WEST PALM BEACH, Fla.- Auto leasing has long been considered the step-child to CUs' auto lending activities, fed by the complexity of the product and CUs' concerns about getting burned by lease losses. While auto leasing will probably continue to play second fiddle to auto lending, market conditions are ripe for the product becoming a larger portion of CUs' auto lending portfolio in the coming months. "Auto leasing is definitely a more complicated product than auto lending, the accounting involved is much different and there are different insurance products that have to be offered some of which credit unions aren't accustomed to having," such as residual value insurance, says Jeff Gurney, president, CU Services Inc., a wholly-owned CUSO of Credit Union of Texas, Dallas, the top ranking credit union in leases receivable as of first quarter 2005. The CUSO was formed by what was then called Dallas Teachers CU in 1995 expressly to manage an auto leasing program for members. Gurney explained that the credit union at the time was offering a balloon note program "off and on" and some members inquired about auto leasing which got the program rolling. "There's a tremendous amount of due diligence involved with auto leasing. If you don't do that and set up your program incorrectly, you can get burned badly," he adds, which is exactly what happened to some credit unions a few years ago and is the main reason so many CUs are gun shy about getting involved with the product. In addition, Gurney says credit unions have seen a lot of banks take some big hits over the years from auto leasing due to inflated residual value projections, and "that's scared credit unions as well." According to CNW Marketing Research, the U.S. auto leasing market reached a 20-year high in 1999 when 37.4% of all new vehicle transactions were leases. Over the last couple of years, though, with the Big 3 automakers offering consumers enticing incentives in the form of 0% financing and rebates, that figure dropped and has sat around 20% for the last couple of years. CUs' involvement with auto leasing reached its peak in 2002 when leases receivable were at a high of $1.77 billion. The following year that figure dropped to $1.51 billion. It inched up to $1.57 in 2004 and remained the same the first quarter 2005. Callahan & Associates estimates credit unions held 1.06% of all vehicle leases receivable at the end of 2004. So what's changing in the market that suggests CUs' auto leasing activity will increase? To start, interest rates are rising. "When rates are higher, there's a bigger gap between a loan and a lease payment, so leasing becomes more attractive," opines Gurney. That's coupled with the rising price tag on new cars, says Keli Ninnant, supervisor lease origination services, Navy FCU, Vienna, Fla. "For a consumer to drive the vehicle of their dreams and keep their monthly payment in range, that's bringing more consumers to leasing vehicles," she says. Those factors together, says Callahan & Associates' Joe James, senior industry analyst, are making leasing more attractive to consumers because the incentive to own a vehicle isn't as strong. James estimates that only about 100 credit unions are doing virtually credit unions' entire auto leasing activity and most of those are larger credit unions because they can afford to maintain their own auto leasing programs. Some smaller credit unions also are involved with auto leasing through partnerships with CUSOs such as CUILA. Like CU of Texas, Navy FCU has been offering auto leasing for 10 years. Ninnant explained that the $22-billion credit union began offering the product when the market was hot and it wanted to be able to offer members an alternative auto financing product "to be able to assist members who wanted to drive new vehicles without having to purchase them." At the end of 2004, Navy had $138.6 million in leases outstanding, and as of May 2005 that figure was about the same. Ninnant says Navy makes new leases every month, but leases also mature, "so that keeps the ratio of new leases to matured leases very close." The credit union has been maintaining the same balances for the last three to four years. "The market always seems to be payment driven. If consumers can find a way to get the vehicle they really want at a lower payment, then they're going to be very interested in that option," says CU of Texas' Business Development Coordinator Sunny Geels. "Anything that causes vehicle payments to be higher such as higher vehicle prices, increasing interest rates or no available rebates, can make leasing a more attractive financing option. Currently prices and rates are increasing, plus incentives are decreasing, so this makes leasing a popular alternative." CU Services did $148,206,096 in new auto lease volume in 2003, and that figure increased to $265,520,517 in 2004. In 2005 YTD it's done $124,929,155 in volume. Gurney said the CUSO was purposely set up to manage the leasing program so it could offer leasing services to other credit unions' members, but currently less than 10% of its business is with non-members. The CUSO has relations with 1,000 dealers throughout the U.S. It expanded its program in August 2003 to include commercial leasing that involves offering commercial leasing to companies that have fleets of vehicles. The CUSO's indirect leasing program works similar to an indirect lending program. The CUSO makes the underwriting decision and the dealer works within the CUSO's parameters. After the lease arrangement is completed, the CUSO buys the contract from the dealer. Gurney and Hinnant agree that the key to a successful leasing program is communication with the member. "In any credit union membership, you have members who are clearly leasing candidates and those who aren't," says Gurney, adding that "one reason credit unions' leasing programs haven't succeeded is they put members in leases that shouldn't have been." Who is the ideal leasing candidate? Gurney suggests some characteristics: they're someone who's accepted they'll have a car payment, they know how many miles they want to drive a car, they take good care of their vehicle. Who's not a good candidate? "Someone who gets a two-to-three year auto loan, pays it off and drives the vehicle for 10 more years," he says. Hinnant points out the various misconceptions there are about leasing and they typically involve the additional costs incurred at maturity for things such as excess mileage, wear and tear, disposition fees and possible early termination fees. "The members would want it to be as simple as signing the contract, driving the vehicle away and returning it when the lease expires. They don't understand the concept of extra mileage and are usually surprised when they return the vehicle at the end of the lease," she says. That's why good communication with the member is so important, says Gurney. In most cases when you explain the lease to members, they're pleasantly surprises. "One thing I tell people is if they buy a car and do a 60-72 month loan with no money down, they really don't own anything for awhile even if the title is in their name, because the lender holds the note," he says. Still, he adds, "I'd rather lose a lease customer and put them in the right kind of loan than force them into a lease." Hinnant agrees it's crucial that members be able to make informed decisions about whether to lease or purchase a vehicle. That comes from making the member aware of all the costs involved and the different options available to them. -

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