By Ray Birch
CARMEL, Ind.—Due in part to an increased focus on indirect lending, credit unions are now seeing a marked rise in auto loan delinquencies and repossessions, according to one company.
“We're seeing delinquencies and repossessions rise all over the industry. But what has notably changed is that credit unions are starting to see a greater share of the problems,” said Brooks Stewart, VP of Auto Finance Growth and Innovation at Allied Solutions. “We're seeing credit unions starting to experience the same thing that's been going on in the auto lending for about 18 months within the subprime and nonprime markets.”
Stewart said rising delinquencies within credit unions can be attributed, in part, to expanded lending in lower prime and non-prime segments than they have in the past.
Lower Tiers, Higher Repos
But moving into the lower credit tiers, Stewart noted, has allowed credit unions to increase their member base over the last four years, much of that coming via increased volume from indirect lending.
“Delinquencies have risen over the past 24 months as we have come out of COVID and the money from the government has stopped. Within 90 days of that money stopping, delinquencies started to rise,” Stewart said.
Stewart sees the problem hanging around for another 12 to 18 months. He said the problems started within the entire auto financing industry about 12 months ago, and that it generally takes about 18-24 months for lenders to stem spikes in delinquencies, as lenders tighten standards once problems are spotted.
“Once we get past the next 12 to 18 months of elevated delinquencies and repossessions, I see things coming back down to what I would call a normal range of delinquencies and repossessions,” he said.
Brooks Stewart
Fed Could Play Role
That timeline, however, could be shortened if the Fed cuts rates this year, giving borrowers more money at the end of the month, Stewart said.
Just as credit unions are seeing delinquencies rise to levels being seen in the broader auto financing industry, so, too, is the rate of repossessions.
“Houston-based Automobile Recovery Bureau has seen more repossession assignments coming in from credit unions recently,” Auto Finance News reported.
Added Stewart, “Interestingly, we are seeing a higher rate of reinstatements with repossessions in the last 12 months, especially in credit unions, more than what we have historically seen. This is when borrowers find the money to get back into their car after it is repossessed and before it is sold off by the lending institution.”
Watching the Portfolio
Given the current conditions, Stewart is advising credit unions to be especially mindful of what they’re putting into their portfolios today.
“As you move forward make sure the ROI of what you're putting on is in line with what your expectations are for 12 to 18 months down the road—for performance of those loans. Most credit unions today aren't used to managing high delinquency rates and it's affecting their staff.”
Stewart said the rising delinquencies and repossessions are shifting credit unions away from indirect lending, returning to more of a “member centric portfolio” that is less expensive to service.
“Some of that indirect business comes with a lower credit tier, and that’s going to cost more to service,” he said. “It just depends on the focus of the credit union—do they want very low delinquency and repossession rates and their servicing costs to be lower? Or, do they want to take that risk from lower credit tiers, understanding they make more money on rate but their servicing costs are higher?”
What to be Watching
When it comes to repossessions, what should credit unions be watching?
Stewart pointed to an indicator of what’s currently happening in the market, noting the auto repossession companies are straining to meet demand—and that demand continues to grow. He urged credit unions to carefully choose the right partner.
“With repossessions rising these guys are getting busier and maybe they're cutting corners. Also, there are not as many repossession companies today, after many went away during COVID due to a lack of business,” Stewart told CUToday.info. “Today, there's only about 65% of the repo providers that were around pre-COVID. We lost 35% of the providers during COVID just due to the low demand for repossessions.”