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Indirect auto lending could struggle to rebound from coronavirus

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The coronavirus has led some credit unions to pull back from indirect auto lending even as the pandemic adds new hurdles to the car-buying process for consumers.

Indirect lending at credit unions was already slowing, dropping from double-digit growth in 2017 and 2018 to just over 3% last year, according to the National Credit Union Administration’s 2019 Annual Report. Despite that drop, delinquency rates on indirect loans have fallen every year since 2016, and some of last year’s decline could be attributed to a slight slowdown in total auto sales nationwide, along with most credit union loan growth also slowing.

Now the coronavirus could exacerbate that.

Many car dealerships across the country reduced their hours as the pandemic worsened, and dealers in some states were forced to close their doors entirely if they were deemed a nonessential business.

That didn’t stop members from pursuing vehicle loans, though some credit unions are now taking a closer look at new applications.

The $12.4 billion-asset Alliant Credit union serves members across the country, so the impact of reduced dealership hours wasn’t as concentrated as it might have been if Alliant primarily served members near its Chicago headquarters. Still, loan volumes dropped by nearly $9 million from March to April as the pandemic pummeled the auto lending market, but its loan count began to rebound in May.

"We’re seeing incredible application volume, but I think the reason we’re not seeing our look-to-book to be as high as it consistently was is for a variety of reasons,” said Jeremy Pinard, VP of consumer lending. “We’ve tightened some of our underwriting criteria, so we’re being a little more conservative. We’re not making as many exceptions as we may have used to, and we’ve pulled our underwriting standards in a little bit.” That includes bumping up the interest rate on deals where a buyer might want a longer term and being stricter about how borrowers’ proof-of-income is verified.

Still, some markets saw more severe drops than others as the outbreak limited consumers’ access to auto dealers.

“When Denver went into lockdown, we saw application volume drop there, Pinard said, “whereas in Illinois it remained strong and we saw a good volume there, and in Arizona and Florida. Arizona seems like nothing has happened.”

Some states’ restrictions have been more stringent than others. New York suspended in-person auto sales beginning on March 20 and only allowed dealerships to reopen in mid-May on an appointment-only basis. Other states have moved to appointment-only dealer visits, too, and credit unions with dealer partners facing those restrictions will need to be nimble in order to capture those opportunities.

Lee Decker, indirect lending sales manager at University of Wisconsin Credit Union in Madison, said the need for speed is likely to be an even bigger factor moving forward.

The $3.5 billion-asset shop has learned to move quickly, having grown from 920 indirect loans in 2007 – when UW instituted automated decisioning – to as many as 1,500 per month last year. The credit union’s platform allows it to issue loan decisions within seven minutes and provide same-day funding.

“We must be responsive,” Decker said. “Dealers will be looking to turn those appointments fast, so underwriting decisions must be done quickly. Dealers will most likely take the first decision as long as rate and terms are agreeable.”

Decker said the credit union expects to see higher delinquencies through at least the remainder of 2020 and is adjusting for that by suspending relations with dealerships that have track records of high delinquencies, charge offs and other collection issues. The CU is also paying special attention to borrowers’ employment status and may shy away from longer-than-usual loan terms because of the potential for additional risk.

Similar to Alliant, UW's auto lending pipeline saw a roughly $7 million dip between March and April, but rebounded to normal lending levels in May.

Fork in the road ahead

Credit unions aren’t through the tunnel yet, however, when it comes to auto-lending.

More than 40 million Americans, the equivalent of about one in four workers, have filed for unemployment benefits since the pandemic began spreading rapidly across the country in March. The million-dollar question, as CU Direct’s Chief Operating Officer Bob Child put it, is whether workers who were furloughed or unemployed will have a job to return to once the economy regains steam. That is likely to determine the sort of delinquency rates credit unions can expect in the future.

“That’s the biggest concern on why some credit unions are remaining on the sidelines,” Child said. “It makes sense because if unemployment is going to remain really high — and we are seeing that in some states — that will result in some delinquencies.”

Though credit union indirect volumes have slowed and some CUs have stepped back, analysts say there is still a market for that product, particularly as car-buying increasingly moves into the digital realm. Child noted that more people are shopping and negotiating prices online, and then either taking advantage of remote delivery or visiting a dealership and even closing a deal out on the vehicle lot.

And as some states restrict dealer appointment hours, gone are the days of walking into a dealership and doing test drives for hours at a time. Some experts believe the coronavirus could accelerate the rise of purely online vehicle sales, but convincing consumers to buy a car without ever seeing the vehicle itself remains a hurdle.

That could be good for credit unions that remain in the indirect space.

“Indirect lending is an opportunity in many regards because people are wanting to limit their contact with other individuals and make less stops, [and some may not] want to go to their credit union directly,” said Scot Hall, executive vice president of operations at Swapalease.com, an automotive lease marketplace.

One bright spot for some CUs even as auto lending dips due to the pandemic has been an increase in recreational vehicle loans. Child said RV loans are up 300% year-over-year within CU Direct’s network of nearly 1,100, which represents about 20% of the total industry. Alliant and UW Credit Unions also reported boosts in their RV portfolios. The RV Association of America said sales within certain parts of the country have spiked by as much as 170% compared to last year.

But Alliant’s Pinard suggested there could be some buyer’s remorse. RVs may feel like a good bet for consumers now in the days of social distancing, but those deals – which carry higher prices and steeper interest rates than traditional auto loans – could be burdensome this time next year if the travel sector returns to relative normalcy.

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