, and serves educators in 12 counties surrounding San Antonio.

"They are trying to convert our credit union members over to another credit union, and that causes a lot of hard feelings," Mr. Ewing said.

A Growing Technique

Of the 1,200 credit unions in Texas, about 10 are doing indirect auto financing through dealers, but the practicce is expected to spread.

"It's a method that will proliferate because it is a way to get more loan business and it's a way to recruit more members," explained John Hale, the state's credit union commissioner.

A report issued by Mr. Hale's office in September concluded that there is not enough information about the practice to merit regulations or restrictions. The report was issued after a three-month investigation of indirect financing.

Mr. Pape, who until 1987 worked for Citibank in Houston, said San Antonio Federal is just trying to prevent banks and finance companies from grabbing all the auto loans.

Stemming the Outflow

"We were losing five of every 10 members to [finance companies of car companies] or banks," he said. "That was a hemorrhaging that had to stop.

Mr. Pape helped start San Antonio Federal's auto finance business at the end of 1987, and now does business with 51 local dealerships. "I view that as 51 branches," he proudly said in an interview last week.

As for the cannibalization issue, Mr. Pape offers few apologies.

"There is no member loyalty anymore," he said. "And auto lending is the bread and butter of the credit union industry."

He criticized smaller credit unions for their old-fashioned attitude of wanting to "sit back and wait for someone to come in and make something happen."

"I think there is an awakening going on in the industry."

Even Mr. Ewing said: "We may one of these days be forced into it."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.