MIAMI–Credit unions’ efforts to focus more on B and C credit should be made with an even more watchful eye now, cautioned several lending executives attending the 2012 CUNA Lending Council Conference.
As Credit Union Journal has been reporting, the slim margins all lenders face now on top-tier credit auto loans have persuaded more CUs to accept greater risk and reach down to lower credit scores to improve margins (CU Journal, Feb. 27). However, Bill Vogeney, SVP at the $3.7-billion Ent FCU in Colorado Springs, Colo., is concerned that competitive pressure now is driving down rates for these lower FICO segments to a point where this book of business could well be proven to be a bad gamble down the road.
“As crazy as the best rates in A and A-plus are, B and C rates now are even nuttier,” Vogeney told Credit Union Journal. “Lenders are saying they will take on a little more risk to pick up yield, and all these entrants into the lower FICO scores are bringing down rates.”
Vogeney, vice chair of the CUNA Lending Council, said a year ago the national average for B and C auto loan rates was about 5.5% to 5.75% and today it’s near 4.5%.
“That is a 125-basis-point drop. Rates are falling faster on B and C credit than any other loan segment, partially, too, because this segment of the portfolio is performing well–people are paying their car loan ahead of most other obligations now,” Vogeny said. “But in time that changes, and where rates have fallen to, if there is any kind of degradation in credit quality in the B and C book of business, the B and C business put on the books now will be unprofitable in the future.”
Could Get Dicey
Keith Reynolds, community president, CEFCU West, San Jose, Calif., concurs, saying that any change in the economy could make this business dicey.
He told Credit Union Journal that his concern now, especially on the West Coast, is soaring gas prices.
“A spike in gas prices makes this particular segment of the market more volatile. Sure, there are many who have improved their financial picture from a few years ago, their balance sheets look a lot better,” said Reynolds. “But really, how solid are their positions? Family earnings are down, and put the additional pressure of another $20 in gas a week on some and you will see many more hardships.”
Fred Ryerse, senior vice president of lending at the $2.3-billion Members 1st Federal Credit Union, Mechanicsburg, Penn., has seen B and C rate competition increase but said credit unions should be OK as long as they stick with their underwriting guidelines and don’t give into price wars.
“We offer auto loans throughout many credit tiers, and we are doing very well. But one thing we don’t do is change our policies or pricing to match others in our market.”
Mike Long, chief credit officer at the $1.7-billion UW Credit Union in Madison, Wis., said his credit union exited the B and C auto loan market this year after having a brief problem with delinquencies.
“We started to buy deeper last year but found it only worked, for the most part, with our current members, whom we knew. It did not work so well with new members, so we pulled back. We caught it early.”