From the field. A recent story by a colleague working on site with a client.
I just wrapped up a meeting with a $6 billion CU that does a lot of indirect lending.
- Used car values are falling.
- Manufacturers are providing strong incentives for new vehicle purchases.
- Some credit unions are desperate for income and are attracting business with below market rates via their indirect relationships.
The CFO shared that members with an expensive to own, drive, and insure car are going out and buying another car that is much cheaper to own, drive, and insure–both new and used models. But from a different funding source. For example, another credit union who will extend credit because the member’s credit score is still good, but about to take a nosedive.
The member knows they can’t afford to keep their existing vehicle. Then after they purchase the “cheaper to own” car, they bring the “expensive to own” vehicle to the credit union and hand over the keys.
The result is that the credit union is experiencing higher than expected losses because used car values are falling, and the cars being turned in are more expensive to own.
Long Story Short
The member lowers monthly payments and the cost to own a vehicle. The old car is turned back to the credit union. The member is unconcerned about how it impacts their credit score going forward.
The credit union has limited recourse because the “member” has just a “$5 savings account” required to join the credit union. (This is an indirect relationship only)
I am hopeful for a soft landing from this financial substitution scheme, but not everyone is on the same flight.
Credit unions are now hooked on RBL. Is it RISK Based Lending or RACE Based Lending? Bad Credit, Poor FICO score, insufficient income, unverifiable income. No problem. Pay the higher rate and drive the expensive car at 100% financing. And to make matters worse the loan term goes out 7 years or more. The car will be a rust bucket before the the final payment. Now the credit union is shocked at the dramatic decline in value. Because the loan rate is high due to the debtor’s FCIO score – the default rate is high. Funny how that works. The higher the rate should enable the credit union to make it up in volume. Never Shocked. Just Disappointed.
Can you honestly blame the “members?” Many of these credits unions are relying on indirect lending for a disproportionate amount of their lending portfolio; purchasing loans from car dealers (some of the worst people on the planet). The dealers have no compunction about slamming consumers into high loan to value vehicle loans, adding on overpriced and useless ancillary products, and too many credit unions enable this behavior by gleefully gobbling up these loans that are clearly not in the member’s best interest. And then we should be surprised when that consumer makes decisions that are contrary to the credit union that enabled them getting into the mess they are in (Provident? Practical? Productive?)? And often this indirect loan is the first and only experience many have with credit unions – Calling them members is a stretch.
In my rural vernacular? The chickens are coming home to roost.
Great article, as repossessions are certainly part of the business model. Things can be done to mitigate risk:
1) Most car loan’s first payment is 30 days from contract date. Break the payment up and ach on the consumers paydays, 5th and 20th.
2) Read the credit report, and see how many lenders have looked at this deal first? Are you #13 on the list or #1-2? Why buy what nobody wants.
3) Limit backend products. Why does a new car need a $4,500 warranty?
4) Stips are there for a reason.
Lastly, we sell seasoned automotive loans. If Mrs. Williams can pay $790 for her truck, imagine how much easier it is for her to keep the same term and pay $628 per month! Remember 52% of the vehicle sales profit is soft money, and the consumer can get the upper hand.