It looks as if the current turbulent chapter of the American auto industry reached a climax last week with the bankruptcy filings of both Chrysler and General Motors.
After months of uncertainty, credit union auto lenders can begin to brace for the fallout and look ahead at the mass restructurings that are sure to come. Last week, after a delay caused by a temporary stay issued by the Supreme Court, Chrysler completed its deal with Fiat.
The fallout from the near-collapse of two of the Big Three American automakers is beginning to unfold as some of the 800 Chrysler dealerships and 1,100 General Motors dealerships that will close over the next year start to shut their doors.
According to Larry Highbloom, president of VINtek, an electronic lien and title provider, there are three challenges that credit union auto lenders face right now: avoiding exposure to fraud, ensuring that collateral is there to mitigate losses and keep delinquencies down.
"This is a fundamental restructuring of the American auto dealer. Because this is so dramatic, there are challenges and opportunities that arise," Highbloom said. "This calls for extreme measures. You can't do business as usual because you will get left behind or get burned."
To meet the challenges, Highbloom said credit unions need to avoid fraud by being very careful with dealer transactions. Dealers could be selling cars to members and not paying off the previous lienholder. Dealers under the gun are playing fast and loose with credit because they want to get cars sold, he said. Credit unions also need to be careful to make sure they have the title before they release funds to the dealer because dealers could be financing vehicles at multiple lenders.
"This all seems like common sense, but there's the opportunity to start doing things you always should have been doing because it's so risky right now with all these guys going out of business," said Highbloom.
Robert Granados, vice president/general manager of DealerTrack, a provider of software and data solutions that connect dealers with lenders, had similar observations about the risks that lenders face. Granados said that lenders now face risks in the representation of collateral, the representation of applications and the overall financial health of the dealer.
Granados said one thing he is seeing among lenders, and something he recommends lenders do right now, is to be proactive in reaching out to dealerships.
"Let them know the quality of business you are looking for, and if you don't receive it, put those dealers under review or end the relationship with them."
Granados recommends that credit unions meet with the owner of the dealership and very clearly spell out the quality of business they expect and monitor the quality of business they receive.
"As soon as you have business that looks questionable, reach out to them and let them know. Have an open dialogue with them. Don't be afraid. If you face an owner that is resistant to that and doesn't want open dialogue, then you have your answer right away," Granados said.
From the dealerships that DealerTrack works with, Granados said he is hearing that with less financing available, dealers are very focused on maintaining good relationships with those that are lending. To a dealer, he said, there is nothing more exciting than a credit union sale day. Credit unions can drive more people to the dealership than the dealer could do on its own.
"When it's all said and done and the market begins to turn, credit unions are going to come out in a better standing in the marketplace and with dealerships."
Highbloom said that he is starting to see the credit union community become aware of dealing with the challenges that are out there and talk about taking advantage of the opportunities.
In his business, Highbloom said, he is seeing a high demand for electronic titles, dealer monitoring and outsourcing of title perfection in order to reduce origination costs so the credit union's margin is larger.
Another trend he is seeing is more and more credit unions moving to direct auto lending. By going to direct lending, credit unions get to deal directly with the customers and avoid the risk of misrepresentation of credit from the dealership, Highbloom said.
Granados said that he doesn't see a situation where credit unions on a mass level will move to direct lending, but he is seeing a modification in the terms of indirect business. There is pressure, he said, for credit unions to move to pay dealers less in indirect lending relationships or to pay them flat fees.
"There is a change in how credit unions are compensating the dealers they work with, but I'd be surprised if there were no more indirect lending relationships between credit unions and dealers."
After Chrysler's bankruptcy announcement, CUDL, the credit union indirect lending network, released a list of tips for credit unions that have relationships with closing dealerships. Among the network's advice:
Identify the number of open titles outstanding with that dealership and work to expedite the perfection of those titles.
Understand the broad picture for the dealership, most specifically whether or not that dealership has other franchises under one roof.
Consider prior history with that dealership and dealer owner or principal.
Ensure that any loan packages your CU has in-house or en route have the required documentation prior to funding.
Understand the source of extended service contracts you are financing for your members.?Responsibility and location of service may vary between manufacturer warranties, manufacturer-backed extended service contracts and extended service contracts issued by other third parties.
Some GM dealerships may convert to independent dealerships after their franchises are closed. CUs will need to determine if they wish to continue to do business with those dealerships.
On the opportunity side for credit unions, more than 38,000 Chrysler and GM vehicles were sold and financed through credit unions in May. So far this year, the average number of vehicles sold per month has been 28,000.
Buyer research conducted by Cucorp showed that 37% of credit union members who are taking advantage of the Invest in America discount previously owned a car that was a brand other than GM and 22% previously owned a foreign branded car.
"This shows that credit union members at least are buying Chrysler and GM despite the bankruptcies," said David Adams, president/CEO of Cucorp.