By Ray Birch
CHICAGO—One big question for credit unions raised by the coronavirus pandemic is not just what it will mean to auto lending moving forward, but to the auto loans already on the books.
As the coronavirus was growing and shelter-at-home orders were beginning to be put in place, credit unions had started 2020 with their foot on the gas as they continued to gain loan share from banks. But even at that point some analysts were sounding the horn that the growth was coming with risks.
One big worry: over the last several years, more than any other lenders credit unions have been more willing to extend terms, according to TransUnion, which has been urging caution around the practice.
Even before the pandemic brought new auto sales to a near stop, the company cited the growing number of consumers who are underwater with their car loans, saying the problem has only been getting worse as these borrowers have rolled that negative equity into their next car deal—and sometimes more than once
As CUToday.info reported, Edmunds data show 33% of buyers who traded in cars to purchase new ones in the first nine months of 2019 had negative equity. In comparison, 28% of borrowers were underwater five years ago and 19% a decade ago. The average amount owed by these underwater borrowers through the first nine-months of 2019 was about $5,000.
Keeping Payments Low, But…
To keep payments affordable as car prices rise and negative equity balloons loan amounts, lenders have been extending terms—and credit unions have been leading the way.
“Credit unions are very competitive and they're continuing to grow their market share as other lender types, like banks, have either maintained or dropped their share,” said Satyan Merchant, SVP of financial services and leader of the automotive businesses for TransUnion, who spoke to CUToday.info before the coronavirus lockdown was largely in place. “Credit unions are growing their share faster than any other lenders.”
But that marketshare has been grabbed via the longer term loans, added Merchant.
Satyan Merchant
“In 2018, 55% of credit union loans were for terms of 76 to 84 months,” said Merchant. “The remaining 45% of their loans were for other term lengths.”
Sean Flynn, director, credit unions at TransUnion, said CUs had benefitted for many years from the closer relationship with members whom they knew, often sitting down with potential borrowers and talking to them about the best way to get into an affordable vehicle. But the growth of indirect lending has changed that dynamic, said Flynn, and the close relationship often isn’t much of a relationship at all, especially as dealers handle most of the arrangements.
The result: credit unions at greater risk for delinquencies and defaults and tens of millions of Americans lose their jobs and stop making payments on just about everything. As CUToday.info has reported, data show that credit unions in the past two years posted record indirect auto lending growth. Regardless of the source of the loans, many members are expected to seek loan forbearances.
A ‘Real Exposure’
Flynn said the combination of credit unions getting more heavily involved in indirect lending and being a leader in extending terms deserves attention, especially as the economy has quickly entered a recession.
“This is a real exposure for credit unions,” said Flynn. “These indirect members—they don’t know them. And the dealers are the ones working these deals. It’s just riskier.”
Still, despite the potential red flags, Merchant said credit unions fared well in the auto lending space in recent years.
“Credit unions are capturing more market share in auto, at the expense of banks,” explained Merchant. “Between 2013 and 2018, credit unions’ market share rose 8%, while banks declined at the same rate.”
Three Reasons For Growth
Beyond the extended terms and attractive rates, Merchant suggested there are reasons credit unions built a robust presence in auto lending. While a key question for the movement will be if it can rebuild that momentum as the economy recovers, Merchant said those reasons include:
- A Void in the Market is Filled
In response to early signs of rising delinquency, many banks tightened their underwriting policies for auto loans and leases between Q3 2016 and Q4 2017, Merchant noted.
“By the end of the pullback, our data shows originations had declined nearly 5% year-over-year. Credit unions took advantage of the void in the market, and gained share across all credit tiers except subprime. They increased their share of super prime originations by 14% and prime plus by 12% between 2013 and 2018,” he said.
- Increased Used Vehicle Financing
Entering the coronavirus lockdown, the used vehicle market had been growing faster than the new vehicle market, and credit unions saw an opportunity, said Merchant.
“With 31% of the share of used vehicle loans and leases between 2016 and 2018, credit unions are in a strong position to continue to capitalize on the growth. On the other hand, our data shows that banks have just 21% share of used vehicle financing,” he said.
- Auto refinancing opportunities Captured.
Although auto refinance makes up less than 10% of the overall market, it is expected to double or triple in size to reach between $80 and $120 billion once the economy begins to recover, Merchant said.
“In preparation for the growth, we observed credit unions capturing the majority of the auto refinance market, taking share from captives and independents,” Merchant explained, referring to the period before the pandemic.“Before refinance, credit unions have just 13% of the share of auto loan and lease originations. After refinance, it spikes to 68% of the share, compared to 24% share for banks.”