By Ray Birch
ONTARIO, Calif.—A new analysis reveals that indirect delinquencies among credit unions are ticking up for the first time since before the recession—another sign that lenders should be diligent with auto lending practices.
According to CU Direct’s latest State of the Credit Union Auto Lending Market report, indirect delinquencies among all federally insured CUs rose more than three basis points from Q2 2015 to Q2 2016.
That same report also suggests that credit unions are pricing their loans too low, especially for lower credit scores.
“In the 12 months since the end of the second quarter of 2015, we have seen a rise in delinquencies,” said Michael Cochrum, executive lending advisor at CU Direct. “While the increase is just over three basis points, from just under 57 BPs to just over 60 BPs, which is not a lot, it does signal that there has been a shift in the delinquency trends.”
CUs still hold the lowest delinquency rate among all lenders, Cochrum added.
As CUToday.info has reported, over the past year analysts have shared concerns about borrowers and lenders forgetting the past. Lenders have been extending terms to keep monthly payments down on vehicles whose prices are rising. The average price of a new car today is above $30,000, but consumers’ wage increases have not kept pace. In addition, the growing number of consumers now trading in cars with negative equity has hit a record level—nearly one-third of all trade-ins today are underwater.
In the past 18 months, Wells Fargo has been among the lenders reporting it is cutting back on subprime auto lending due to concerns over rising delinquencies.
CU Direct said that a bigger concern than the rising CU delinquency rate is the actual dollars beneath that statistic.
“What is really telling is the growth in indirect delinquency dollars,” said Cochrum. “The rise in delinquency dollars is increasing faster than the growth of the entire CU indirect portfolio. That means on our current trajectory we expect delinquencies will rise over the coming quarters. This is something credit unions need to examine and address within their own portfolios.”
Cochrum said that credit unions in their analysis should determine if a rise in indirect delinquencies is a result of lending or collections practices or from growth in the indirect portfolio.
Cochrum pointed out that the rapid growth in CU indirect lending in recent years, which has also fueled membership growth, can mask rising delinquencies.
“This is the effect from dilution,” said Cochrum. “The more our portfolio grows the better delinquencies look, until that growth begins to taper off.”
Cochrum urged credit unions not to wait to closely examine their indirect portfolio and lending and collections practices.
“We want to head off potential risk early,” he said. “Some of the mistakes credit unions have made in the past is waiting too long to address changes in the marketplace. We did not react to them fast enough. We looked at them as anomalies. When something does not look right, we want to act quickly and head that off, readjust our strategy to stay in the game.”
Another issue facing credit unions, according to CU Direct’s analysis of the market, is credit unions continue to price their loans too low, especially with lower credit scores, and are giving away margin unnecessarily.
“We’ve heard credit unions tell us that it is hard to get a reasonable spread on their auto loans,” said Cochrum. “We did some research on this to see what might be causing the problem.”
Cochrum said CU Direct divided the market between those with FICO scores above 702 and those below that number.
“Banks have 67% of their portfolio in borrowers with scores 702 and above,” explained Cochrum. “Credit unions have 73% of their loans in this range. “We have a higher percentage of our portfolio in in the lower risk loan category.”
For this market segment, CUs have an average loan price that is 36 basis points below banks.
“We are more risk averse, and we are making less money than banks in this loan category,” he said. “We can raise our average rate 25 BPs and still be under the banks.”
For the market segment below 702, CUs’ average rate is 192 BPs below banks.
“When we broaden the risk in the portfolio we don’t take full advantage,” said Cochrum. “So that is something to consider. If you are going to make loans to borrowers below a 700 score, price them in such a way to take advantage of that. So 192 basis points obviously offer a lot of headroom. Now I love credit unions and the fact we are priced lower, however, look at your pricing and see if there is a chance to capitalize on this segment of the market.”
Cochrum added that credit union loans are priced on average 124 BPs below banks for scores 640 and above.