Is Auto Lending Still a Core Product?

June 2, 2010

If you’re like me, you spend a lot of time lately trying to figure out what has changed with credit unions, and what has stayed the same. The good news: Credit unions’ priority is still to provide great service to members. That hasn’t changed and hopefully never will.

Many financial realities, however, are vastly different from a couple of years ago. Credit unions are questioning whether products that have been consistently successful and reliable still work today.

During the past 12 to 18 months, credit unions have been recognized as trusted, safe, and secure depositories. We’ve received kudos from sources that rarely acknowledged our existence before the financial crisis. The positive attention, combined with our reliable reputations, has moved millions of dollars to credit unions.

The challenge at many credit unions, including mine, is how to best turn deposit growth into loans. Numerica Credit Union is a $1 billion asset community-chartered credit union. Economic stress has resulted in increased loan losses—roughly three times the level of a couple of years ago. (Charge-offs have increased from about 0.33% in 2008 to a projected 1% for 2010).

Auto lending has always been a significant product for Numerica. For nearly 15 years, we’ve processed loans successfully using two independent channels—indirectly through dealers and through our branch/phone center. It’s easy to see why a large percentage of recent loan losses are auto loans.

So do we keep making auto loans? I say “yes.” In my experience, there’s a direct correlation between the “average life” of credit union shares and the “average life” of auto loans. This correlation makes sense from an asset/liability management standpoint. The relationship between share growth and other traditional credit union loan products is much further apart, with the possible exception of unsecured loans. And members generally need autos to carry on their lives.

As with all business practices, however, we need to continually refine products, policies, and procedures. In fourth-quarter 2008, Numerica was one of a dwindling number of auto lenders in our community. We tightened underwriting and still maintained good volume.

Late in 2009, however, more consumer options for auto loans popped up in the community. Numerica had to choose to either increase allowable loan-to-value ratios well above 100% for good borrowers, or offer higher rates. We’ve done bits of both, but generally favor good rates.

The credit union also must balance the needs of both indirect and branch auto lending. It won’t work to have branches working against the indirect program, increasing the likelihood loans will go somewhere else altogether.

Our solution: If our dealer center funds a preapproved branch loan, the branch employee is credited with the sale. In this situation, the credit union may fare best if the branch employee encourages the member to sign at the dealer.

In all situations, education and alignment of performance measures with what’s best for the member and the credit union are essential. Successful indirect lending is a combination of consistent underwriting, quick funding, respect for dealer product sales, and thorough analysis of the business.

Key monitor points are effective yield, risk-rating distribution, member contact beginning at 15 days of delinquency, and when a dealer has losses. We track applications throughout submission, approval, and funding. Collection efforts depend on current credit scores.

Has auto lending become more difficult? Absolutely. Credit unions must work diligently to offer some lending products, such as mortgages and business loans.

But members will always need auto loans, and credit unions must continue to provide them, now and in the future.

Jennifer Lehn is executive vice president of Numerica Credit Union, Spokane Valley, Wash., and chair of the CUNA Operations, Sales & Service Council. Contact her at 509-536-6183.