How is Your Credit Union Driving Liquidity For its Auto Lending Business?
A variety of options, including participations, securitization and whole loan
sales, are available to credit unions looking to sell auto loans. But how do
they decide how much to sell? And to whom? Which options provide liquidity and
true-sale accounting treatment?
Participations typically involve credit unions selling a partial interest in
a loan or pool of loans to another credit union or financial institution. This
option usually provides more flexibility because credit unions can arrange one-off
transactions with each other. Since there is no secondary market standard, credit
unions can determine between themselves the types of assets sold, the volume
required and any reporting requirements.
The disadvantage to loan participations is that credit unions usually run in
the same liquidity cycles. This means that when a credit union is looking for
loans to put on their balance sheet, often times so are other credit unions
– everyone tends to be flush with liquidity at the same time and everyone
is a buyer at the same time. And vice versa, when liquidity is tight and credit
unions need to remove assets from their balance sheet, few credit unions have
room on their balance sheets to take on additional loans. Then a credit union
that was relying on its participation programs to provide liquidity may have
difficulty finding it and in turn, begin turning down members and dealers for
Participations can also be difficult for accounting and reporting purposes.
Credit unions are required to keep a minimum of 10 percent of the asset being
sold on their balance sheets. Often, even the percentage of the loan sold is
sold under recourse, which limits the accounting treatment for credit unions.
Accounting for the different loans and different percentages to the different
owners with participations can be a costly, time-consuming and complex process.
Another option available to credit unions wanting to sell auto loans is securitization.
Auto securitization involves credit unions aggregating a critical mass of auto
loans, a large pool size of generally at least $200 million in loans. Securitization
often results in significant revenue from the spread. Once the critical mass
is met, the credit union securitizing the loans must also have the expertise,
time and resources required to launch a securitization program. A credit union
securitizing for the first time may have difficulty “bringing” their
deal to the capital markets, especially if the credit union is not rated by
an independent credit rating agency. The cost of establishing a securitization
program can be quite expensive – especially when taking into consideration
the investment banking fees, legal and accounting charges, due diligence expenses
as well as rating agency fees.
Ongoing reporting requirements are extensive even after a securitization has
been completed, including, for example, a monthly portfolio report. Several
other reports are required quarterly and annually. Additions and deletions to
a pool of assets usually require special reporting as well as credit agency
approval. Typically, historical static pool reporting is required and many servicing
systems do not support the tracking of this data, which could cause additional
“Some of our members looked at securitization as an option to move a
portion of their auto loans off their balance sheet,” said Mark Brown,
chief financial officer and senior vice president of finance, First Carolina
Corporate Credit Union. “But when it came down to it, the critical mass
requirement and cost of execution were too great. Our corporate is able to offer
them a flexible option to securitization that doesn’t require the volume,
is low cost and has simple reporting requirements”
In addition to securitization and participations, a third option is whole loan
sales to a secondary market investor. In a whole loan sale, a credit union sells
the entire loan to the purchaser and is able to move the asset off of its balance
sheet without recourse. And unlike securitization, whole loan sales do not have
a critical mass requirement. Instead, credit unions have pool size flexibility
– they can sell as little as $2 million to more than $200 million, which
makes a whole loan sale an option for big and small credit unions alike.
“With the success of our indirect lending program, we turned to First
Carolina Corporate Credit Union’s solution to provide liquidity through
a whole loan sale to Charlie Mac,” said Quince Cody, president, Heritage
Trust Federal Credit Union. “Now, we have the ability to sell loans as
needed in order to continue our loan growth.”
Whole loan sales permit an open tap to auto dealers. A credit union with indirect
lending does not need to worry about the prospect of limiting the number of
loans made through a dealer. Depending on whom the credit union chooses to sell
their loans to, credit unions completing whole loan sales can benefit from competitive
level pricing as well as earning 75 basis points in servicing revenue because
it retains the servicing.
Finding a safe, trusted secondary market investor – ideally within the
credit union system – is important to always be there to buy loans, regardless
of the liquidity cycle in the market. Whole loan sales offer that liquidity
immunity. When choosing a liquidity option, the investor should always protect
a credit union’s most important asset – its member relationships.
Contact your corporate investment representative for more information.