In a state where credit unions excel at auto lending, Oregon Community Credit Union ($1.3B, Springfield, OR) stands out. Driven by indirect lending, OCCU is the No. 3 lender in Oregon, with a 5.6% market share that trails only Wells Fargo and Toyota Motor Credit.
Five of the top 10 auto lenders in Oregon are credit unions. Nationally, industry pundits expect auto lending to continue strong in the year ahead, but Jerry Liudahl, OCCU’s chief credit officer, is wary as well as optimistic about possible changing conditions. Here he shares insights about OCCU’s success and the road ahead.
Your auto loan penetration rate is about twice that of the average $1B credit union. How much impact does indirect lending have on that?
Jerry Liudahl: We have made a strong commitment to indirect lending as a vital part of our strategic lending plan. Being a community charter credit union, we have the opportunity to partner with auto dealers in the highest population areas of Oregon and we have been able to expand our indirect program across the state. Through November 2014, we have originated 36.4% more loans based on dollars originated than in 2013 and 90% more than in 2011.
CU QUICK FACTS
orgeon Community Credit Union
data as of 9.30.14
HQ: Springfield, OR
12-MO SHARE GROWTH: 6.37%
12-MO LOAN GROWTH: 18.54%
A TransUnion survey shows that many credit union executives believe auto loans are a top growth area in lending for 2015. Is that the case at OCCU?
JL: We have plans for growth in vehicle loan origination in 2015, but we do not plan to see the percentage of growth we experienced in 2014 or even 2013. Auto sales — new and used — are at or above pre-recession highs. I’ve seen projections for vehicle sales to be relatively flat in 2015, with used auto sales declining about 5%.
That said, I certainly agree the opportunity for auto loans will be there for credit unions positioned to take advantage of it. New lenders looking to capitalize on demand will be competing with lenders that are trying to retain or grow market share, potentially making it a great opportunity for consumers.
What about qualifying borrowers for these deals? How do you see the credit climate?
JL: Rising vehicle purchase and operating costs, rising interest rates, and escalating consumer debt might make qualifying vehicle buyers more difficult in the coming months, even if there are great deals to be had. According to Experian, the average monthly new-vehicle payment is $470, up 3% from Q3 2013. The used car average is up 2% over the same period to $358.
One-third of our used auto loans are to buyers in the 18- to 34-year-old age range. They are the most susceptible to the financial impact of rising payments and vehicle operating costs — can you say ZipCar or Car2go? As a result, loan terms are increasing, with the average new car term now at 66 months and used car term at 62 months. We’ve experienced an increase in 72- and 84-month loans and offering these terms is important to be competitive in the indirect lending market.
I should add that credit quality in these longer terms has not declined when compared to prior years, so quality in longer-term loans remains strong. However, we as a market might lack enough experience with increasing loan terms to know what, if any, repayment dynamics might change as larger numbers of buyers seek longer repayment terms.
What about leasing? How does that affect your outlook?
JL: Experian says lease penetration was up to 27.4% of all new car volume in the third quarter. It was 23.1% at the same point a year ago. As leasing continues to eat away at the number of available new vehicle finance deals and manufacturers up the ante with incentives and captive financing, it makes the marketplace for the best business much more competitive and more difficult for the inexperienced or ill prepared.
How much of the credit union’s focus is on indirect lending and how much is on direct?
JL: Indirect lending contributed almost 40% of the interest income to the credit union last year. We did not portfolio a high percentage of mortgage loans the past three years, choosing to concentrate on indirect auto loans, even though the margins are slimmer. This has positioned us well for interest rate risk in a rising rate environment in exchange for increased income in loans with longer durations and a higher degree of rate risk.
Our direct program focuses primarily on members buying used vehicles through private party sales. We understand the high percentage of buying and financing decisions that are made at the point-of-sale, but if a member wants to do all their financing with the credit union, we will not discourage it.
That said, we’re working to increase our recapture rate of auto loan business through teamwork with both direct and indirect lending.
How To Succeed At Indirect Lending By Trying
Jerry Liudahl, chief credit officer at Oregon Community Credit Union, says commitment, expertise, and effort can make indirect lending profitable. Following these five tips from Liudahl won’t hurt, either.
Commit to both a short-term and long-term indirect business strategy. If the credit union views indirect lending as a necessary evil rather than a business opportunity, it’s probably not the best cultural fit. “Indirect lending is not something you can stop and start and expect to be successful,” Liudahl says.
Due diligence and dealer management are vital and take ongoing, full-time resources and expertise. “We have three experienced full-time dealer representatives that create and work the relationships,” Liudahl says. “We work with dealers as business partners, not vendors. It’s all about attitude and approach.”
Service provided by indirect processing, underwriting, and funding teams usually trumps lower rates and higher participations paid by other lenders. Set standards for time of application through decision and funding. Provide extended hours — including weekends and holidays — for underwriting and processing.
Understand the importance of ancillary products to the dealer profit model and don’t be overly restrictive in the limits of what the dealers can sell.
Do not give indirect staff credit authority. Liudahl says, “That saves a lot of potential conflicts of interest and problems.”