(This is an excerpt from an article that originally appeared in the winter 2008 issue of CUDL's Merge magazine)
The blustery winds of a turbulent economy continue to blow with tremendous force, from northern Maine to southern California. So why are many credit union officers feeling upbeat?
The lack of nervousness at most credit unions is simply the result of the industry's being in a strong position to assume a substantial role in helping pull the country out of the current economic malaise, a position that the big banks seem almost happy to concede. And, with that strength comes an opportunity for real growth.
"Because we're focused on our members and not on stockholders, we never considered subprime or any other exotic types of loans," says Debra Tarbuck, Indirect Lending Manager of Seattle-based Boeing Employees Credit Union (BECU). "This might be a good time to remember that credit unions first began as a result of the Great Depression. BECU was founded in 1935 because Boeing workers couldn’t secure loans in order to buy the tools they needed for their work."
"During these economic times, it's important to focus on the one thing that hasn't changed, and that is the shared goal of credit unions and dealerships – dealers want to sell cars and credit unions want to finance the loans," says Robert Boucher, Senior Vice President, Lending, of Sikorsky Financial Credit Union. "As more and more big banks pull out of indirect lending, we're getting a bigger piece of the pie, though the quality of the loans on our books is the same as it's ever been. We did $6.6 million in loans in October. People still need vehicles."
Of course, the situation is not lost on dealers, either.
"Every dealership around us is bleeding, but we've had one of our most successful years ever, all because of our relationships with credit unions," notes Chris Duggan, General Sales Manager of Merchants Automotive Group of the greater Manchester, New Hampshire region. "Through October, fully two-thirds of our auto sales have gone through CUDL. This is a super opportunity for credit unions because people have lost confidence in the big financial institutions."
"Dealers and credit unions must develop a personal relationship – one built on trust," agrees Tim Rivers, Finance Director of Gunn Honda in San Antonio. "Gunn Honda is unusual in that we've had a 'One Simple Price' policy since 1994. We don't negotiate the price of cars and we don’t mark up the rate beyond what the credit unions offer. That helps close the deal because it results in the lowest price for consumers, and we do about $40 million a year in sales with area credit unions.'
Credit Unions' Secret Weapons
That last point, of course, is critical these days: in troubled times, sound lending practices are revealed as the credit union’s first secret weapon to provide stability and enable CUs to thrive in uncertain financial conditions, when other, perhaps bigger, institutions are in serious trouble. To many, this is the best of times for credit unions to grow by helping the country regain its financial footing.
George Ransom, Director of Sales for Hall Automotive Group in the Virginia Beach, Norfolk, Virginia area, notes, "Almost every day I hear of another company that's getting out of indirect lending. The strength of their portfolios is what makes credit unions strong. When all the other financial institutions were pursuing all these bad loans, credit unions that I know resisted and those business decisions are now paying huge dividends for them."
South Florida Acceptance Company (SFAC) creates and maintains indirect lending operations for a number of regional credit unions. Working with more than 80 dealerships in the region, SFAC then assigns rights to the auto loans back to the credit unions, who maintain control over their own receivables.
Jim Sturdy, CEO/General Manager of SFAC, says, "In this economic climate, credit unions seem to be the last ones standing. Because of them, for people with good credit there’s plenty of money available."
The second secret weapon in the credit union’s arsenal is the personal relationship that they develop and maintain with area dealerships. According to Barry Rose, Vice President of Lending at Citadel FCU of Thorndale, Pennsylvania, this personal touch, something that big financial institutions cannot offer, is a critical component when building the trust factor.
"The relationship we aim for between the dealership and our credit union is based on high service standards," says Rose. "Our goal is to provide dealers with maximum value in order to help them sell cars. It's a win-win situation for both Citadel and the dealerships."
"We have two business representatives who visit our dealers and discuss the overall business," he adds. "We ask the dealer how we can improve, how we can receive more business and the better credit applicants, and how we can improve the delinquency ratio. These visits occur at least monthly, with other follow-up visits scheduled as needed to ensure we are getting the business we both want. It has to be an open communication."
"We've been writing a lot of loans, primarily indirect, because we've concentrated on building our relationships with dealerships," notes Mike Chisholm, Senior Vice President of Northeast Credit Union. "We hired a new field rep this February and it’s really supporting our indirect lending, which is where we’re finding growth at present."
"The partnership between credit unions and dealerships is all in the relationship," says BECU’s Tarbuck. "What sets credit unions apart from banks is the focus on membership and the goal of providing a quality financing experience," she adds. "What makes partnerships work is when both credit unions and dealerships know what each other's goals and objectives are. We have two full-time dealer account field representatives whose job is to cultivate and maintain our relationships with dealers in the area."
After remaining at around 17% market penetration for the last three years, credit unions' share of the lending market surpassed 20% in the third quarter of 2008, according to AutoCount. As banks continue to pull back because of the subprime mortgage crisis, a number of other auto lending industry trends point to additional conditions favorable to CUs' continued growth in the indirect lending arena:
- According to J.D. Power and Associates, a full 90% of new auto loans throughout the country are transacted at dealerships;
- As auto leasing continues to shrink, that business is shifting back to financing, so dealers need another choice that offers low rates and flexible terms;
- As the volume of home equity loans also contracts, those consumers need an alternate form of traditional financing.
For many years, banks have taken a rather condescending attitude toward credit unions, saying that consumers would be better off conducting their business with a "solid" financial institution, like a bank. The current economic climate may put the lie to that attitude once and for all, but credit union officers are spending little time gloating – they’re very aware of the important role they can play in helping American consumers through a difficult period.