Tips To Build A Better Leasing Program

A Cleveland credit union is one of only seven of its size in the country that makes auto leases, and it does a lot of them.



The Ohio Educational Credit Union
Data as of 12.31.16

HQ: Cleveland, OH
ASSETS: $129.2M
MEMBERS: 17,437
12-MO LOAN GROWTH: 22.0%
ROA: 0.08%

The Ohio Educational Credit Union is ($129.2M, Cleveland, OH) making money by making leases, taking advantage of its already strong business as an indirect lender in its northeast Ohio market.

OHecu has generated $650,000 in net income from its indirect leasing program since launching it in 2014, says longtime chief financial officer Art Boehm.

According to Callahan’s Peer-to-Peer database, OHecu was one of only seven credit unions in its $100 million to $250 million asset class nationwide to offer automotive leasing in 2016.

At year’s end, 93.2% of OHecu’s auto loans were from indirect lending, ranking it 142nd among all credit unions nationwide that use the channel. Of the 2,251 total indirect loans on its books, 644 were leases.

The indirect lending and leasing business is countering the downward trend occurring in direct lending, Boehm says. Indeed, although OHECU’s overall loan portfolio grew 8.1% in 2016, its leasing pot grew by 37%.

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Spreading The Bread And Butter

According to Boehm, leasing is a logical product for OHecu.

Art Boehm, CFO, The Ohio Educational Credit Union

Auto lending has always been our bread and butter, he says. Many of our members already preferred leasing over purchasing, and indirect leasing provided an avenue to capture new leasing business that would end up with the banks and captives.

The credit union already had a well-established network of dealer relationships, and with a broad field of membership that includes employees, retirees, students, and alumni of educational systems within Ohio along with 200 SEGs there’s room to grow, Boehm says.

But OHecu doesn’t expect many of those new lessees to become full-service members.

It’s challenging to successfully cross-sell indirect members with other credit union products and services, Boehm says. Consumers view auto purchase and leasing as a transaction with little or no connection to their primary financial institution.

Instead, OHecu considers indirect lending and leasing as an alternative to investments.

Leasing has been a major contributor to improving our profitability, the CFO says.

Indeed, Boehm credits indirect leasing alone for adding $200,000 more to the credit union’s net income over what would have been generated by investments.

But rising interest rates will have some effect. OHecu expects to see some decline in indirect lending in 2017 as it adjusts its pricing to maintain an adequate spread to investments. Meanwhile, indirect leasing has a spread of 120 basis points greater than indirect lending.

So, it’s still an attractive investment alternative, Boehm says.

6 Tips For A Successful Leasing Strategy

The Ohio Educational Credit Union has generated $650,000 in net income from its indirect leasing program since 2014. Here, Art Boehm, chief financial officer at OHecu, offers advice on how other credit unions can do the same.

  1. Perform due diligence to ensure you understand your risk and exposure.
  2. Partner with an experienced leasing services provider.
  3. Perform due diligence that ensures your leasing partner has the resources and expertise to determine accurate residual values.
  4. Routinely monitor residual value risk.
  5. Do not buy deep when underwriting leases.
  6. Set concentration limits for the leasing portfolio. OHecu’s is approximately $25 million, or one-fourth of its total loans and leases.

Leasing, Not Lending

Although the same underwriting criteria can apply ― a focus on B credit tier and above has kept delinquencies low to non-existent ― there’s one significant difference between leasing and lending: how much the car is worth at the end of the road, when it goes back to the lessor.

Setting the proper residual value is the most critical part of leasing, Boehm says. We don’t have that expertise.

That’s why OHecu leaves the minutiae of how make, model, and trim affects current values when the lease is up to its third-party partner.

Third parties provide the processing and management of the leases, and OHecu services them. The credit union, however, sets the lease money factor, comparable to an interest rate on a loan.

The money factor must be competitive with the market, Boehm says. It’s a combination of that and residual value that determines the monthly lease payment and whether we’re competitive to get the deal.

The Ohio Educational Credit Union uses Credit Union Leasing of America and CRIF for its auto leasing and lending processes. Find your next solution inCallahan’s online Buyer’s Guide.

May 1, 2017

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