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WASHINGTON – Are auto dealers’ zero percent financing offers and captive finance companies’ low rate offerings to blame for credit unions’ shrinking new auto loan portfolios? While it’s difficult to draw a straight cause and effect line between the two, one thing is certain: credit unions’ new auto loan portfolio as a percentage of their total loan portfolio hit a record low at year end 2001 and showed a negative growth in May 2002 compared to the previous year. In 1999 and 2000, credit unions’ new auto loans grew an average 10 to 11% a year, said CUNA Senior Economist Steve Rick. This May compared to May 2001, CUs showed a negative growth of 1.5%. Rick pointed to dealers’ 0% financing offers and the Fed’s low interest rates that have allowed captive finance companies to continue to offer very low rates as the main culprits behind the turn of events for CUs’ new auto loans. “Credit unions were offering rates a percentage point lower for new auto in May 2002 than they were a year ago, still new auto loans only accounted for 18.3% of their loans compared to 19.9% from a year ago,” he said. Rick said the numbers show that credit unions will have to push used auto loans or other areas of their loan portfolios, at least for a while. Used auto loan numbers have remained comparatively more stable than new auto loan numbers. Leigh Brady, senior vice president, consumer education for State Employees’ CU, Raleigh, N.C. agreed with Rick’s assessment. According to Callahan & Associates’ Peer-to-Peer study, SECU ranked third among all CUs in auto loans for the first quarter 2002, seventh in new auto loans and second in used. But Brady said those numbers don’t really show the nuances of the $8.8 billion CU’s auto lending activity. SECU’s new auto loan portfolio in May 2002 was $394 million, compared to $420 million in May 2001. Used auto loans however were up 12%. Likewise new auto loans were down 4.3% in April 2002 compared to the previous year, but used auto loans were up 16%. Brady said some of the downturn could also be attributed to members who were trading in leased vehicles and purchasing them as used, but she said that would only account for a small number of used auto buys. To compensate for the fall off in new auto loans, SECU is leaning more of its marketing efforts to home equity loans. The credit union is also offering a mortgage modification product where for a one-time processing fee of 3/4% of the outstanding loan balance, the credit union lowers the rate on a member’s existing mortgage with SECU to the current ARM. So far, SECU hasn’t had to call off any previously scheduled auto loan promotions. Brady said SECU typically schedules promotions a few months out, based on how a particular market is doing. “We’ll wait and see what happens with auto loans,” she said. “The auto sale paradigm has definitely changed,” said Mike Chapman, senior vice president of lending for San Antonio, Texas-based Security Service FCU, the second ranking CU in total, new and used auto loans for the first quarter 2002, according to Callahan. “Before 9-11, March through September or October used to be consider the prime months for car sales while the other months were usually slower because of the winter weather conditions . So you used to be able to look further back if you wanted to see if there was anything happening with new and used auto loans that would cause you to reevaluate your lending strategy. Now you have to be more acute to the changes,” said Chapman. When dealers first launched their 0% financing offers last year, SSFCU switched gears and began focusing more on the used car side of its auto lending portfolio. Prior to 9-11, Chapman said SSFCU did about two new auto loans to every one for used vehicles. Now the ratio is more 1 to 1. SSFCU typically shows about 17% growth yearly in auto loans and does an average $60 million a month in all auto loans. The credit union has been able to maintain that level because of its indirect lending program – SSFCU is the leading auto lender in the San Antonio area. In January it did over $70 million in auto loans in Texas. It did another $20 million in auto loans through its branches in Colorado as well. “With the economy the way it’s been lately, these are definitely unique times,” said Chapman. -

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