Auto Revival Wave Is There to Ride: Guest Opinion
Auto lending has traditionally been the backbone of many credit union lending operations.
Some lenders have recently benefited from the Cash for Clunkers program and from the rebound in auto sales since the recession.
Banks and captives simultaneously moved back into the business and quickly regained market share. So how do credit unions remain relevant and how can we differentiate ourselves in the highly competitive market with historically low rates?
The trend in many markets has been to cater to dealerships via buy rate agreements, increased dealer reserves, and huge advances for ancillary product and negative equity. But what about the member?
We must go back to our roots of serving the member and always look out for their best interest. We have long been the trusted financial institutions among the “driving” class, and we must capitalize on our reputation to differentiate ourselves from our for-profit competitors. Here are some questions and ideas of how to look at your auto lending program and hopefully, help find ways to capture more loans.
Do not ignore your credit-challenged and limited credit members? Someone will finance them and the potential yield can easily outweigh the credit risk if structured correctly. Lending to lower and limited credit score borrowers requires discipline and defined lending and collection parameters.
Give your loan officers the opportunity to say yes to these borrowers by having customized pricing and programs using prudent rates, reasonable terms and loan amounts, and conservative loan-to-value structures. You will be surprised at how many members will gladly refinance out of a 29% subprime loan and into an 18% credit union auto loan. Assisting your first time buyer members will gain trust and loyalty for life. My first auto loan was with a credit union and I had very limited credit experience at the time. The auto loan gave me the ability to get to my job which allowed me to pay back the loan.
Customize your indirect auto loan strategy based on your membership and organization. Is your membership geographically diverse? A third party indirect relationship can give you exposure to hundreds and even thousands of dealerships in the various communities in which your members reside.
If your membership is geographically concentrated, consider partnering with a select few local dealerships and create an in-house indirect program leveraging the local relationship. Do you even need an indirect program? Working with dealerships can be costly and risky. An indirect program requires technology, diligent risk management, and a significant amount of staff resources. Indirect lending may produce loan and membership growth, but are you getting profitable and engaged members?
Let your members know that you sell the same ancillary products as a dealer at a superior value. Products such as guaranteed asset protection, credit life and disability insurance, and extended warranties generate much needed noninterest income and help protect the collateral, the borrower, and the credit union. Make sure your employees offer these products on every eligible loan, give your employees an incentive to sell, and integrate the sales and fulfillment process into your loan workflow.
Educate your member on how to buy a vehicle and provide tools to help them successfully shop and negotiate. Can members and potential members apply online, get approved automatically and sign documents electronically? Does your website offer links to online values, vehicle history reports, and online vehicle shopping?
Does your staff educate the member on how to use these tools before stepping on a car lot? Once your member finds a vehicle, they must first negotiate with sales person on the price. Once a price is agreed upon your member is passed onto the finance department, which normally entails sitting in a little room where the real pitch begins.
Let your member know what to expect and how to continue the negotiation process through the finance experience. Most of all, make sure your member is asking for credit union financing if you participate in indirect lending. Tell your member to bring their credit union's pre-approval letter with them to the dealership and to demand credit union financing. If you work with an indirect partner, see if you can upload your pre-approvals into the dealer interface. Not only will you save on credit report expenses, you will also have a higher likelihood of capturing the loan at the point of purchase.
If a loan gets flipped, make sure you have processes and controls in place to identify and recapture the lost business. Monitor member and third-party payoff requests and find out where your loans are going. Offer flexible, risk-based and relationship pricing and do not lose loans over small differences in rate. Flexible pricing parameters, such as rate matching, allow employees to save and recapture loans. Pre-screen pre-approvals can be a great tool to identify and market to members with auto loans at other institutions. Your credit report vendor has an enormous amount of data and customized solutions for pre-screens so you can firmly offer your members credit with confidence.
There is no one size fits all solution to regaining our auto lending market share. Involve your staff as they know the member best. We can easily gain back our lost market share by focusing on creating value for the member and serving as their trusted financial partner.
Caleb Cook is vice president of lending at Seattle Metropolitan Credit Union.
Contact 206-398-5530 or firstname.lastname@example.org