New Jersey CU’s New CUSO Carves Out Indirect Niche
Getting New Jersey car dealerships to partner with credit unions for vehicle financing has been a hard nut to crack for some.
The $171 million First Financial FCU in Wall, N.J., can attest to this as it tried to scale barriers since the cooperative started offering indirect auto lending eight years ago, said Alice Stevens, chief operating officer. One of the obstacles was the proliferation of banks that had already secured alliances with dealerships across the state.
"This area of the country is very highly banked," Stevens said. "Up until late 2007 into 2008, we had a tremendous amount of competition from Chase, Wells Fargo, Sovereign Bank and Bank of America."
First Financial is hoping to stand out among those major players with the launch of Jersey First Auto Connection, an indirect auto lending credit union service organization. The new entity aims to pair New Jersey credit unions with vetted dealerships in their areas using the expertise of First Financial’s staff.
The CUSO will provide participants with a CU Direct Corp. platform, software and funding, a decision engine customized for a credit union’s underwriting criteria, custom dealer reserve or a flat dealer incentive, underwriters and ongoing resources to enlarge and cultivate dealer network relationships. Credit unions can use their own pricing model.
Since Jersey First officially opened for business in February, the CUSO has been advertising its services and held meetings with a half dozen credit unions, Stevens said. The initial plan is to form alliances in the southern and central parts of New Jersey and then make its way throughout the rest of the state.
Credit unions that sign on to the CUSO pay an annual maintenance fee which includes any CUDL fees to ensure that the appropriate underwriting guidelines are in place. Stevens said there is a per-funded loan fee. All fees are based on a credit union’s membership size. First Financial is the 100% owner of Jersey First but bringing in other owners has not been ruled out, she noted.
First Financial is touting its reputation as one way to court credit unions. Stevens said it has built a $35 million indirect auto lending portfolio since 2003. The program morphed over the years as the economic downturn slowed lending volume. It was shut down in 2005, but when Stevens, a 15-year veteran in the niche lending space, was hired in 2006, the program was resurrected. Even though the credit union was getting fewer loans per dealer, it was hoping to maintain the same volume, she pointed out.
One key move was hiring a fulltime staffer dedicated solely to expanding the First Financial indirect network that would recruit and do the necessary follow-ups to seal the deals. Before, the credit union had business development staff that "would jump in and out" and did not have the designated time in their busy schedules to nurture relationships, Stevens said. When the new hire arrived in October 2009, First Financial worked with 20 active dealerships. Today, the network has more than doubled to over 40.
When indirect lending’s spigot slowed to a trickle a few years ago, many of First Financial’s bank competitors pulled out, leaving a potential void to fill. Stevens said Jersey First’s timing could not be better. Still, she noticed that some of the big, national banks are slowly coming back into the market.
"Really, this is a good time now because there are fewer lenders around. We feel when things start to turn around, we will already have some strong ties and dealers will know our reputation," Stevens said.
Besides the bank competition, Stevens acknowledged that indirect lending has left a bad taste in the mouths of some credit unions. The NCUA was concerned enough to issue a letter in early 2010 warning that an "improperly planned or loosely managed indirect lending program can lead to unintended changes in the risk profile and financial performance." The regulator strongly urged credit unions to mitigate these risks by establishing proper goals and portfolio limitations for indirect lending programs, creating and following specific underwriting standards and vendor policies, and maintaining a "comprehensive, effective, and ongoing due diligence program."
"There was a time when some credit unions didn’t handle indirect well. It got a bad reputation, it frightened some people," Stevens said. "I have a saying with my staff–‘you can do anything poorly.’ Indirect lending is something that has been done poorly."
Part of the problem is not aligning with the right dealerships, she offered. First Financial vets each one to ensure that their business model is a right fit for members. The credit union has had to sever a few relationships that didn’t pass the service test with its members.
Another critical issue is always keeping a keen eye on portfolio performance. Stevens said First Financial’s chief financial officer does a unique static pool analysis of the indirect loan portfolio so that at any given time, ups and downs can be spotted and addressed. The credit union has a 1% delinquency rate and an average yield just over 8.5%. Stevens uses the data as an advertising tool for potential CUSO signees.
"This is a type of business that can be managed and can be profitable," Stevens said. "In times like these with so little borrowing going on, it’s an opportunity to create some deep relationships that can serve well into the future."
One other component that might help is keeping in constant contact with the dealerships once the alliances have been formed. Steven said turnaround is key. If a customer is sitting at a dealership ready to sign, the time it takes to reach and connect with someone at a credit union can easily break a deal.
"If you get a bad reputation with the dealership, it’s very hard to recover," Stevens said.