FOM Limit Discounted
When a credit union makes the announcement that it is planning to convert to a bank, it almost always throws the industry into a tizzy.
The controversy often stems from the motivations behind wanting the conversion.
In the case of HarborOne Federal Credit Union in Brockton, Mass., field of membership limitations may be among the reasons why the $1.8 billion CU wants to change its financial model. Credit Union Times recently reported that HarborOne President/CEO James Blake told local media that the credit union’s FOM covers four counties and the cooperative had to turn down $70 million in mortgages from potential members who live outside of membership boundaries.
A devil’s advocate might likely understand the frustration of how a FOM can confine lending to certain geographic regions, particularly in mortgage and business lending.
Are the same constraints felt when trying to grow auto loans? Joe Greenwald, vice president of marketing at CU Direct Corp, said FOM issues may not be a huge concern in this area because many CUs have expansive community charters.
“Ninety-nine percent of the people walking onto a car lot, a credit union will be able to help them,” Greenwald said.
CU Direct in Ontario, Calif., provides lending tools to 990 credit unions and is the parent company of the CUDL, Lending Insights, Lending 360 and CUDL retail brands.
“If you’re SEG-based, it could be limiting,” Greenwald acknowledged. “But with credit unions, there’s such a loyalty from members that it offsets any disadvantages.”
Even with recent declines, auto loans account for 29% of credit union portfolios, Greenwald noted. But with the recent turbulence in the marketplace from a drop in auto sales to the recent re-emergence of other lenders to new norms in the auto buyer’s behavior, credit unions must take a closer look at how they can be more competitive.
Today, credit union auto lending market share hovers around 17%, up from 13% to 14% a few years ago, Greenwald said. At one point, it was 25%, but that was when no one else was lending, he added.
Still, wherever they are based, credit unions will likely still need to continue building alliance with local dealerships. Greenwald said in some markets, lenders have been aggressive on rates but that can be a good thing for the industry.
“They don’t have any unique advantages if they’re just competing on price,” Greenwald said of banks and others competing with credit unions.
At the $1 billion Pacific Service Credit Union in Walnut Creek, Calif., the bigger issue is dealership financing at below market rates such as 0% or 0.9% rather than FOM limits, said Noelle Fischer-Herbert, vice president of corporate development.
The credit union spans 12 California counties, which have a total population of more than 9 million, she pointed out, adding that the CU rarely receives requests from consumers who do not meet its FOM.
“As we do not embrace the practice of loss leaders, our new and used auto loan rate is 2.99% for 72 months with automatic payroll deduction for the payment,” Fischer-Herbert said. “Even at this low rate, which is our break even, it is above dealer rates currently available in the market.”
Greenwald said as long as credit unions are being very effective in meeting their members needs and offer things like preapproved financing, they will have an advantage over the competition.
“If they use the tools needed, given the relationship, I don’t see there the charter would be an obstacle,” Greenwald said.
Meanwhile, Pacific Service said it has its eye on a model that is working.
“Fortunately, we have a loyal membership that look to us when they are in the market for loans because they understand our methodology of doing the best we can for all members,” Fischer-Herbert said.