I assume that anyone who has read one of my articles in the past has figured out I have a slightly offbeat (I prefer the term “refreshing’) perspective on lending. That being said, I think that trying to fix your loan program would be a lot easier if you understood what truly was “the root of all evil” for Indirect lending. Most of my peers across the country would say that failure in Indirect Lending has a high correlation to the inability to maintain consistent credit quality. I maintain that credit quality is NOT the root of all evil in Indirect; it’s really a lack of a sustainable dealer value proposition. If you don’t understand what I mean by the term value proposition, ask yourself this question: why would a dealer’s finance manager send you loans?
In reality, there are just a few major reasons why a dealer will do business with your credit union:
Price If your credit union consistently has the lowest possible rates on loans, you’ll get business. But do you really want to compete on price only? Right now, the market for auto loans is ultra-competitive. There are large national and regional banks that have cost of funds 50 BP lower than the typical credit union, which means they can undercut us in price and maintain similar margins. These competitors are also larger and more efficient, adding to their price competitiveness. There are re-formulated competitors such as Ally Bank, along with General Motors Finance and Chrysler Finance that are also trying to build market share at all costs. In addition, our biggest competitors may be other credit unions trying to give their money away! Recently, I was speaking with one of my peers in the Midwest who was lamenting that a local credit union was offering 2.5% for 72 months for credit scores down to 600. THIS IS NUTS! I’d hate to tell this credit union’s board they’re probably going to experience loss ratios going forward of more than 2.5% on anything below perhaps 660 and they’d probably be better off investing the money or driving off some deposits if they want to improve their earnings.
Credit Quality In today’s market, if our competitors aren’t trying to chase business with the lowest possible rates, they’re trying to buy as “deep” as possible. Whether than means sub-600 scores, or virtually any B and C deal regardless of the LTV (imagine a deal at 150% LTV plus dealer sold products), there will be lenders who are attempting to buy market share by sacrificing credit quality. For these competitors, the allure of higher yields on B, C and D is also hard to resist.
In reality, most credit unions are not very good at servicing (okay, I meant collecting) mid-prime and non-prime loans, especially auto loans originated to consumers with no real account relationship with the credit union. We’re used to dealing with long-time members who like doing business with us and will repay us before they pay their other creditors. It’s very difficult for any credit union to compete with a “full spectrum” lender that buys 800 and 500 FICO scores.
Program Flexibility As any experienced finance manager will tell you, no two auto loans are alike. The finance manager is in a position that they need to get virtually every deal done, regardless of the LTV, credit score, or term. By the way, not only does the finance manager have to make sure the borrower gets financing, they need to ensure the dealer makes $1000+ per car loan from just the financing. Flexibility in LTV, term, dealer sold products, and dealer compensation can build your credit union business. You may not want to lend 150% LTV plus a $5,000 warranty for a 625 FICO borrower, but you might consider it for a strong borrower with a 740 FICO score. If the finance manager can get this deal done by increasing the rate a bit to account for the higher LTV, and make an extra $100 flat fee by sending it to your credit union, you don’t have to provide the lowest rates in town to gain business.
While program flexibility is important, any object that is flexible will eventually break. It’s very easy to take the flexibility to extreme levels and forget your credit union’s overall risk position. If you’ll buy two “out of the box” kind of deals, are you getting two additional loans at a low LTV? What has happened to your weighted average term and LTV since you added some flexibility to your program? Is the additional risk you’re taking manageable?
In the second part of this article, I’ll give you an idea on how to find your value proposition. Hopefully, you’ll have a better idea of what it takes to be successful in Indirect lending, along with picking up some clues as to whether you’d be better off building a Direct auto loan model.
Bill Vogeney is Executive Vice President and Chief Lending Officer for $3.3 billion Ent Federal Credit Union in Colorado Springs. He can be reached at bvogeney@ent.com
The ratio of borrowers 60 or more days past due will remain the same during 2012, according to the annual auto delinquency forecast released this month by credit information firm TransUnion.
Sixty-day auto loan delinquencies are expected to decrease in the first two quarters of 2012 before rising back to 0.51% at the end of the year, finishing at about the same percentage as year-end 2011.
Auto loan delinquencies have decreased markedly since the recession-driven peak of 0.86% in the fourth quarter of 2008. Since that time, 60-day delinquencies have dropped on an annual basis to the expected 0.51% level for the end of 2011 and 2012.
Delinquencies are down in part because auto lenders tightened their standards during the recession, so newer loans on the books are performing better, says Peter Turek, automotive vice president in TransUnion’s financial services business unit.
Lenders have stayed conservative in approving loans, observes Turek, who says lenders today are better at matching individual borrowers to a particular vehicle based on its collateral value.
Auto loan originations have greatly increased since the official end of the recession in mid-year 2009, moving up nearly 28% as of second quarter 2011, the latest data available.
U.S. auto sales increased 11% last year as the market rebounded from the weakest demand in almost three decades. This year's volume was up 10% through November, reports Automotive News.
Good for CUs
In the next year or so, expect auto lending to show “gradual improvement, but nothing dramatic,” predicts Mike Schenk, CUNA’s vice president of economics and statistics.
He says new car sales should hit about 12.6 million this year, up from a low of 10.4 million sales in 2009, but still markedly lower than the 17 million new vehicles sold in 2000.
Used car lending is where the action is for credit unions. Credit unions’ new car loans outstanding totaled $60.4 billion as of June 2011, roughly the same as in 2000. By comparison, credit unions’ used car loans outstanding totaled $104.8 billion in June 2011, up considerably from $60.9 billion in 2000.
“Pricing wise, credit unions are head and shoulders above others in the market,” Schenk tells Credit Union Magazine.
Credit unions’ average rate for a five-year new car loan was 3.82% on August 1, 2011, compared to 5.24% at banks. Used car loan rates were 3.95% and 5.48%, respectively, for a four-year loan, according to Informa Research Services.
“You don’t want to live and die on pricing,” Schenk advises, noting that credit unions have always done a great job on education, too, making sure members are informed about the car-buying process.
In another effort to drive in more business, some auto lenders, including credit unions, may be more willing to be flexible with credit-challenged consumers.
Experian Automotive recently said 21.87% of all new vehicle loans went to customers in the nonprime, subprime and deep subprime categories, according to its most recent quarterly data.
The largest percentage increases were in the two highest risk segments–deep subprime, which jumped 17.3%, and subprime, which jumped 17.8%. Nonprime loan shares also increased by 12.5%.
“With more loans being booked outside of prime, lenders are showing they are willing to be more flexible in their lending strategies,” said Scott Waldron, president of Experian Automotive. “However, consumers may still have the impression that lending is extremely tight, so it is important for lenders and retailers to educate car shoppers that there are financing options available to a wider group of consumers.”
Experian’s analysis also showed that the average consumer credit score for both new and used vehicle loans dropped in the third quarter of 2011. For new vehicle loans, the average credit score fell from 769 in third-quarter 2010 to 763 in third-quarter 2011. For used vehicle loans, the average fell from 683 in third-quarter 2010 to 676 in third-quarter 2011.
Despite the drop in credit scores and more courting of subprime borrowers, the automotive finance industry is continuing a steady climb to good solid footing, said Melinda Zabritski, director of automotive credit for Experian Automotive.
“Consumers continue to do a better job of repaying loans, while at the same time, many of the most risky loans from 2007 and 2008 are now off the books,” Zabritski said. “These factors combine to lower the total volume of dollars at risk and give lenders more confidence in loosening their overall lending standards.”
During the third quarter, 30-day delinquencies fell 7.05% while 60-day delinquencies fell 7.4%, according to Experian. Repossession rates dropped by 6.4%, from 0.67% in third-quarter 2010 to 0.62% in third-quarter 2011.
The average loan amount for new vehicles was up $600, going from $25,273 in third-quarter 2010 to $25,873 in third-quarter 2011.The average loan amount for used vehicles jumped $653, from $16,706 in third-quarter 2010 to $17,359 in third-quarter 2011.
For most of 2011, credit unions were the go-to lenders with some of the country’s lowest auto loan rates, industry data showed. However, auto finance companies topped the list when it came to lending to subprime borrowers. According to Equifax, 38.5% of all auto loan originations from subprime borrowers came from auto finance companies as of the third quarter. The figure was 17.6% for credit unions and banks.
Credit unions and banks originated 820,200 loans in July 2011 compared to 832,000 for July 2009, which was a 2% increase. Auto finance companies originated 854,800 loans in July 2011 compared to 581,300 in July 2009.
Michael Koukounas, senior vice president of special client services at Equifax, said unemployment rates had led auto lenders to become proactive in adopting comprehensive data and verification tools for greater loan transparency. This has resulted in evaluating a larger group of car-buying public which has aided the auto lending industry recovery, he added.
This article was originally published in Credit Union Times at www.cutimes.com and is reprinted with permission.
Risk-management professionals hold a decidedly pessimistic outlook on the housing market and consumer credit, according to a survey conducted for analytics firm FICO by the non-profit Professional Risk Managers’ International Association (PRMIA).
The survey, reversing the growing optimism seen in late 2010 and early 2011, shows that risk professionals expect delinquencies on consumer loans to rise, underwriting standards to become stricter, and the housing sector to continue struggling far into the future.
Key findings and predictions about the next six months:
* Most (85%) believe the level of mortgage delinquencies will rise or stay the same.
* Nearly half (49%) expect auto loan delinquencies to stay the same.
* Many respondents (48%) think the U.S. is heading for a double-dip recession.
Housing sluggish until 2020
When asked if housing prices nationally would climb back to 2007 levels before the year 2020, 49% of respondents said no, only 21% said yes. And the negative sentiment extended beyond property values. Among those surveyed, 73% believe mortgage defaults would remain elevated for at least five more years.
“Housing has been an enormous drag on the economy for over three years as U.S. households lost trillions of dollars in equity,” says Andrew Jennings, chief analytics officer at FICO and head of FICO Labs.
“While the housing sector will almost certainly gain strength during the next nine years, many professionals believe prices will remain depressed for half a generation,” adds Jennings. “This puts the devastation of the housing crash into perspective.”
Credit health seen declining
Survey respondents expressed concern about consumer credit health beyond mortgages.
When asked their opinions about the next six months, a large number of survey respondents indicated that they expect delinquencies to rise on auto loans, credit cards, and student loans:
Auto lending, previously a bright spot in FICO’s quarterly surveys, has a mixed outlook, with 30% of respondents expecting auto delinquencies to rise, while 21% expect them to fall.
*For credit cards, 40% expect delinquencies to rise and 23% expect them to fall.
*And for student loans, 48% of respondents expect delinquencies to rise and 13% expect them to fall.
Small businesses face challenges
“Small businesses have traditionally been providers of much-needed jobs during economic recoveries,” says Jennings. “But the tight credit conditions facing small businesses today make it difficult for them to invest and expand. The notion of small-business job creation seems, for the moment at least, aspirational.”
The survey revealed that:
About 36% of respondents expect delinquencies on small business loans to increase; 17% expect delinquencies to decrease.
* While 57% of those surveyed expect the amount of credit requested by small businesses to increase over the next six months, only 34% expect the amount of credit actually extended to small business to increase. This credit gap between supply and demand has been persistent over the past six quarters.
Card use could rise slowly
About 50% of survey respondents expect credit card balances to increase over the next six months. The increases are likely to be driven by higher spending among some consumers and smaller monthly payments from others.
But not everyone is optimistic about credit card growth. In a sign that risk managers aren’t optimistic about the ability of consumers to power the economic recovery, 64% of respondents expect credit card usage to remain below pre-recession levels for at least five more years.
Attributed to a toast given by British Parliament member Sir William Curtis in 1825, the three Rs were long known as the foundations of a basic skills-oriented education program. While reading, 'riting, and 'rithmetic may be obsolete in today's era of standards-based education, this simple concept can still be a valuable tool for credit unions when considering the opportunity in private student lending.
Reading
We've all seen the headlines. Ever-increasing college costs have left students and families searching more than ever for affordable college financing options. According to one recent survey, 46 percent of families borrowed money to help pay for college. The federal government's Stafford and Perkins student loan programs are the most widely-used student loans and remain the best and cheapest way for students to borrow. In addition, President Obama's recently announced plan to lower monthly payments for federal student loan borrowers is another positive step during challenging economic times.
However, students and families also rely heavily on private student loans to fill funding gaps, with 13 percent of families utilizing them in 2010, versus just 8 percent two years earlier. With the average cost of attending a four-year, in-state public college at $17,131 per year (up 6 percent from 2010-11) and the average cost of a private college at $38,589 per year (up 4.5 percent from 2010-11), it comes as no surprise that families need additional financing options.
Reality check: Nearly $8 billion in private student loans were originated in 2011 and remain a critical funding component for millions of people. While the ubiquitous "student loan" moniker may mask the issue, it's important to understand these loans are a family decision, oftentimes with mom or dad playing the role of co-borrower.
Writing
As any financial institution can attest, writing loans is a risky business. Understanding that risk and employing proper mitigation tactics are the keys to portfolio performance. While private student lending is unique in many ways, it's not unlike mortgage or auto lending, in that there are important factors that can be utilized to mitigate risk. Key factors include:
For credit unions looking to eliminate risk completely, it may seem easy to refer borrowers to another lender or simply not make these loans at all. But is the answer really that easy?
Risk check:Regardless of a credit union's role in student lending, risk is present in some shape or form; understanding that all student loans are not created equal and that aligning that risk with a credit union's business strategy is essential.
Arithmetic
Delivering superior value to borrowers is an admirable goal, but it's only possible if value is also being returned to the bottom line. In 2011, the average private student loan rate on a national level was approximately 8.5 percent (variable rate that resets quarterly based on index). The average rate on private student loans issued by the 200+ credit unions partnered with Credit Union Student Choice was just a shade over 6 percent.
Quite simply, these credit unions are doing better for their members while simultaneously returning value to their balance sheet and establishing a genuine foundation for a long-term member relationship.
Rewards check: While the numbers have to make sense, the rewards can be measured in more than just ROA. Fulfilling a social role by delivering fair-value credit to those in need, establishing new relationships with young adults and families, and helping students achieve a critically important achievement in life are all part of the "mathematical" equation.
Credit Union Student Choice is the leading provider of higher education financing solutions to America's credit unions and is a preferred product provider of Credit Union Resources, Inc. Reprinted with permission from the Texas Credit Union League (www.tcul.coop).
| Home | News Archive |