Auto loans — especially those for used vehicles — have long been a staple of credit union loan portfolios, both via the direct and indirect route.
Together, new- and used-vehicle loans comprise about one-third of all credit union loans, in terms of dollars, and 13% of all credit union members have a used-car loan with their institution — the highest penetration rate of any loan type other than credit cards.
Their beauty lies in three characteristics that border on being inherent: They’re diversified, they mature quickly, and they most often produce admirable payoffs. Also, consumers find it easier to commit to paying off vehicles as opposed to other loan types because they rely so heavily on their cars, and the payments generally aren’t all that expensive.
Thanks to pent-up demand, continued low interest rates and the steep drop in the price of gasoline, credit unions experienced nearly 20% year-over-year growth in new-auto loans and almost 12% annualized growth in used-auto loans in 2014, according to the Credit Union National Association (CUNA). That reflects the strongest numbers in 20 and 14 years, respectively. And analysts forecast another year of double-digit auto loans in 2015, when the streak of positive-growth quarters is expected to hit 15%.
When evaluating your portfolio metrics for this bread-and-butter credit union product, you must consider two components — market performance and compliance.
The latter has proven more important in recent years, triggered by the economic downturn but intensified by the inception of the Consumer Financial Protection Bureau. Poor oversight or documentation can prove devastating to the bottom line, cutting into or consuming incremental business-side gains, so this area is not to be overlooked.
Indirect auto lending poses the greatest risk from a compliance standpoint, because the credit union is responsible for the practices of the individual dealers through which it offers financing. Of particular interest to CFPB and examiners are the indirect lenders that allow dealers to mark up lender-established buy rates.
As the bureau notes, these policies create incentives that, because of the discretion allowed, pose significant risk for pricing disparities on the basis of race, national origin, and other protected classes.
Thus, CFPB recommends that financial institutions conduct regular analyses of both dealer-specific and portfolio-wide loan pricing data, and either impose controls on dealer markup and compensation policies or eliminate dealer discretion through use of another mechanism, such as a flat fee per transaction.
Financial institutions would be well-served to proactively explain the consequences to these dealers — including the termination of their partnership — and should consider remunerating consumers affected by dubious actions at the transactional or portfolio level.
Delinquencies and charge-offs continue to be the metrics that matter most from the business side, and credit unions fortunately continue to ride low ratios in each category.
As is the case with the overall loan portfolio, credit score migration proves to be one of the leading indicators in determining the health of individual borrowers and loans, and the auto portfolio as a whole. Used as a predictive tool in conjunction with your collections department, migration data can stave off delinquencies and charge-offs, which always proves beneficial from a cost-efficiency standpoint.
Backing it up a step, it’s always important to review application approval and rejection ratios, segmented by various traits including dealer, vehicle type and age, and as mentioned earlier from a compliance perspective, borrower characteristics.
Notably, extended-term auto loans of 72 and even 80 months have proven increasingly popular — on the consumer side because many prefer the lower monthly payments, and on the lender side because the majority of vehicles now carry longer warranties and are built to last longer than those from past eras. About one-quarter of loans issued this past fall matured at 73 to 84 months, according to Experian. Credit unions that offer them would be well-served to closely track repayment progress to discern their effectiveness; those that don’t offer them should also pay close attention to these statistics.
Credit unions also should monitor interest margins closely, and keep an eye on competitors’ rates. Industry-wide, rates have been static for the last two years, which severely decreases refinance opportunities and has turned the focus almost exclusively to purchase vehicles, whether they be new or used. Recapture doesn’t become an attractive opportunity until at least a year after a rate increase; for now, credit unions that prioritize loan retention have been willing to match competitors’ rates.
One final set of metrics relates to the performance of vehicle loans in an emerging sector: those that originate through the mobile channel. The most telling statistics in this instance relate to the mechanics of the application and approval process. Speed is crucial to the connected set, which has demonstrated a propensity to shop for everything — including vehicles — with their smartphones. If your credit union has invested heavily in optimizing mobile lending, you must quantify the effectiveness of that investment, and change gears if necessary to make the process easier and more appealing.