In the credit union world, Credit Union of Texas, Dallas is the top leaser and manages its program internally. Lockheed FCU, Burbank, Calif. ranks second, and their program is managed by CULA.

But it's not just the larger noncaptive leasers that CUs are up against, there are also the 0% financing and rebate offers from the Big 3 auto manufacturers that take a bite out of CUs' leasing business.

Still, Gandolfo insists it's a product credit unions should be involved in.

"Leasing is sold at the dealership level, so if a financial doesn't have an indirect leasing relationship with dealers then leasing isn't an option for the member through their credit union and the credit union winds up losing that business to someone else," he explained.

CULA has provided leasing and balloon programs to CUs since 1988. Since then it has originated over 55,000 lease and balloon loans totaling more than $1.5 billion. It is actively doing business in 22 states and currently has 55 credit union clients grouped in three categories-lease, balloon loans, and run-off clients which Gandolfo describes as "credit unions that have balloon or lease portfolios but are not pursuing new business."

CULA's balloon note program recently got a boost when Member Advantage Service Corp., Bradenton, Fla., went out of business earlier this year. The now defunct company used to offer balloon loans, but in the last 30 days, Gandolfo said 30 former Member Advantage Service Corp. credit unions with a combined portfolio of approximately 9,000 balloon loans signed on with CULA. Three of those CUs have new programs with CULA and are not just run-off clients. In addition, two of Member Advantages' three former largest clients-GTE FCU and Viewpoint Bank (formerly Community CU of Dallas)-brought the management of their programs inside. The third CU-Eastern Financial Florida CU-is still undecided. Also signing up recently with CULA has been Colorado-based CU Direct Connect. The multi-owned indirect lending provider signed on with CULA last December to provide indirect leasing to its members. The program was officially launched July 17.

Gandolfo said the rising cost of vehicles coupled with the "stagnation" of the paychecks of the American population" is contributing to a resurgence of residual base loans including balloon loans and leasing. A residual base product, he explained, allows lower out-of-pocket costs and monthly fees.

Even so, he understands CUs' concerns with the residual risks of leasing and balloon notes and consequently their hesitancy to participate in the market. CULA's response to that, he said, is its "hold back account fund" of $200 that's set up for each balloon loan and lease a credit union does with CULA. When the term of a lease or balloon loan is up, CULA takes the maturing vehicle and sells it for the current value. The company then uses the hold back account fund to make up the difference in the value of the vehicle at the time of sale and the value of the loan. This practice, said Gandolfo, allows CULA to minimize the residual risk at the maturity of the balloon note for credit unions.

According to Gandolfo, the average residual is about $11,000. The average loss on a leased vehicle is $262 and is $92 on a balloon loan, he said.

"The leases are only coming in at a 30-33% return rate, and balloon loan vehicles at 10%. So if we reserve for 100% of the vehicles up front, then our reserves are high and that brings the averages down. Which means we reserve double what the average losses are," he explained.

"So for every vehicle we do a reserve on, that leaves a reserve pool available for up to 10 times the reserve rate," Gandolfo added.

CULA's portfolio is maintained and valuations are done by Automotive Lease Guide, Santa Barbara, Calif. CULA currently manages a portfolio of over $660 million consisting of over 20,000 lease and balloon loans.

The jury is still out on whether leasing will enjoy the same popularity it did in the 1990s, but industry leaders concur it's making a comeback.

"The residual value is the piece that can either take a credit union head-to-head with the competition or cause it to be left in the dust by competitors. CULA can control the residual risk for credit unions and give them the opportunity to compete in this industry that's making a comeback," said Gandolfo. [email protected]