Today’s car buyers have it tough: tightening liquidity and tightening credit standards. Traditionally, credit unions step up their member loan activities during economic times like these – a practice made easier by working with secondary market investors that let you retain the servicing.
Tight liquidity is putting obstacles in the path of car buyers. With the continuing market dislocation, a large number of financial institutions have tightened their credit standards so much that even very creditworthy borrowers are being left in the dust.
The Fed reports that nearly 70 percent of all banks have made borrowing requirements stiffer for non-credit-card customers. And now, GM auto dealers are being told buyers must have a credit score above 700 for company financing – well above what is considered prime-borrower status. Interest rates are going up, too. GMAC is hiking by 75 basis points the rate dealers must pay to make loans that aren’t part of special incentive programs. (Never mind that the action is contributing to a 45 percent drop in GM’s automobile sales, its worst since World War II.) Other automakers are cutting back sharply on dealer financing, too.
Bring on the good guys
For credit unions, it’s a hat of a different color. Thanks to more conservative practices and a member-oriented philosophy, many credit unions are stepping up their loan operations, with borrowings up 6.22 percent through the first nine months of 2008, compared with growth of 4.86 percent for the same period in 2007. Admittedly, that isn’t as impressive as higher-growth periods, such as 2004 and 2005.* But given today’s economy, it is promising and perhaps a trend in the right direction … perhaps. Loans continue to outpace savings, with credit unions’ loan-to-savings ratio increasing to 84.3 percent in September. That means making more loans depends on your credit union’s ability to keep liquidity flowing.
Whole-loan sales offer an attractive option for numerous credit unions. Selling all or a portion of your auto-loan portfolio to a secondary market investor provides off-balance-sheet accounting treatment, while offering maximum liquidity and flexibility. You can sell as many loans as your balance-sheet strategy requires, regardless of ups and downs in the liquidity cycle. It frees room in your loan pipeline, so you can attract new borrowers. Further, it makes sense to sell to a secondary investor if your credit union has an indirect-lending program, requiring you to keep funding available at competitive rates for your dealer networks.
Choose the right trail
If your credit union wishes to sell auto loans in the secondary market, make sure to partner with an investor that allows you to retain the servicing. That way, your credit union continues to be at the center of the member relationship. It is important to keep your members happy in order to open opportunities for your other products and services. To their dismay, some credit unions have found themselves following a path that led to more business – not for them, but for their service providers. Probably not the intended outcome. To grow your auto-loan business, you need reliable sources of additional liquidity. The secondary market can help – if you turn to a partner that won’t lead your credit union down a lonely trail and keep you away from your core business perspectives: deepening member relationships.
Charlie Mac, LLC® is a CUSO and secondary market investor committed to helping credit unions maintain their member relationships. Charlie Mac partners with corporate credit unions to offer this outlet to credit unions. For more information, visit http://www.charliemac.org or contact your corporate investment sales representative.
Source: CUNA Economics and Statistics Department, Oct. 28, 2008