Despite the slowdown, total auto loan balances among U.S. credit unions reached a record $378.2 billion as of September 2019, and now comprise 34.4% of the credit union industry's loan portfolio. Still, the indirect lending deceleration has resulted in declining auto market share at cooperatives nationwide, falling from 20.4% in September 2018 to 18.4% in September 2019. Broken out, new auto market share decreased 3.4 percentage points to 16.2% and used auto share decreased 2.4 percentage points to 24.6%.

Credit union auto growth slowed to 3.5% year-over-year as of September 2019, the lowest annual rate since March 2012. This follows double-digit annual auto loan growth in every third quarter since 2013. New auto loans increased 2.2% over the past 12 months, while used auto loans grew 4.4%. September marked the second consecutive quarter where used growth outpaced new growth, a dynamic that had not previously occurred since the third quarter of 2012.

Indirect Lending

The trend toward increased indirect lending began around December 2012. The 209 credit unions with the largest indirect lending portfolios today – they hold 50% of the industry's total auto loan balance – had 2.52 accounts per member at the end of 2012, higher than the 2.37 number for all U.S. credit unions.

Since then, loan balances at the top indirect lenders have grown much faster than the industry as a whole – driven by substantial indirect lending growth – but accounts per member growth has lagged, allowing the rest of the industry to begin catching up. In the third quarter of 2019, those top indirect lenders had 2.58 accounts per member versus 2.5 industrywide.

The total auto portfolio at the 1,925 credit unions with indirect programs was $319.4 million, accounting for 84.4% of nationwide auto loans. As these credit unions slow their indirect lending programs – directly impacting their total auto lending businesses – they have a powerful effect on the industry's overall growth rates.

Direct Versus Indirect

As of the third quarter, there were 3,391 credit unions that reported auto balances without indirect loans. These institutions posted stronger auto loan growth numbers than indirect lenders. Their totals were:

• New auto growth = 7.6% (10% in September 2018)
• Used auto growth = 6.1% (8% in September 2018)
• Total auto growth = 6.6% (8.7% in September 2018)

Comparatively, the slowdown reported these totals at the 1,925 credit unions with indirect programs (direct loan balances at these institutions are also included in these rates):

• New auto growth = 1.8% (13.3% in September 2018)
• Used auto growth = 4.7% (10.6% in September 2018)
• Total auto growth = 3.5% (11.6% in September 2018)

Broken down further, there are 209 institutions that reported more than $275 million each in indirect loan balances, each. These institutions reported auto balances that account for more than 50% of the credit union industry's total. Their growth rates for the third quarter of 2019 were:

• New auto growth = 0.8% (12.4% in September 2018)
• Used auto growth = 5.5% (11.2% in September 2018)
• Total auto growth = 3.5% (11.7% in September 2018)

Penetration Rates

Total auto penetration rates in the industry grew 21 basis points year-over-year, from 21.1% to 21.3%. However, this growth has slowed over the past few quarters, with penetration rates staying flat between June and September 2019. As with loan growth, the industry's penetration rate was hindered by the pullback in indirect lending.

As of the third quarter of 2019, credit unions with no indirect lending programs reported increasing auto loan penetration rates quarter-over-quarter, up from 15.7% in June 2019 to 15.8% in September. However, indirect lenders' penetration rates contracted slightly over the same period, falling from 23.04% to 23.02%.

Region by Region

All regions of the U.S. reported slowing indirect loan growth. The NCUA Western region reported the largest auto growth slowdown as of the third quarter. Though direct loan growth slowed as well, indirect balances reported more drastic decelerations and made up more than 50% of total loan balances in all three regions, indicating that the total auto loan slowdown is predominantly driven by the pullback in indirect lending.

Western Region:

• Indirect loan growth = 3.5% (15.5% last September)
• Direct loan growth = 2.6% (3.0% last September)
• Total auto growth = 3.2% (11.3% last September)

Southern Region:

• Indirect loan growth = 4.3% (13.3% last September)
• Direct loan growth = 2.6% (7.1% last September)
• Total auto growth = 3.5% (10.1% last September)

Eastern Region:

• Indirect loan growth = 7.1% (17.9% last September)
• Direct loan growth = 0.0% (2.7% last September)
• Total auto growth = 4.1% (11.0% last September)

Bottom Line

Over the past year, U.S. cooperatives scaled back the rate at which they engage in indirect lending. This has pulled down overall auto growth, which had been growing at a consistent double-digit clip for six consecutive years. With a market influx of off-lease vehicles, credit unions – particularly those involved in indirect programs – are seeing a consumer push toward used vehicle loans, which will likely continue to drive average balances lower.

Indirect loans still dominate the auto loan portfolios at credit unions nationwide, but growth over the past 12 months shows that cooperatives involved exclusively in direct lending are reporting higher growth rates in both balances and member penetration as of the third quarter. Although indirect lending may have been the definitive feature of credit union auto lending over the past decade, new (and old) strategies may begin to gain prominence in the coming years.

Will Hunt

Will Hunt is an Industry Analyst at Callahan & Associates in Washington, D.C.