Credit unions continue to see strong gains in auto lending, but tried-and-true tactics may need a tune-up in the year ahead.
According to Bob Child, chief operating officer at CU Direct, a “softening” of used car market values – along with increased usage of ride-hailing services and the continuing need for CUs to accelerate decisioning in the auto lending space – may pose a challenge for credit union auto lenders in 2018.
Similarly, Karen DeSalvo, chief marketing officer at Truliant Federal Credit Union, a $2.2 billion institution based in Winston-Salem, N.C., said while she expects CUs to continue to increase market share in the year ahead, it may be at a slower rate than seen during the past two years.
“We expect a larger push from manufacturing (captive lenders) in offering financial incentives for new car sales,” she said. “However, banks do seem to be continuing to exit or strategically restrict credit in the auto market and I expect that will carry into 2018.”
Truliant had more than 55,000 new and used auto loans on its books through the third quarter of 2017 (the most recent data available), for a total of more than $780 million, an increase of more than $80 million over year-end 2016..
DeSalvo said most experts agree that 2017 saw consumer demand for new car loans peak, and that demand is now “leveling off.” Additionally, she said, longer loan terms and longer vehicle lifespans are changing consumers’ buying habits.
“Manufacturers are offering aggressive financing incentives, combined with rebates to keep their production levels consistent,” she added. “This is negatively affecting depreciation rates and the underlying collateral’s value. However, I think credit unions are well poised to continue to responsibly lend money in the new/used market and will be able to strategically grow market share in a very competitive lending environment due to our focus on our members’ best interest.”
Strong market, but beginning to slip?
Auto loans continue to be a bread-and-butter product offering at nearly all credit unions – to the tune of more than $338 billion in new and used car loans through November 2017 (the most recent data available), according to CUNA Mutual Group’s Credit Union Trends report. That’s up from $300.3 billion in November 2016 and $263.6 billion in November 2015.
But at least one lender sees a number of threats coming down the pike. Chief among them, said David Jacobs, vice president of consumer lending at the $2.9 billion Coastal Credit Union of Raleigh, N.C., are projections that used car values will continue to decline at an even higher pace, which will lead to a greater severity of losses.
The economy and gas prices will also always play into this dynamic as well, he added. “Regulation will also play a role, especially with some of the latest guidance on the [Military Lending Act] rules with the latest clarification stating that purchase auto loans that have GAP insurance on them will no longer be exempt from the rule,” said Jacobs.
Meanwhile, as for the health of the overall auto market, the National Automobile Dealers Association recently projected that 16.7 million new cars and light trucks will be sold in 2018, slightly down from an estimate of 17.1 million for 2017. Also, NADA projected that new-car dealerships will retail 15.3 million used vehicles in 2018, versus an expected 15.1 million used sales in 2017.
Moreover, credit unions' auto loan market share is growing as banks’ share shows signs of slipping, according to CU Direct’s Child, who noted some banks have pulled back from auto lending in order to offset some nonprime/subprime concentrations they made in 2015 and 2016.
“The [overall] retail lending market has shrunk slightly over the past year,” he added. “On the credit union front, credit unions have done an excellent job staying engaged, improving loan decision times and building dealer relationships.”
Truliant’s DeSalvo agreed, adding she has seen a similar trend in other consumer loans, as well.
“The behavior is likely influenced by a combination of several factors including lower rates, and increased numbers of consumers using credit unions,” she told Credit Union Journal. “Banks historically tend to enter the auto market aggressively with credit policies that align with their targeted risk and profitability models. When that environment starts to change, they pull back and reassess.”
But the cooperative nature of credit unions, she said, allows them to be more consistent and “fully engaged” during all phases of the economic cycle. “This creates a more stable environment for credit union members and their partner dealerships,” she offered.
Coastal’s Jacobs noted that the nature of auto lending itself has also changed somewhat, shifting “to more of an emphasis on the dealer side to sell product instead of making reserve on rate mark-ups,” he said.
Most credit unions, Jacobs added, pay a flat reserve (a certain percentage of the amount financed) instead of paying the rate reserve with mark-ups and tend to be a "little more giving" on the allowable back-end percentages granted to the dealer—so this has also aided the credit union sector.
New and used
However, credit union auto lending remains largely focused on used vehicles, rather than new ones.
Of the $338 billion in auto loans CUs funded through November of last year, more than $205 billion of that was in the used car market – a trend that has held steady for the last two years.
CU Direct’s Child explained that leasing and manufacturer-financing incentives make it “extremely difficult” for credit unions to compete in new car sales. “Some banks have been able to obtain increased share of new car sales by assisting dealers with floor plan inventory financing. On the used car market there are not the same barriers, and credit unions do an excellent job underwriting members.”
One other continuing trend is the fact that auto loan terms continue to lengthen – in some cases to as long as seven or eight years for a new car loan. One factor behind that, suggested Child, is millennials’ growing impact on the auto loan market.
“Affordability and timing of purchase are the two factors differentiating millennials from other buyers,” he said. “They typically carry higher debt and lower income than their predecessors, and they are delaying the purchase of first vehicles to later in their twenties. Extended loan terms are probably a result of efforts to make car loans more affordable.”