ONTARIO, Calif.—The latest data confirm what experts have been predicting—a slowdown in new car sales—is happening. Yet even as the pace of vehicle sales slows, credit unions continue to increase market share.
That was a key point shared during CU Direct’s latest State of the Credit Union Auto Lending Market webcast. But even with the good news CU Direct is cautioning that for credit unions to continue their share growth they will have to review current strategies, make adjustments, lean more on technology to streamline the loan process and turnaround time, and lead with service, not price.
“2016 was what we expected,” said Michael Cochrum, VP of analytics and advisory services. “New vehicle sales plateaued, but we still had positive growth as new vehicle sales were up 32 basis points last year. Be aware that this part of the market is expected to stay level in the next couple years.”
Lenders other than banks and credit unions saw growth declines last year. Cochrum said banks showed very limited growth while credit unions in the last 12 months have taken on new market share at a record pace.
“By the end of 2016, overall credit unions have 23% share in auto lending, banks are at 39% and captives 19%,” said Cochrum, who noted that CUs have advanced to their 23% share after a low of 17% several years ago.
Record $32 Billion Plus
Credit union financing is being used in 27% of all used originations and 18% of all new.
CU Direct credit unions last year processed a record $32 billion-plus in auto loans. Moreover CU Direct credit unions accounted for 1.1 million total auto loans in 2016, making them—as a group—the second-largest lender in the nation behind only Wells Fargo Dealer Services.
As CU Direct has been advising during the last six months, credit unions need to brace for much tougher competition from the lending arms of the automakers as they introduce more aggressive incentives to meet production requirements in a slowing new car sales market.
“The manufacturers will respond to this plateau in auto sales,” said Cochrum. “Whether it will be subvented financing or rebates, they will increase their efforts to keep vehicle production where they need it to be.”
Credit unions, too, should expect more aggressive sales tactics from dealers, as they will be less likely to allow potential buyers to walk away. Cochrum said that scenario will place greater demands on CUs serving their dealer partners, such as improving response and loan turnaround times.
Cochrum also addressed what may automotive experts have been warning about—the large number of high-quality vehicles coming off lease today and in the coming year. Analysts have stated the result could mean lower used car values, which will mean a challenge to lenders to do a better job of assessing the true value of their collateral when loans are booked.
Cochrum advised CUs to not only watch carefully for increased growth in negative equity in their collateral, but to look more closely now for instances of power booking—when dealers misrepresent the car’s equipment, showing on the loan agreement extras actually not included with the car that boost the auto’s price.
“I advise you to do random audits of your loans to check for this,” Cochrum said.
Another issue to watch for, added Cochrum, is the “repo close.”
Cochrum explained that the repo close is when a buyer comes to the dealership with a trade that has a great deal of negative equity. Instead of incurring the loss by trading the car, the buyer allows the car to be repossessed by the lender. But the buyer signs up for a new loan before the repossession, with a credit score much higher than after the car is taken back by the lender. As CUToday.info has reported, numerous automotive industry experts have cautioned that negative equity in trades has been markedly rising.
“I am not saying that you panic over this,” said Cochrum. “Just be aware of these realities and address them in your practices and policies.”
Cochrum also recommended that credit unions monitor repayment speed in their portfolios.
“Especially since we are in a turning market,” he said. “Over the last three to four years you have been increasing your portfolio. But now the market is plateauing, and it may be likely your portfolio is plateauing as well. When that happens you will naturally have an increase in delinquencies. So you want to be able to monitor your portfolio on regular basis to ensure you are catching these occurrences as they appear—and not assuming you will maintain the delinquency levels you had in the past.”