By Ray Birch
IRVINE, Calif.—Banks are elbowing in on credit union auto loan market share and a big reason is human resources, says one expert, who is additionally urging CUs to prepare now for a shift in how used cars are bought and sold.
As CUToday.info recently reported, credit unions lost two percentage points of the new vehicle loan origination market to the banking sector, according to CUNA Mutual Groups latest Trends Report.
The inroads made by large banks are the result of increased focus on auto lending as commercial lending volume tapers off, CUNA Mutual Group stated. But other factors are also in play.
The report found auto loan balances have risen 1.2% since September 2019, which is slower than overall loan growth, and in turn has led to auto loans making up only 32.5% of the credit union loan portfolio, down from 34.2% last year.
But another trend is also at work, according to Bob Child, COO for Origence, a CU Direct Brand: credit unions have been shifting auto lending personnel over to mortgage lending as the demand for new home loans, and especially refinancing, has surged.
“They're pulling loan processors out of their auto unit and putting them on the mortgage side because they are just so far behind there,” said Child. “That's been going on for five months now. The interest rates are at these insanely low levels, and it has felt for many people like a once-in-a-lifetime opportunity.”
While the banks are facing the same mortgage application onslaught, they don’t face the same staffing issues as credit unions, explained Child.
“The banks have been pulling their processors away from commercial lending, which is pretty much dead right now,” explained Child. “They're making up the volume that they would have had on commercial side on the auto loan front. They’re picking up more auto lending business as they pull away, right now, from the commercial side.”
Most credit unions can’t follow the banks’ leads given their smaller staffing levels. Moreover, most CUs are also not significant commercial lenders.
And One More Thing…
As if those trendlines weren’t challenging enough for the average credit union, for some, there has been another new demand on their limited resources: Paycheck Protection Program loans.
“I know that some credit unions are still struggling with PPP—those have just been a headache for some,” said Child.
Child expects credit unions will start to pull back on mortgage lending a bit and re-engage more heavily in auto in the year to come.
“I think the first half of 2021 is going to look a little bit like what we're seeing right now from a credit union lending perspective,” said Child, adding he anticipates a shift back to auto lending in the latter half of the year.
Child emphasized credit unions have continued to excel in used lending during the pandemic. He pointed out credit unions typically have two-thirds of their overall auto lending business in used cars, but during the health crisis that percentage has increased.
“What we're seeing in 2020 is about 71% of the funding is for used and 29% for new,” said Child.
Bob Child
Child noted manufacturer incentives during the health crisis have made it more difficult for credit unions to compete on new cars.
“There was a big push during the summer with 0% financing, and also in May,” said Child.
A Fortunate Miscalculation
Finally, there’s been another contributor to declining auto loan volume at many CUs, and that is decisions cooperatives made at the close of 2019.
“In the fourth quarter of 2019, many credit unions expected they were going to going to face a recession in 2020. So, they were tightening their credit standards both on FICO scores and LTVs,” explained Child. “This had nothing to do with COVID. But it was a good thing from the perspective that they were ready for what happened with the pandemic, being a little more conservative.”
By emphasizing higher quality paper and lower LTVs, Child said credit unions are in a better position now with delinquencies.
“Credit union delinquencies now are lower than what the banks are seeing,” he said.
Child reiterated that auto lending for credit unions should pick up in the second half of 2021.
“We're predicting (the seasonally adjusted annual rate of vehicles sold) in 2020 will be 14.3 million units and we think it will go up to between 15 to 15.5 million next year,” forecast Child.
A Word of Caution
Child closed with words of caution and advice for credit unions regarding a shift to online car shopping, particularly for used vehicles.
“Credit unions are extremely well positioned in the used car space, but I think what's going to start changing is you're going to see more companies—like Carvana, AutoNation and Tesla—selling directly to consumers online. I've seen predictions that over the next 10 years we could start to see 22% of used car sales being sold in a direct model. It's going to be incumbent for credit unions, to maintain used car market share, to be connected with these players—such as on API connectivity, so the whole transaction can be done electronically. Otherwise they'll miss this window for the shift that is happening in the used car space.”