As the national auto market continues to perform well, the credit union auto loan portfolio has grown significantly in recent years and has shown little sign of slowing down.
This week, CreditUnions.com looks at different sources of auto loans, from the indirect channel to leases, and considers the possibility of a subprime auto bubble.
The high delinquency rates of loans made to poorly vetted borrowers then packaged into bonds and sold to investors have raised fears of a bubble.
Sound familiar? In Is There An Auto Bubble In Credit Union Land, Callahan Senior WriterMarc Rapport writes that credit union ledgers show no froth amid larger financial industry reports about a growing subprime auto loan bubble.
Indirect auto lending the process wherein a consumer obtains an auto loan through a car dealer as opposed to directly from a financial institution is on the rise in the credit union sphere.
Philosophically, the industry’s opinion of indirect lending is split. Some credit unions believe indirect lending brings in new members who otherwise would not tap into the cooperative FI model. Others believe indirect lending adds hidden costs and unnecessary layers the credit union must break through to build personal relationship with members.
However polarizing the topic, indirect lending is in the midst of a boom. Read more about it in Callahan Industry Analyst Liz Furman’s piece this week, The Rise Of Indirect Lending.
Credit unions increased their market share for auto loan originations by 20 basis points annually, reaching 16.5% as of December 2015. Read a further breakdown of the industry’s auto performance in the fourth quarter 2015 in Auto Performance By The Numbers.
In early 2012, Directions Credit Union was looking for ways to increase its loan portfolio. So when a third-party auto leasing company, Credit Union Leasing of America (CULA), approached Directions with the hope of expanding its business into the Northwest Ohio market, Directions listened.
CULA is strategic about partners, the credit union’s senior vice president of lending, Tim Crosby, says. Unlike some other programs, it wants just one credit union to manage a program in a certain market.
Directions started originating auto leases in late 2012 and has since originated just north of 2,700 leases corresponding to $86 million. To learn more about this strategy, read The Driving Decision To Offer Auto Leases by Callahan Associate Editor Erik Payne.
When Matt McCombs became CEO of Vibrant Credit Union in May 2011, the $570 million cooperative’s auto loan program was almost nonexistent. It had less than $22 million in direct auto loans, $58.1 million in indirect loans, and a loan-to-share ratio of 62.9% versus 69.2% for credit unions $500 million to $1 billion in assets, according to data from Callahan Associates.
At the time, pricing in the indirect channel was competitive in both rates and dealer reserves, so the credit union became more aggressive in capturing direct auto loans. The result? In second quarter of 2011, indirect lending at Vibrant accounted for 22.8% of total loans. At the end of first quarter 2016, it accounted for only 3.1%. Vibrant’s percentage of indirect loans versus total auto loans dropped from 72.6% to 8.5% in that timeframe.
But the journey to a fortified direct loan portfolio was not smooth. See more in Why Vibrant Credit Union Doubled Down On Direct Lending by Callahan Senior Writer Marc Rapport.