MADISON, Wis. – Regulatory and market changes over the past year in the two areas that account for the largest share of credit unions' loan portfolios – auto loans and mortgages – and their impact on consumer borrowing behavior, forced credit unions to modify their lending practices. What's in store for CUs in 2003? Credit unions had the opportunity to learn about what they can expect this year from RESPA, HMDA, and Credit Union Direct Lending experts in an audio conference sponsored by CUNA & Affiliates. Participating in the Jan. 29th audio conference panel were Tony Boutelle, president/CEO, CUDL; Kenneth Markison, assistant general counsel for HUD; and John Wood, counsel for the Federal Reserve Board. Credit unions, said Boutelle speaking on "The Impact of Auto Lending Trends on Credit Unions," are facing four major issues when it comes to auto lending – continuing 0% financing offers; buy-rate financing at an all-time low; more consumers financing at point-of-sale; and lender aggregation at the dealership. For those credit unions that hoped they might see an end to manufacturers' 0% financing incentives this year, Boutelle delivered the bad news. "The 0% interest rate environment won't go away," he said. Boutelle called 0% financing "a brilliant marketing ploy on the auto manufacturers' part that's very expensive to maintain, but will continue. Auto manufacturers are committed to high levels of incentives." The plus side of these offers, he said, is they've helped get consumers to the dealer sites. The downside for credit unions though, is there was no new car balance sheet growth for credit unions in 2002 – according to Callahan & Associates Peer-to-Peer, CUs' new auto loans increased only 1.2% from June 2001 to September 2002. Only unsecured credit card loans increased less, 0.9%. "Zero percent financial incentives are something credit unions are going to have to live with. The key to dealing effectively with them is to work closely with dealers so they're aware of credit unions' financing options," he suggested. CUs' ability to compete with banks' buy-rate financing may prove more challenging. Although a few CUs do buy-rate financing, Boutelle said banks are proving to be more competitive in this area. "Banks have lower cost of funds and expense ratios, so they can afford to push rates down," he said. Another trend in auto financing facing credit unions, said Boutelle, is more consumers are financing at the point-of-sale at the dealer site. Citing J.D. Power & Associates' `2002 Consumer Financing Satisfaction Study," Boutelle said findings showed 81% of consumers who purchased new luxury vehicles in 2002, financed their vehicle purchases at the dealer site, compared to 69% in 2001. For new, less luxury vehicles, 88% made financing arrangements at the dealer site in 2002, compared to 82% in 2001. The same study showed banks have 30.7% market share and were the only auto loan provider segment that gained appreciable market share in 2002 – 5.1%. Captives lost .6%, although they continue to hold the largest share – 52.4%; credit unions have a 12.3% share, but lost 4% last year; independents have 3% share and lost 0.1%. However, in terms of loan financing satisfaction by segment, credit unions came in first. Financing arrangements are increasing being handled by technology and lender aggregation at the dealer site because it provides an instant decision on the borrower's credit worthiness, a loan decision within seconds, and electronic contracting within minutes. What this means, said Boutelle, is "credit unions must be at the point-of-sale." Credit unions involved in mortgage lending should be familiar with the nuances of new RESPA and HMDA regulations. "The problems with the current RESPA rules is they don't adequately make consumers aware of the real costs of getting a mortgage," said HUD's Markison. He said the agency's position is that "the current RESPA rules have proven to be ineffective.the rules don't help consumers to shop for a lower product." Markison noted that RESPA consumer disclosure requirements have remain unchanged since 1974 when RESPA was first enacted by Congress. "HUD estimates that $50 billion are spent annually by consumers on settlement costs. Despite the use of technology in the system, closing costs haven't come down," he said, adding that "there's little opportunity for the industry to innovate to lower settlement costs." Markison emphasized though that the problem isn't resolved just by offering reasonable settlement rates. Consumers, he said, should understand the relationship between origination rates and settlement costs. "It's important that consumers understand all charges and the information be presented to them in a simple form so they can make decisions," he said. "The current rules add to consumers' confusion. Billions of dollars could be saved by changes in RESPA. Fundamental changes are warranted." The comment period for proposed RESPA changes ended Oct. 28, 2002. Markison said HUD received over 40,000 comments. Wood lastly discussed and fielded questions concerning changes to Reg C of the Home Mortgage Disclosure Act. Some of the amendments were effective Jan. 1, 2003 such as those concerning the expansion of coverage of nondepository lenders and the simplification of the definitions of `refinancing' and `home improvement loan.' Others amendments such as requiring lenders to ask telephone loan applicants for information on their race, ethnicity and gender, and requiring lenders to use the 2000 Census tract for geocoding loans, will take effect Jan. 1, 2004. -

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