With the introduction of indirect lending, many credit unions quickly seized on its potential as a powerful tool to help build membership as they also grew their loan portfolios. The speed and convenience of indirect lending proved to be a powerful draw to potential members, and the ease of an auto purchase left many open to see what additional benefits and conveniences credit union membership might offer.
Lately, however, the industry has found itself in the deepest recession since World War II, sparked by a collapse in the housing market, coupled with bank failures in both the U.S. and Europe. The resulting tightening in the credit market has encouraged many credit unions to shift away from using indirect lending in this way, at least for the time being, preferring instead to refocus their efforts on building loan portfolios through their existing membership.
Although this new strategy limits growth in membership, credit unions embarking on this path should know that other credit unions have already pioneered the business model of using point-of-purchase lending to grow their loan portfolios with existing members, and most happily report that initial concerns over having to turn away business have proved unfounded, as their growth has continued unabated. And though credit unions must take a closer look at loan applications these days, that closer look need not stand in the way of doing increased business.
Taking A Closer Look
As Stephen Webster, VP Lending at Qualstar Credit Union in Bellevue, Washington, notes, "Every day we're uploading information on pre-approved loans." With 50,000 members, Qualstar processes between 2 and 3 million dollars in auto loans each month.
"Our members buy nearly 1,000 vehicles per month," continues Webster. "And about three-quarters of those loans are pre-approved. We strongly urge members to use the CUDL pre-approved function." According to Webster, the effect of the housing crisis on indirect lending is clear. "Whereas last year a credit rating of 660-680 was considered average, 700-720 is now considered 'so-so' credit because our delinquency rate became unsustainable. Two years ago a 680 was seen as B+ credit, but today 735 is the average."
Though Qualstar previously accepted dealer-generated loans for non-members, the credit union has since moved its focus to member lending in order to accommodate the stricter credit rating considerations. "It was getting out of hand," says Webster. One notable example, according to Webster, "was a potato picker who claimed that he was a computer operator making $4,000 a month."
Another reason that credit unions are faring well in the down economy is the simple fact that, unlike banks, credit unions view their members as partners, not just customers.
With major economic problems now besetting the auto industry, communities like Janesville, Wisconsin, where the Blackhawk Credit Union was formed in 1965 to serve employees of the Fisher Body Division of General Motors, as well as the office employees of UAW Local 95, have hit a stormy patch. "We have experienced some challenges," says Ryan Olson, Director of Consumer Lending for Blackhawk. "In April a GM plant closed down, and with it several support companies in the area. We now have between 12 and 13% unemployment here."
Partnership Never Goes Out of Style
Nevertheless, Olson reports that with 32,400 members, Blackhawk has captured (and retains) a 33% market share. "The reason we're doing well," continues Olson, "is that we're here to partner with our members. The dealers in our area, too, are looking for community partners." This means that members know they can likely borrow money from their credit union when they might not be able to borrow from their bank. And credit unions know that loans to their members, with whom they already have a relationship, perform better.
It also means that auto dealerships are also looking to bolster their business by taking a more personal interest in their customers. This is no surprise to Julie Kinney, Indirect Lending Manager of Summit Credit Union in Madison, Wisconsin. Summit is a community credit union serving more than 106,000 members in the Madison and Milwaukee area.
"One strength that credit unions have over our competition is our quality service and consistent underwriting," notes Kinney. "I've been involved in indirect lending for about 18 years and the feedback we get from dealerships is that they appreciate that we're consistent lenders and that when they call, they know they will speak with a live person."
Amber Berger, Dealer Center Manager of Horizon Credit Union, based in Spokane, Washington, and serving more than 30,000 members throughout Washington and northern Idaho, agrees. "The big banks have pulled back on their lending to the extent that we don’t even look at the rates offered by, say, Bank of America anymore. All competition these days is local."
In many ways, Horizon seems like the archetypal credit union that once used indirect lending as a way to help grow its membership. Originally founded in 1947 to serve Kaiser Aluminum employees and their families, Horizon in the early 1960s began a series of mergers and charter expansions that saw it grow dramatically in the next few decades. Member growth came through indirect lending, but at a price.
"About four years ago, we starting talking about this because we were getting overrun with dealers 'shot-gunning' applications to numerous credit unions in the state," notes Berger. "After some months of talking over the situation, we finally decided to limit our focus to existing members. Of course, at the time we were afraid of losing business, but the result has been the opposite of what we predicted. In fact, during the next year we experienced our highest CUDL month ever, and today we have a 60% penetration rate."
Not only has Horizon continued its notable growth, but its dealer relationships are doing just fine, as well. "The dealers have by and large gotten the message," continues Berger. "Now they tell their customers about our rates, but advise them that they have to come to our office to join Horizon before they are eligible to get a loan."
Berger also insists that the indirect lending experience itself is a major factor in Horizon's continuing success. "We push CUDL in all our branches because the convenience offered by the CUDL experience is a major factor in customers' decisions," she adds. "Convenience remains within the top 5 elements of a buyer's purchase decision. We know we can't be there in person 24/7 for our members, but with CUDL we can. That helps keep us competitive."
Kicking the Tires
Irene Rodriguez, Vice President of Consumer Lending, notes that the University of Southern California Credit Union has felt the effects of the current economy and is reacting to it with increased outreach to members.
"We have felt it because people just aren't buying as many autos these days," she says. "We've become a bit more aggressive in getting the word out to our current membership base about our good rates, and the convenience of CUDL's AutoSmart tool." Rodriguez also explains that the USC Credit Union has built partnerships with local dealers to further enhance its members' buyer experience, without putting their loan business at risk.
"Our members like to kick the tires, so to speak. They want to visit the dealerships and discuss the vehicles they're considering, so we've strategically aligned ourselves with the local automotive groups so that they’ll get the sale and we'll get the loan," notes Rodriguez. "That's been working quite well for us.
"Since we're the 'education credit union,' we also organize seminars for our members," she continues. "They include 'How to Buy an Auto,' 'How to use AutoSmart,' and so forth. We stay in close touch with our membership, not just our students but our alumni, too, particularly those who live here in Southern California. It works for us."
Overall, it seems clear that in today's economy credit unions have an ideal opportunity to "shift indirect lending gears," and look to their members to grow their auto loan portfolios.
(This is an excerpt from an article that originally appeared in the Fall 2009 issue of CUDL's Merge magazine)
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