Darwinism vs. Intelligent Design

According to Ed Callahan and Bucky Sebastian, the future share and direction of the credit union industry may lie in the hands of mid-sized credit union CEOs.

Austin, Texas is very competitive when it comes to credit union auto lending. 11 of the top 20 lenders in Travis County, where Austin is located, are credit unions and 7 of them have indirect lending programs. A+ Federal Credit Union ranked eighth in total auto loan originations in the county as of August and has over $241 million in indirect auto loans outstanding.

About a year ago, the credit union decided to take an approach to indirect lending that was different from other Texas credit unions. In Texas, most credit unions let the dealer decide what the final interest rate will be on the credit union auto loan, based on the dealer’s buy rate and the mark-up that the dealer charges as a fee. The mark-up is typically capped by an amount of percentage points above the dealer’s buy rate.

Dealers like this approach because it gives them more flexibility in choosing an interest rate for the auto loan when they are negotiating with a member. However, there are some downsides. The member could get charged a higher rate on their auto loan than they would have if they went into a credit union branch to get their loan. They could also get a lower rate if they can get the dealer to discount their buy rate. Under this scenario, however, other members get penalized for going to the credit union first to receive an auto loan instead of trying to negotiate with the dealer on a different rate.

To avoid these discrepancies, A+ Federal Credit Union changed their program so that the auto loan rate that a member gets at the dealership is the same rate that the member would get if they applied for the loan at one of the credit union’s branches.To compensate the dealer for originating the loan through the credit union, A+ provides them with a flat fee for each loan that is originated through the credit union.

According to Sharon Gaugler, Vice President of Lending at A+, When we did the break-even analysis, we found that the additional loans that we originated thanks to the lower interest rate outweighed the additional costs of paying a flat fee for every loan that the dealer originated.Furthermore, the lower rates reduced the risk of members re-financing their auto loans with other financial institutions that offered lower rates.

The credit union has so far experienced a lot of success thanks to this bold change. Their indirect loans outstanding have increased 56.1% between June 2004 and June 2005. They are also the tenth largest credit union in terms of indirect auto loans outstandingin the state of Texas. A+’s experience just goes to show that a credit union can take a different approach than their competitors in indirect lending and still be successful.

Auto Loan

The Top 10 Texas Credit Unions in Indirect Loans Outstanding
Data as of June 30, 2005
Rank Credit Union $ of Indirect
Loans Outstanding
Auto Loans
1 Security Service $2,496,496,468 $2,808,801,946 $3,795,701,762
2 San Antonio $807,981,592 $878,144,693 $1,838,019,182
3 Government Employees Credit Union $518,809,647 $670,536,558 $1,073,703,768
4 OmniAmerican $517,959,731 $481,568,951 $1,087,039,440
5 Community $430,604,666 $649,862,318 $1,420,706,193
6 Texans $385,831,454 $564,625,274 $1,466,750,849
7 Credit Union of Texas $324,321,809 $450,767,029 $1,555,237,979
8 Velocity $273,083,028 $300,579,492 $498,228,781
9 Fort Worth Community $257,650,361 $343,265,496 $610,630,611
10 A+ $241,399,904 $280,700,036 $465,383,448
April 26, 2016

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