In Winning the Auto Lending Race, What’s Next?

by Michael Cochrum

You may have heard the expression, “to the victor go the spoils.” Interestingly, this phrase did not originate in some centuries-old prose or novel. As eloquent as it seems, it was actually believed to have been spoken by Senator William L Marcy in 1831, as he described the benefits that come upon winning the presidential election. While winning the Presidency is no small feat, the contest has more meaning than just the office and salary attached to it. The individual who wins has the opportunity to make substantive change through policy and appointments. Currently, credit unions are winning the auto lending game, so what are the spoils that go with that victory?

At the mid-year point of 2017 (end of June), CU Direct’s 1,100 credit unions collectively funded more auto loans than the largest commercial banks and captive automotive finance companies, edging out Capital One to become the nation’s #1 auto lender. Having attained the top lender ranking for the first time, it is important that we ask ourselves two questions, “why are we here?” and “what are the spoils?”

In response to the first question, instinctively, when one finds themselves in a new position, one wants to understand how they got there. In the case of credit unions, some have asked if they are taking on more risk. Research by CU Direct effectively dispels this as being the case. In fact, CU Direct research indicates tightening of risk across the entire spectrum of lenders. Credit unions traditionally have been, and continue to be, less risky with lending than their competitors, and statistics show that they have actually decreased risk even more in recent months. Credit unions are number one due to their ability to, in concert, become better indirect auto lenders over the past two decades, while also building solid reputations in their markets.

As for the second question – “what are the spoils?” — is there anything that credit unions can do — or should do — in the light of victory to improve their auto lending business, and provide a better experience for their members? The answer is, yes, there is! For over two decades, credit unions have operated under the “rules” set by larger lenders, and the risk those lenders have been willing to tolerate. These rules have affected pricing, loan-to-value thresholds and terms. Now in the driver’s seat, credit unions have the ability to set some of these standards. But the question is, how much change is tolerable? Keep in mind, a number of the larger lenders have left the space because competition has become too aggressive and margins are thin. However, if the changes made are too drastic that they create a competitive niche, these lenders will soon return in effort to retake market share.

Here are a few things that credit unions need to consider moving forward:

1. In light of falling residual values, lenders should consider the balance of risk in the portfolio pertaining to Loan-to-Value ratios and Term. It is not necessary to eliminate options, but simply ensure that the risk is properly spread across the portfolio.

2. Lenders have complained for the last several years about thin margins in auto lending. With demand remaining at historic highs despite a recent reduction in sales, and supply decreasing, credit unions should not only look at market share, but also yield. Do opportunities exist to raise prices on loans to increase profitability over the long-term?

3. As banks and other lenders retreat from the marketplace, credit unions have the opportunity to deepen relationships with dealers in their networks.
Strong dealer relationships with a concentrated group of dealers are the key to indirect lending success.

If your credit union is looking to improve these areas and advance its auto lending program, CU Direct’s Advisory Services can provide the guidance and insight.

About the Author

Michael Cochrum
Michael Cochrum is the Executive Lending Advisor for CU Direct.