RANCHO CUCAMONGA, Calif. — Credit unions are pricing their auto loans too low, and may be missing out on an opportunity to earn interest income in a tough yield environment.

That was the most surprising statistic uncovered by CUDL's 2007 Business Intelligence Report, said CUDL Executive Vice President Jerry Neemann. The new report, which CUDL intends to produce annually, was complied from data collected by the CUSO from member credit unions and third-party sources like Experian and J.D. Power and Associates. “The one piece that stuck out to me was the rate differential between credit unions and captive and bank sources. Credit unions talk about how difficult it is with the yields being the way they are, but when you look at national averages, it appears that credit unions are leaving some rate opportunities on the table,” Neemann said.

According to 2006 Experian figures, the average rate for a credit union auto loan was 8.12%. In comparison, banks averaged 9.89% and captives averaged 10.81%. Not surprisingly, rates diverged most sharply when comparing subprime and below subprime paper; however, even when comparing prime paper loans, credit unions still averaged more than a full basis point lower than banks.

“Are credit unions monitoring bank and captive rates from a competitive aspect on a consistent basis? I can see being lower, but two basis points is too much in this rate environment. It appears, on a nationwide level, that we are underpricing our loans relative to the marketplace,” Neemann said. Another statistic CUDL is plenty proud to tout is the fact that, according to statistics from Callahan & Associates, 80% of all net credit union auto loan growth in 2006 came from indirect channels, to the tune of $5.5 billion.

Neemann attributed the growth to the increasing number of participants in indirect lending systems, which elevates the image of credit unions as a go-to funding choice for auto dealers.

“When it comes to CUDL, we're aiming for a strategy of implementing something like an ultimate point-of-sale or ATM network, where all credit union members could be funded through one portal. It creates a business proposition for the dealer, because it's easier to send customers right back through to the credit union using the credit union portal, rather than worrying about how to finance them. At the end of the day, they just want to sell a car,” he said.

The VP pointed out that in states where a large percentage of credit unions participate in the CUDL system, credit union market share is much higher than the nationwide average of 18%. For example, in CUDL's home state of California, credit union market share is 22%. In Utah, where CUDL participant America First Credit Union is the state's leading auto lender, boasting nearly 17% of the market on its own, 45 out of every 100 auto loans is funded by a credit union. “The opportunities are there, state-by-state, to recreate what they have in Utah. I think market shares could go much higher nationwide, but credit unions have to consider the big picture. How does this industry create a POS deliverable for auto loans? It's already there, they just have to start participating,” he said.

The CUDL exec admitted that the findings may sound rather self-serving, considering such a strategy would result in exponential growth for the CUSO.

“I'm excited about the opportunities, but it's so challenging for others to see that potential. You run into those situations where a credit union has their own direct lending program and kind of owns the local market, which is great for them and their members. But, what they're missing out on is that bigger credit union strategy. It would have a tremendous impact on how auto lenders do business, and I think it would revolutionize the industry. Plus, it would be the most efficient and best way to control members' experience at the dealership,” he said.

Neemann stressed that CUDL is a credit union-owned CUSO, so partner credit unions would only stand to benefit from a stronger CUDL. And, the entire industry would benefit from a nationwide auto loan branding strategy.

The report also showed that the average auto loan rate term has increased, with more than half of all CUDL-originated loans having terms longer than 60 months. This trend isn't limited to credit unions–banks and captives showed similar numbers.

Longer terms mean more interest income, provided the loans stay on the books. However, credit unions should also be mindful that longer terms increase the credit union's risk for loss because the loan amount is more likely to exceed the vehicle's value. “It does increase exposure on back side and on the remarketing side, but I don't think we've seen a negative impact at this point, no greater increase in defaults because of longer terms,” Neemann said. Neemann said he has already received a call from a captive lender, wanting to purchase the CUDL report. For now, the CUSO is declining such requests, electing to make the information available to credit unions first.

“We're analyzing the information to determine if there's anything in there we don't want the captives to see,” Neemann said, adding, “But of course, we realize that if they really want it, they can probably get their hands on it anyway.” –ivanaknapp@gmail.com

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Are Credit Unions Pricing Auto Loans Too Low? New CUDL Report Says Yes

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