The number of consumers (non-members) that are joining credit unions primarily for auto financing is increasing. Existing members also are relying on their local credit union more and more to finance auto purchases. With this trend, credit unions face higher risks as auto loan delinquencies continue to rise. However, it's important for credit union managers to meet these challenges and maintain a steady flow of loan products to its members and overall communities in which they serve.
Though an economic recovery is imminent, just when this will occur is the question. While the national 60-day auto delinquency rate (the ratio of auto loan borrowers 60 or more days past due) dropped slightly between the fourth quarter of last year and the first quarter of 2009 (0.86 percent to 0.83 percent), the year-over-year delinquency rate at the national level increased 27.69 percent in the first quarter.
TransUnion forecasting models indicate that the national 60-day auto delinquency rate will rise to about 1 percent by year-end, about the same level as that experienced at the end of the last recession. And it is probable that the overall economy, weak labor market and lower disposable income levels will continue to negatively impact the consumer well into 2010.
At the end of the 2001 recession, the national auto delinquency rate increased to a high of just over 1 percent, and then began to edge downward for the next four or five years. As the recession came to a close in November of 2001, three of the five riskiest cities in the country were found in Texas: El Paso (5.00 percent), McAllen (2.46 percent) and Laredo (2.09 percent). In our current recession, Laredo is still leading in terms of auto delinquency (3.08 percent), but now is followed closely by metropolitan areas within the state of California such as Visalia (2.33 percent)—reflecting the impact of the housing market on that state's economy. Today, the least risky metropolitan area is Corvallis, Ore., which shoulders an almost zero auto delinquency rate—a position consistent with what it held during the previous recession.
What can credit union managers do to mitigate these risks? First and foremost, they need to explore better tools when they evaluate members for auto loans. By streamlining the auto financing process, credit union managers can gain a competitive edge.
Credit unions should review automated decisioning solutions in place to capitalize on making the lending decision on the entire member picture – instead of a simple score driven decision in their auto portfolio. The healthy review of the decision trees in place will allow credit unions to make sound decisions in the changing economy.
It is also important for credit unions to price for risk. The change in risk level associated to the consumers shopping in the market is truly an opportunity to prove the value of credit unions. In an effort to serve the entire membership base, credit unions must price appropriately for the risk of the consumer. Utilizing analytics which are focused on understanding previous member auto performance can provide a validation of current strategies or suggested changes directly to the pricing of the auto portfolio.
Solutions that can assist credit unions include TransUnion's Auto Summary and APR Estimator, which serve as an add-on tool to online credit reports. These solutions provide information on the five most recent auto trades, summarize data on auto payments, delinquencies and balances as well as estimate the consumer's APR on existing auto loans all through an online credit report. This decisioning information can be used to quickly identify the type of vehicle and finance options that best suit the members' capacity to pay and help meet member expectations.
Helping to achieve greater efficiency, Auto Summary and APR Estimator also can help lenders improve the underwriting process, enhance portfolio reviews and analyze lost sales to help refine future program offers and pricing. These automotive finance solutions enable lenders to quickly and accurately assess current member interest rates to provide competitive financing offers.
By utilizing new solutions and providing competitive loan products, credit unions will continue and enhance the outstanding service their members have relied on for years.
Peter Turek is an automotive vice president in TransUnion's financial services group. He may be reached at firstname.lastname@example.org. Linda Moynihan Vance is vice president of credit unions in TransUnion's financial services group. She may be reached at email@example.com.
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