In January 2012, Bethpage Federal Credit Union ($5.3 billion, Bethpage, NY) began offering auto leasing with the help of Texas-based Fusion Auto Finance*. Eighteen months later, the credit union has financed nearly 1,800 leased vehicles, adding more than $45 million to the value of its new car portfolio. For the first six months of 2013, Bethpage’s leasing program outpaced new car loans by $7 million.
According to the Bureau of Transportation, 20% of all new cars in the Unites States are leases. In Bethpage’s community, leasing accounts for more than 50% of new cars sold.
“To not be in [the leasing] market we would be missing out on a large opportunity for lending,” says Michele Dean, senior vice president for lending and investment services.
But leasing is not for every credit union, warns Terry Bowdler, CEO of Credit Union Leasing of America, which provides auto-leasing services to credit unions. According to Bowdler, credit unions that offer lease financing typically have assets of $500 million or more. Most of the institutions Credit Union Leasing of America works with have $1 billion or more.
In addition to its asset size, Bethpage fit the profile of what makes a good lease financer in other ways. The cooperative already had a robust indirect lending program and catered to members in a metropolitan area. Most importantly, Bethpage did its homework. For years, the credit union observed the market and Fusion’s abilities before venturing into leasing. Its complexity and risks especially required careful thought.
Understand How Leasing Works
Leasing is so complex that most credit unions, lacking the necessary expertise, follow Bethpage’s path of partnering with a leasing company to deliver the service. That company typically owns the car and administers the lease even though the credit union, which acts as a lien holder, finances the entire deal.
In its leasing agreement, Bethpage collects all of the interest while Fusion gets 100% of the fees, including those for the vehicle’s acquisition and disposal as well as any penalties for excessive mileage. Bethpage only offers leasing on certain makes and models, and the list Fusion provides changes monthly. Although they run up to 60 months, most of Bethpage’s leases are for three years.
The lease’s value is the difference between what the new car is worth at the beginning and end of the lease, which functions like a balloon loan. The leasing company estimates the car’s residual value to determine how much the lease is worth and sells the vehicle after the lease expires so it can repay the credit union for the balance of the original sale price.
Know The Risks
A profitable transaction for the credit union and its leasing partner hinges on estimating the residual value correctly and selling the car for that price.
“The biggest risk to leasing is when the car comes back to you,” Dean says. “If the car is only worth $15,000 and the residual value was $18,000, there’s a $3,000 loss.”
Although the leasing company must be insured for such losses, both parties can still take a hit because of deductibles and other costs not covered by insurance.
The estimated residual value also plays a role in how competitively the credit union can price the lease. Although Bethpage sets the interest rate, a high residual value makes the lease more affordable. Leasing is payment driven, and a credit union can lose a customer to another financial institution for the difference of just a few dollars a month, Dean says.
A shortage of used cars means residual values are currently high, but the same market conditions might not apply a few years from now when today’s newly leased vehicle comes off lease. And there’s another risk: A leasing partner with poor service or excessive fees can damage the credit union’s reputation.
On the positive side, people who lease cars tend to be better credit risks. Typically, they earn higher incomes, own their own homes, and have credit scores of 750 or higher, Bowdler says.
For Bethpage, choosing the right partner was the key to mitigating its risk. The credit union first learned of Fusion through its indirect lending partner Groovecar but was leery of working with what was then a startup. Instead, Bethpage took a few years to evaluate Fusion’s customer service and its track record with forecasting residual values.
“We would go to them and say show me what happened when these 100 cars were turned in and what fees were charged,” Dean says. When the credit union was ready to sign a contract, it negotiated the amount of every fee that Fusion could charge Bethpage members.
Bethpage also limited its exposure.
“We have a controlled rollout of how many leases we want to put on our books each year — about $30 million,” Dean says. Her biggest regret is that Bethpage can only offer leasing through the dealer network and not through the credit union’s branches or call center. “For our staff to be set up to understand the whole leasing process was just too tough to overcome.”
* The leasing company is known as CU Xpress Lease, a joint venture between Fusion Auto Finance and Groovecar.