Imagine walking through the palms toward the beach with an umbrella and cooler in hand. As you turn a corner, you see snakes, crocodiles and everyone else rushing past you headed for higher ground.
Michael Cochrum of CU Direct calls the resulting insecurity the “tsunami effect.”
“Why is the beach open? Why am I the only one here?” Cochrum said.
Those kinds of worries have arisen as credit unions continue to increase their auto lending even as almost all other lenders retreat.
The worry is that maybe banks know something that credit unions don’t. It’s a worry that has led Cochrum and others at the Los Angeles-area CUSO to check and recheck their numbers to see if they are missing some underlying weakness.
His conclusion?
“We see no indication credit unions are taking on more additional risks than other lenders,” he said.
For example, delinquency rates past 60 days have risen for other lenders, but not credit unions.
In CU Direct’s “State of the Credit Union Auto Lending Market” webinar Thursday, Cochrum showed that auto loan originations among credit unions in the second quarter were about 6% greater than during the second quarter of 2016. Meanwhile, every other lender cut back: banks down about 7%, captives down more than 2% and finance companies and buy-here-pay-here lots both down about 1%.
Since March, captive lenders have stepped in more aggressively, and increased their share to 53% of new car loans funded in the second quarter. The increase from 37% in the first quarter came as they took aboard many of the subprime borrowers abandoned by banks.
Overall, credit unions originated 20% of all auto loans in the second quarter, down from 24% in the first quarter. Captives’ 29% overall share was up from 18% in March. Other overall shares were 32% for banks (down 5 percentage points), 12% for finance companies (-1 point), and 7% at buy-here-pay-here lots (-1 point).
The changes occurred in new car originations, where shares fell to 13% for credit unions (-6 points), 29% for banks (-9 points) and 5% for finance companies (-1 point).
In the used car market, credit unions had 27% of originations, gaining 1 point from banks, which had 35%.
Based on data from the Federal Reserve and CUNA Mutual Group, credit unions’ share of the nation’s total automobile loan portfolio has risen steadily from about 25% in June 2015 to nearly 30% in June 2017.
NCUA data shows credit unions’ automobile loan portfolio had been growing faster than other loans since 2012.
Auto loans accounted for 34.9% of total credit union loans in June, up from 34% a year earlier. Auto loans’ share of total loans has been growing steadily since it stood at 28.9% at the end of 2011.
Indirect point-of-sale lending (like through car dealers) has grown from 25.6% of total car loans at the end of 2007 to 38% in December 2016 and 38.7% in June.
Part of the indirect lending portfolio reflects increases in leasing, a market some credit unions participate in through deals with companies that own the cars through loans from the credit unions that are repaid by the lease holders.
The lease rate for new cars was 31% for consumers nationally in the second quarter, essentially unchanged from the first quarter.
Loans right now have become more attractive with manufacturers’ interest rate discounts and rebates. But Cochrum said the trend toward greater leasing would continue with Generation Z starting to graduate from college this year. Even more than Millennials, Cochrum said, Gen Zers have looser attachment to ownership of things than their Gen X and Boomer elders, and a greater willingness to rent experiences.
