By Ray Birch
CARMEL, Ind.—Credit unions could face large collateral losses—and unwanted car sales on their lots—in the coming year if their repossession processes are not in good working order and plans are weak, asserts Pete Hilger.
Hilger, CEO of Allied Solutions, told CUToday.info CUs must be able to repossess cars quickly and dispose of them just as fast as defaults rise and values on used cars have been unpredictable, but are likely to fall sharply.
“The plan of having all of your cars on the credit union’s lot and having a used car sale is not a good one,” said Hilger.
Two Concerns
Hilger said the two things to be concerned about are the impact of the pandemic economy on small businesses that credit unions use for repossessions, and the “bubble” now is used values. As CUToday.info recently reported, used values have come back to pre-pandemic levels.
Hilger pointed out repossessions have slowed as lenders have offered forbearance during the COVID-19 crisis. “We have seen the number of repossessions in each month go way down,” said Hilger.
But all those forbearances have also artificially inflated the values of used cars, he said, keeping inventory off the market. Hilger predicted that market scenario will dramatically reverse when lenders have to eventually take collateral back from a growing number of delinquent borrowers in the coming months.
Help Needed
Hilger emphasized credit unions are going to need great deal of help.
“Credit unions typically have their own local repossession companies they work with that they have built close relationships with over the years. But how many of those local small companies are going to be around later this year?” asked Hilger, whose company offers repossession and remarketing services. “What credit unions need to do is align themselves with some people that have the resources to handle larger volume—some of the bigger players in the in the market, such as Roquemore, Primeritus…You want someone who has the ability to take this process from cradle to grave—repossession and disposal of the car.”
Otherwise, Hilger fears many credit unions will be stuck with used inventory on which the value will sharply decline. As CUToday.info has reported, Black Book is forecasting used vehicle values to fall by as much as 30% annually by the close of 2020.
“Credit unions are going to have a hard time not only picking vehicles up but getting any kind of prioritization on the disposition of their cars if they work on their own,” Hilger said. “Every day that goes by the used market can change, and with this backlog of repossessions you are going to see used values plummet. I think in six to 12 months this process is going to become a real struggle.”
Pete Hilger
Making Matters Worse
What’s making matters worse, according to Hilger, is the increasing number of the extended LTV loans and the significant negative equity in many auto loans, an issue on which CUToday.info has regularly reported.
“It's not uncommon to see 135%, 140% or even 150% loan-to-value with all the add-ons,” he said.
Hilger restated the need to get cars in fast and get them out the door in the same fashion.
“Don’t try to get the one or two vehicle wins that you think you might be able to add some extra dollars,” Hilger advised. “Get the cars in and dispose of them quickly and efficiently; that is what will minimize losses.”
‘Gotcha’ Laws
Hilger cautioned credit unions to be vigilant, as some states, such as California, have new laws in place protecting those late on home and auto payments from repossession and foreclosure, which is making auto repossession more difficult in some areas. He further suggested lawyers are waiting with “gotcha laws.”
“Maybe you forgot a certain rule in a state, and they are so different by state,” he said, noting that as the pace of repossession increases so does the risk. “You have to do this right. There are legal arms out there lurking… and you could have a lawsuit on your hands.”
No Time for Mr. Nice Guy
While credit unions look out for their membership in ways banks often don’t, Hilger said now, unfortunately, is not the time for credit unions to be so altruistic.
“We're going into uncharted waters here,” said Hilger. “Credit unions do an admirable job serving their members and they treat people with so much respect in the collection process. But today is not the time to be Mr. Nice Guy. CUs really need to hold the individual accountable for their financial obligation, and then deploy the resources and technology they need to expedite the disposition of the collateral. The storm is coming. Get ready. You're going to be extremely busy.”