While some credit unions have received favorable results from indirect lending programs, one credit union in Texas was able to increase direct auto loan volumes and profitability through better member service and educational programs.
For seven years, University Federal Credit Union ran a lucrative indirect lending program that grew over time to involve about 110 auto dealers. The Austin-based credit union has over $510M assets and 94,000 members, with $180M in outstanding auto loans. While initially pleased with the increased volumes, several problems eventually surfaced that gave them second thoughts on maintaining an indirect program. Despite the potential risks of scrapping a profitable program, they were able to develop a direct program that was just as financially viable, while strengthening member relationships through a consumer education campaign.
According to James Naster, Vice President of Lending at University FCU, problems with dealer participants in their indirect lending program were beginning to adversely affect relations between the credit union and its members. One issue was that indirect lending rates were set higher at the dealerships in order to help offset commissions. Members complained after discovering they could have received a lower rate by applying directly to the credit union. There were also instances in which the credit union found itself in the middle of miscommunications between members and dealers. "Dropping the program was a difficult decision to make, and we received a lot of complaints from dealers about it," noted Naster.
University FCU worked with a consultant to develop a new program based on consumer education. The goal was to provide crucial information on the car buying process -credit ratings and how they are used, how to determine what you can afford, how to negotiate effectively, etc. - so that members could make more educated decisions. Called "Wheels 101," the new program was launched in January 2000. It was a "back-to-basics" approach that paid off quickly, resulting in a 26% increase in new loan volume the first year.
Several new communications tools were produced to support "Wheels 101": a monthly online newsletter, 24-page car buying guide, educational seminar, and a revamped website with links to consumer sites like carsmart.com. The car buying seminars are particularly popular, drawing hundreds of attendees several times a year.
An aggressive loan "recapture" program was also launched, targeting members with auto loans financed by other lenders. University FCU pays members $25 to sit down with a loan officer and find out whether the credit union can beat their current auto loan rate. The program has thrived, and refinanced loans now account for over 20% of their auto lending business.
The new programs have gone a long way towards accomplishing the credit union's mission of serving members while achieving financial goals. James Naster sums it up this way: "We want members to think of us as their trusted advisors. By building trust, we earn their business."