If the folks who manage automotive lending at credit unions arefeeling a little queasy these days, it's with good reason. Watchingtheir market share the past four years has been akin to spending along weekend at an amusement park, going up and down on the world'ssteepest and fastest roller coasters.

Several years ago, the banking world was in high-risk mode, withbanks, finance companies and captive lenders fighting for a sliceof a frenzied lending market.  Loans with highloan-to-value ratios to customers with somewhat riskier creditbecame the norm. Credit unions, taking a traditionally conservativeapproach, captured just 15.64% of the market in the first quarterof 2008.

Of course, this risky loan strategy came to a crashing halt, andcredit unions, because they had much less of their loan portfoliosat risk, did not need to pull back as much from automotive lending.When the markets crashed, credit unions were well-positioned toserve the remaining automotive market. The upshot was a 24.17%market share in the second quarter of 2009. 

However, all good things must come to an end, as they say. Asbad loans began to cycle through and come off the books, banks andcaptives were ready to resume regular lending activity. As banks and captives adopted more aggressive lending policies inthe past two years, credit union market share retreated back to15.28% in the first quarter of 2011.

So where on this wild ride do credit unions stand today, andwhat are the signs of more ups and downs or smooth tracks in thefuture?

First, when comparing open loans from first-quarter 2011 tofirst-quarter 2010, credit unions have shown only a slight drop,going from $144 billion in first-quarter 2010 to $142 billion infirst-quarter 2011. Banks had the steepest decline, going from $231billion to $225 billion, and captives went from $194 billion to$193 billion. Only finance companies saw their overall open loanbalance grow, jumping $13 billion from $64 billion to $77billion.

One might look at the finance company performance and thinkcredit unions are underperforming. The reality, however, is thatfinance companies typically serve higher-risk customers and aregrabbing a portion of the market that credit unions traditionallyavoid. When looking at credit union performance versus banks andcaptives, credit unions have held their own.

Another key indicator is the stability of credit union loanportfolios. For the most part, credit unions have stuck to theirtraditional conservative lending practices. This has yieldedindustry-leading stability for credit union loan portfolios. Whenlooking at 60-day delinquencies, credit unions have only 0.35%loans at risk. This compares favorably with banks (0.60%), captives(0.50%) and finance companies (1.58%). 

However, even though delinquencies are lowest for credit unions,they are lower for every lender type in the industry. With fewerdelinquencies on the books, it is likely that banks and captiveswill become more aggressive in their lendingstrategies. 

In addition to a drop in delinquencies, credit unions also havethe lowest quarterly repossession rate in the automotive lendingindustry, at 0.20%. This compares with an overall industry averageof 0.68%. Finance companies, because of their focus on subprimecustomers, have the highest quarterly repossession rate (2.57%),followed by captives (0.52%) and banks (0.35%). 

Another sign of credit union stability is found in terms ofoverall dollars at risk. Credit unions have just $396 million atrisk, compared with finance companies at $1.047 billion, banks at$934 million and captives at $743 million.

With few loans failing and relatively low dollar volumes atrisk, credit unions have clearly stuck to their traditionalconservative lending patterns over the past few years. What thendoes the future hold for credit unions and automotive lending?

First, automotive analysts predict sales will continue toimprove at a steady rate.  According to Morgan Stanley,auto sales could reach as high as 14 million in 2012(Bloomberg.com, April 19, 2011). That means the total pie forautomotive lenders should grow correspondingly.  

Lenders overall seem to be loosening their criteria for loans,as the average score for a new vehicle loan fell by 10 points yearover year. In first quarter 2010, the average score for a newvehicle loan was 776. In first quarter 2011, this dropped to 766.In addition, loans to subprime customers grew by 3.6% from firstquarter 2010 to first quarter 2011. Both of these trends seem toindicate a more aggressive strategy for the industry as awhole. 

Despite the lower credit scores for customers and the expansioninto lower risk tiers, lenders have stayed cautious when it comesto loan-to-value ratios. In first quarter 2011, the averageloan-to-value ratio for new vehicles was 107.17% and 126.35% forused vehicles. Credit unions are very close to these industryaverages, at 111.79% and 129.69%. This will be a key statisticmoving forward. If banks and captives start to grant higherloan-to-value ratios, it would signal a more aggressive strategythat could mean a drop in market share for creditunions. 

Overall, the automotive lending industry is significantlyhealthier today than it was two years ago when credit unionsgrabbed a large chunk of market share. With banks and captives onmore solid footing and an expanding pool of loans, it is likelythey will become even more aggressive with their lending strategiesin an effort to regain lost market share.

Regardless, credit unions remain extremely well-positioned tocontinue to serve the automotive loan market. However, if they wantto hold on to a larger portion of market share and smooth out thepeaks and valleys of their recent roller coaster ride, they mayhave to begin employing more aggressive lending strategies. 

Melinda Zabritski is director of automotive credit at ExperianAutomotive.
Contact 714-830-5300 [email protected]