Credit Unions' Top Auto-Lending Challenges

Credit Union Magazine
May 28, 2007

Credit Union Magazine recently discussed credit unions' top auto-lending challenges with Tony Boutelle, CEO of CU Direct Corporation, Rancho Cucamonga, California, a credit union service organization.

What are some top auto-lending challenges that credit unions face?

The industry is changing as the captive finance companies and big banks now have credit unions on their radar. They're making internal changes/moves to combat credit unions' market share. The question is, are credit unions making the right changes to stay competitive with these big time lenders? And do they even realize that their one-time superiority in the used car segment is being challenged?

Rising interest rates coupled with higher gas prices will affect the sale of the big ticket items--sport utility vehicles and trucks. Historically, these are the largest volume sellers.

Credit unions are challenged to finance auto loans with current members. Credit unions need to educate, persuade, and capture more business from current members through indirect channels. The average credit union finances about 18% of members' auto loans.

Credit unions also face internal industry competition challenges—credit union vs. credit union.

Credit unions must to look at their own portfolios to determine rates, terms, and advances. They can no longer take a “me too” attitude: “If ZYX Credit Union can offer those rates, terms, and advances, so must we.”

In some ways, the credit union industry has become its own worst enemy. Matching rates, extending terms, and offering large advances to attract loans have become the norm. Some credit unions have forgotten common-sense lending practices trying to secure indirect auto loans.

How can credit unions overcome these challenges?

Credit unions must deliver excellent, consistent service to dealers. They must develop key partnerships with the dealers and help their dealer partners sell more cars. This means making sure they push/motivate/direct their membership to these dealers. If you can help the dealers sell more cars, they'll reward credit unions with more loans.

Credit unions must recommit to member retention as an effective and efficient lending strategy.

They must examine members' needs to determine the most effective way to increase member loan opportunities.

What economic and other factors are affecting credit unions’ auto-lending efforts?

Rising rates, liquidity, higher cost of funds, and higher gas prices.

What are some unique auto-lending efforts you've witnessed? We work with some of the most successful auto lending credit unions in the country. They have developed indirect lending and point-of-sale lending as core competencies. Many credit unions conduct special car sales exclusive to dealers that provide consistent volume throughout the year, promote their best dealer partners on their websites, and hold contests with their dealers.

What technologies are aiding credit union auto-lending efforts?

Technology that makes the application process fast and easy, and eliminates re-entry. CU Direct's front-end portal, dealer management system integration, credit union data processor integration features, and integration with a variety of external decision engines improve processing efficiencies for credit unions and dealers.

Faster funding is key for the dealers. If you can get the dealers their money faster, you'll get more of their business. CU Direct has developed a technology called SmartFund. Essentially, it's an imaging technology that allows credit unions to review loan documents and fund vehicle purchases in one day. It's a new product that has had very high dealer satisfaction.

What do you see for the future of subprime auto lending?

This segment will continue to grow. The market for A- and B-quality borrowers is flat to shrinking.

Subprime lending (C and D loans) is growing 5% a year. Credit unions have an opportunity to become subprime experts and grow their auto loan portfolios going forward.

A-paper loans alone aren't very profitable, pushing credit unions to develop lending strategies for a mix of business. Margins can increase with proper lending practices.

What are the keys to success for auto lending?

Developing good long-term relationships with the dealers. Listen to what the dealers have to say, react to dealer concerns and suggestions, and make changes where it makes sense for you and your lending team.

Also, train all participants on your technology to ensure you're maximizing its capability.

Effectively use business intelligence and employ cross-selling strategies.

On the underwriting side, use experiential data to determine what you can afford to advance and how deep you can buy and still turn a reasonable profit while being competitive. Look at the lenders in and outside of the credit union movement, find out what they're doing that you can do in your credit union, and improve upon it.

Credit unions must collectively leverage technology, learn from each other, consistently identify best practices, and hold true to their core values. Working together, credit unions can improve processing efficiency, more effectively manage risk, and create more marketing opportunities. This will all lead to higher market share and profitable loans.

Tony Boutelle is president/CEO of CU Direct Corporation, Rancho Cucamonga, California, and a member of the National Association of Credit Union Service Organizations, Newport Beach, California. Contact him at 877-744-2835. This article appeared on www.creditunionmagazine.com and is reprinted with permission.