Blank Checks Are Better Than Middle Men

Maryland-based Johns Hopkins Federal Credit Union ($438.7M, Baltimore, MD) is a closed-membership cooperative that serves students, teachers, and alumni of the university, employees of the hospital system, and other select groups.

Because the credit union has a limited field, the unlimited reach of indirect lending is less than appealing. Seven years ago, the credit union joined a large auto lending network but quickly found that existing members were driving production.

“We were paying the dealership money for a loan that we were probably going to get anyway,” says Sharon Battaglia, the credit union’s assistant vice president of lending.

Preapprovals And Blank Checks

As an indirect lender, Johns Hopkins FCU found that channel’s loans were not as creditworthy as the institution would like; applicants were not members or couldn’t qualify to be members; or people were already members and the credit union could offer them a better deal as a direct borrower.

To skirt dealership originations entirely and put money back in members’ pockets, the credit union started offering a “blank check” program in January 2016.

For purchase loans only, members with a credit score higher than 670 qualify for a pre-approval check for an amount delineated by the member, not more than 75% of their yearly income. The credit union encourages members to request an amount that will accommodate dealer fees and other costs that could make the total balance greater than the sticker price, an important point. If the purchase amount exceeds the value of the check, the member then must supplement the shortfall. When this happens, Battaglia says, often the member eschews the credit union’s check for dealer financing.

Check in hand, the member has a 60-day window to negotiate with the dealership before the check expires. Then, the member simply endorses the check for the purchase amount. The credit union shows members a monthly cost structure based on the full value of the check, so the lower the purchase price the lower the monthly payment. And the member knows this going into the transaction.

The check includes instructions for the dealer to fax the purchase order and the front and back of the check to the credit union. Once the credit union has this information, the credit union makes the final decision whether to fund the loan before printing and sending off a final Truth-in-Lending Disclosure Statement to the member. Because the credit union has this final review, it is able to catch any potential fraudulent activity — though, to date, none has.

Because the credit union checks credit worthiness and verifies income before writing the check, the final approval is quick, which is good for both member and dealer.

“When we give members the check we are almost guaranteeing the dealer that, if they follow the steps, we are going to fund the loan,” Battaglia says. “We want to make sure at the end of the day the loan is not suddenly an issue.”

For many years we spun our wheels on how could we get more auto loans. I think we’ve found our sweet spot.

Blank Check Best Practices

After nearly two years of offering the program, Johns Hopkins FCU has identified two simple blank check best practices.

Historically, indirect lending at Johns Hopkins has not been big business, especially compared to peers with assets from $250 million to $500 million.

First, dealers rarely fax the purchase order and check without follow-up from the credit union. Once the member signs the check, he or she is free to drive off the lot; the member has agreed to the loan terms and conditions. However, neither dealer nor lender are making money on the loan until the dealer returns the collateral to the credit union.

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The credit union has until 2 p.m. each day to finalize loans through M&T. In Battaglia’s experience, dealer finance departments don’t open until 11 a.m. It’s a tight window. And despite the credit union’s best efforts, the dealer doesn’t always return the purchase order and check in a timely manner.

To prompt dealerships to finish the paperwork, the credit union places a fluorescent note on each check that reads, “You Must Fax.” It also calls the dealership to remind employees how much time they have each day. If the dealership does not meet that deadline, the credit union returns the check and it’s on the dealer to redeposit the check — an inconvenience of both time and money. The member, meanwhile, has already driven the car off the lot.

Since fourth quarter 2015, auto loan growth at Johns Hopkins has trended up, eclipsing the rate of asset-based peers by third quarter 2016. As of second quarter 2017, the credit union’s growth outpaced peers by nearly eight percentage points.

“It’s a hassle for the dealer,” Battaglia says. “Eventually, they will call us back. They want to get paid, so they get us what they need.”

Second, the credit union now offers e-signature to make check-signing easier.

So far, blank checks have proven successful for the Maryland credit union. As of Oct. 13, Johns Hopkins FCU has issued approximately 737 blank checks totaling nearly $18 million. The average check amount is approximately $24,000.

“For many years we spun our wheels on how could we get more auto loans,” Battaglia says. “I think we’ve found our sweet spot.”