A strong 2014 for credit unions should bode well for the New Year—at least as far as lending is concerned.
Credit unions are poised to make gains across a number of loan products, say experts, and 2015 could be a banner year for one of CUs' most bread-and-butter offerings.
"I think it's going to be a banner year" for car sales, declared Steve Klees, SVP of specialty channels at EFG. Klees predicted new car sales of approximately 13.83 million, which would beat the previous record of 13.8 million, set almost 11 years ago.
Because employment is still rebounding and rates are still low, he said, manufacturers this year will be getting heavy into incentives in a way that they haven't many years—at least for the first three quarters of 2015.
"Around the third quarter we're going to see either 0% interest or some pretty heavy rebates in order to push the volume to that number of 13.83 million," he said.
So what does that mean for CUs? For starters, said Klees, if the incentives come back and manufacturers go to 0%, "new car business for credit unions then becomes either flat or actually reduced."
The big opportunity for CUs then, he said, continues to be in pre-owned.
"We're going to see continued heavy lease returns and going to see customers that are interested in value-type cars—the three- or four-year-old off-lease value car, maybe with a certified pre-owned warranty on it. Credit unions play very well in that space." On the indirect side, he added, once incentives hit, credit unions will need to carefully define their niche for dealers so that dealers have a clear understanding of the kind of consumer—and the kind of credit—CUs are going after.
Gas Prices Down, Delinquencies Up
But Melinda Zabritski, senior director of automotive finance at Experian, countered that CUs shouldn't abandon the idea that they'll be priced out of new car markets.
"Incentives have been around for years and years and years, and even if the incentives ramp up, it's not going to eliminate the market for credit unions—especially when you consider that incentives are really only touching the very prime portion of the marketplace," she said. "Even with incentives you've got a lot of competition on that low end of prime. Just having the incentives out there is not going to completely price out credit unions form the new car market."
No matter new or used, added Zabritski, expect to see trends around finance amounts continuing to grow, in part because vehicle costs are on the rise.
"I would also expect to see some upticks in delinquencies," she said. "We started to see some modest increases toward the end of last year and we expect to see that continue. It goes hand in hand with that growth in subprime, so we expect to see it to continue."
One of the pleasant surprises for consumers at the end of 2014 was a decline in gas prices to levels not seen in several years, and Pete Turek, automotive VP at TransUnion, noted that sliding fuel prices are providing yet another boost to consumer confidence. The catch, however, is that gas prices are far more volatile than other factors like rising house values, employment figures and shifts in 401(k) values.
For Amy Crews Cutts, chief economist at Equifax, the key to 2015 isn't one specific product line, but rather a particular credit niche—a group she calls "near prime" and classified as scores approximately between 620 and 680.
"That's an imperfect range, but for the purposes of this discussion, it works," she said.
Cutts cited near prime as a sweet spot for CUs in 2015 because prime and super-prime consumers can get credit nearly anywhere, whereas subprime consumers become increasingly difficult to service the further down the credit spectrum they go. Near prime consumers, she said, "are not getting a lot of offers of credit near prime guys are not getting a lot of action because lenders have gotten very conservative," she said.
Members in that credit tier may have suffered due to a job loss, foreclosure or other problems from the Great Recession, but "those guys are the very best, because you're on their way up, and if you get them now on their way up perhaps with a little bit of a premium that you can refinance them into something better later or automatically rate adjust them later and really provide a service that's needed."
When it comes to credit cards, Cutts noted that balances are likely to grow by 4-5% this year—similar to what they saw in 2014, she said. One trend she predicted is that there will be an increase in the total number of credit cards opened during 2015, but those cards are likely to be general credit cards rather than merchant-specific cards.
"Where they can look to grow things is the opportunity to have a card that meets the needs of their members, and how to counsel them on the use of cards," she said. "Twenty years ago credit cards were credit cards; today they're a transaction card that we use for gas, groceries, et cetera." The question for members is how they manage those cards, she said, and CUs can help members and themselves by offering education around managing these products.
For Jason Osterhage, SVP of lending at Chicago-based Alliant CU, much of the focus will be on residential mortgages, as well as consumer and commercial lending. But whatever the product, he said, the key is that "there will be higher demand for transparent, responsible, consumer-friendly lenders. But, no doubt, I think we'll see some resurgence of past mistakes on both the lender and borrower side. It always feels like memory is far too short [following events like the Great Recession]."
Osterhage is also chair of the CUNA Lending Council, and he noted that there is a good opportunity for credit unions right now in the SBA space. The reason for that, he said, is because the old credit standards still haven't come back and many small businesses are struggling to get credit, because many lenders don't see that category of borrower as desirable as they once did.
"SBA loans can be a really good fit for credit union members' small businesses," he said. "It's not the right loan structure for every borrower in every case, but it's a really good tool that more and more credit union should be using, and that's going to be something we will expand here at Alliant in the next couple of years."
Whereas four years ago consumers were still paying down balances and being mindful of new debt, will improving economic conditions lead to a greater willingness to take on new loan obligations? Or have members retained the lessons of the Great Recession?
"What we're seeing at Alliant is that consumers still remember those lessons," said Osterhage. "We think they're starting to forget them, but more slowly than in the past. I'm not a macro economist by any means, but perhaps that's tied to the slow recovery."
For EFG's Klees, the recession is "going to be a hangover that lingers for a long period of time. For those under 40 that lived through that, that had a major impact on trying to limit excess. I don't think you're going to see—at least in my lifetime—a return to 'I'll finance whatever they can give me.'"