Loans–Or Groans?

Steve Santiago, Credit Union Journal
February 11, 2008 | COMMENTS

The decline in new car sales has some credit unions turning to independent auto dealers to drive up auto loan volume, but some are cautioning over the risk associated with some dealer's sporadic regulatory compliance.

With more than 43,000 independent dealers making 32% of U.S. car sales, according to some estimates, there is ever more reason for credit unions to have due vigilance when it comes to compliance issues. According to CUDL statistics, in the first half of 2006, loans arranged through dealerships accounted for 39% of outstanding credit union vehicle loans.

The areas of greatest concern remain inadequate financing and titling. Particularly impacted are small- and medium-sized dealers that may not necessarily have the resources to devote compliance issues. So far, there are a couple of ways to mitigate risk: invest in technology or partner with an indirect lending network.

AppOne, a division of Wolters Kluwer and a provider of technology and risk mitigation services to independent automobile dealers and lenders, offers a risk-management solution that ensures the security of the document flow between dealers and lenders.

“Our system works on the transaction level. We have a portal that provides a simple, compliant way to finance,” said Gary Perdue, COO of AppOne Inc. “We laser print documents so the dealer can't print documents outside our system and everyone has to use our forms, which also ensures compliance.”

In addition, the AppOne platform numbers and indexes original documents, which are then turned into PDF documents that are locked so they can't be edited outside the system.

In an article that first appeared on www.subprimenews.com, Kevin Kopp, director of indirect lending at Wolter Kluwer, said compliance and legal issues continue to weigh down many independents and some states have stepped in to cut down on fraudulent titles. The direct effect on lenders, he said, is added documentation which places more of a burden on the lending community but also impacts efforts of credit unions especially smaller to ensure added vigilance.

Perdue said many independent car dealers don't have the same resources as franchise dealers do so the focus has to be making sure they are financially sound and that they are in compliance when it comes to dealing with liens and getting titles.

Jerry Neemann, executive vice president at Credit Union Direct Lending (CUDL) in Rancho Cucamonga, California, said his group is working on rolling out a new product in a deal with Manheim Auto Financial Services whereby Manheim does all the title work for the credit union, ensures vehicle trade-ins are paid off, and takes deposit funds to the dealer after all third party paperwork is completed. He said the new product called MAFS Advantage should be available sometime in the next few months.

“Sometimes the title is two purchasers back lagging because the car is used and the lender has to make sure the title is OK,” Neemann said. “Manheim will have the title in hand after the transaction is completed at auction and that's a nice compliance and safety feature for the credit union.”

According to the National Automobile Dealers Association (NADA) used car sales at then end of 2007 outpaced new car sales last year by a 3-to-1 ratio. And used car depreciation is steadily slowing. With independents well known for carrying large inventories of used vehicles and credit union auto lending market share increasing (18% in 2006 according to CUDL) the stakes in the compliance game are rising.

One independent dealer thinks there is a third way to reduce the compliance risk: through forging well-informed relationships with high quality independent dealers.

“I'd say there are about 10% of independents that are what we call rogue dealers who give everybody else a bad name,” said Chris Duggan, general manger of Merchants Auto Group, a Manchester, N.H.-area independent. Duggan also serves on the national advisory council for CUDL.

He argues that part of the problem is that some credit unions don't have the resources to do background checks on independents or check to see if there is any negative data against them from institutions like the Better Business Bureau. He added that many credit unions are reluctant to forge relationships with dealers that lack a “franchise badge.”

Duggan thinks the key to gaining greater confidence from credit unions and greater market share is to mirror the credit union model.

“We've been here for 50 years and in that time, we've created a community brand,” he said. “We support a minor league baseball team, a local stadium and have one of the community's largest blood drives. That gives us more legitimacy in the community than a franchise would.”

Duggan said that in the 50 years that Merchants has been in business, it has formed solid business relationships with major financial institutions and area credit unions like Digital Federal Credit Union, Members First Credit Union, and Granite State Credit Union. Those relationships, he stressed, are based on mutual respect for one another's business practices.

The average new car loan is for $20,000 and the average loan made by Merchants is $12,000 he said. His premise being that the risk on the loan is less for the credit union the loan value is lower and there is less of a chance of the buyer being upside down on a used car than on a new car.

“We're intermingled in this community and they (Merchants-associated credit unions) are intermingled with us—it's a win-win for everybody,” Duggan affirmed. “The credit union retains its customer base, money stays in the community and our dealership profits. People see credit unions in a different light than they do banks. You feel like you are part of a community.”

Duggan said he doesn't like to see credit unions get burned: “It's a bad deal for us, they get gun-shy and that doesn't help anybody.”

This article appeared at www.cujournal.com and is reprinted with permission.