ONTARIO, Calif.—Credit unions continue to increase loan originations at a pace faster than any other lender type–but there’s a cautionary sign on the horizon, as CUs actually lost market share in 2Q, while captives increased their piece of the pie.
That is a key finding from CU Direct’s latest State of the Credit Union Auto Lending Market webinar in which, overall, the data spell good news for credit unions. But Michael Cochrum, VP of analytics and advisory services, cautioned CUs not to become complacent in a marketplace in which other lender types have been pulling back on loan originations and tightening their standards.
“While credit union loan originations continue to increase (nearly 6% growth Q2), captives did increase their market share last quarter (up from 18% in Q1 to 29% Q2),” explained Cochrum, who noted that credit union share dropped to 20% from 24% in Q1. “So, even though credit unions are seeing significant lending growth, it’s always important to keep in mind what our share is. We need to ask ourselves what we need to do to meet our demand.”
The latest data also show that CU Direct credit unions, as an aggregate lender, remained in the No. 1 position for total loans (666,886), slightly ahead of Capital One Auto Finance (658,001). In 2016, CU Direct credit unions funded $32 billion in auto loans through the network.
As CUToday.info has reported, the pullback in lending originations from all lenders except credit unions is due to most other lenders cutting back on subprime loans. Analysts have shared concerns over some lenders getting too aggressive with subprime as weakness has begun to show in this credit tranche. Wells Fargo, for instance, has stated that it is pulling back on subprime auto due to concerns over rising delinquencies.
Banks showed the biggest pullback in Q2 among all lender types for loan originations, cutting back by more than 6%. In that same period bank share of the market dropped by more than 5%, CU Direct reported.
Cochrum said that the falling originations among all other lenders is not entirely due to reductions in the subprime segment, noting some of the smaller Midwest banks have cited particularly strong competition for reducing their efforts.
“There are different reasons for this, and we should not make any assumptions that this current situation, the short-term changes, will stay the same,” said Cochrum. “So, we can’t take our eyes off the competition.”
Cochrum noted that Q2 data show that the manufacturer’s lending arms are stepping into subprime as others exit the business. He said CU Direct saw an increase last quarter in captives’ attention to credit scores below 600.
Another interesting observation the company made is that the captive lenders are increasing their attention to new car lending—paying a little less attention to leasing. Cochrum noted that due the sharp decline in residual values resulting from a glut of high-quality lease-returns, the affordability advantage leasing has enjoyed over new car loans is fading.
“In the second quarter of 2016 to 2Q 2017 we saw leasing growth flatten to 31%,” he said. “We see the captives now shifting their focus a bit from lease programs to buy programs.”
Steps To Take
Given the Q2 data, Cochrum highlighted several steps credit unions should consider:
- “As we continue to benefit from the retreat of other large lenders, we can’t celebrate that,” he said. “They will be back. While they are gone we need to consider how we need to address the marketplace going forward. Are there any strategies today we could change that as the competitors come back could place us in a better position to compete?”
- “At least for short term, the way people purchase and finance vehicles is not changing. But we have to keep in the back of our mind there are disruptors in the automotive world looking to change how people purchase and finance vehicles,” said Cochrum. “All the while we look at current strategies we need to look toward the technology of the future to determine how we stay in the game, especially as these disruptors become more effective.”
- “It’s time to review our strategies to ensure we continue our growth and have a strong presence,” he said. “Look at the current strategies we have. Can we broaden them from a risk perspective? Can we look at our pricing to determine if it designed to keep us profitable over the long term?”
- “In the last few years, we have seen credit unions increase their use of technology, such as optimizing the use of decision engines,” said Cochrum. “Many of the larger lenders now are actually outsourcing some of their processes. So things like funding, and in the case of leasing, vehicle remarketing. Obviously, credit union resources are constrained, so it seems reasonable to look for opportunities to outsource some functions to make us more efficient.”
- “Finally, doing all these things allows us to lead with service and not with price,” Cochrum said, emphasizing that is a better long-term strategy.