As vehicle sales slide, working with new auto dealers takes an even stronger commitment from the credit union to manage that relationship, conduct due diligence, and track the appropriate performance metrics. Does there come a point where the time it takes to manage these relationships outweighs the added benefit? While many credit unions are continuing to expand their dealer network, other credit unions have now begun scaling back those relationships to pay more attention to the dealers they already work with.
Juggling a Nationwide Network
Digital Federal Credit Union ($4.24B in Marlborough, MA) has long been a large presence in the New England auto lending market, but as the credit union grew, they steadily expanded into other areas. “Up until recently, Digital had been conducting auto lending in all 50 states across the U.S.,” notes Diane Richard, Vice President of Consumer Lending at Digital. And with that nationwide focus, came the additional need to manage relationships with dealers across the country. “We had six representatives who were responsible for meeting with dealers in their respective areas on a weekly basis,” says Richard. “These representatives were there to field questions from dealers, monitor dealer performance metrics, track vehicles on each lot, and handle any issues that might arise from that particular dealer.”
The representatives, based in North Carolina, Colorado, California, Texas, Massachusetts, and New Hampshire, were not only responsible for meeting with local dealers on a weekly basis, but also managed relationships with remote dealers. These remote dealers, located outside of a 100 mile range of their representative, met with the representative on a quarterly basis. “The representatives were constantly monitoring dealer performance, looking to catch issues with our look-to-book ratio, or issues with delinquency and charge-offs in each dealer’s portfolio,” says Richard.
While this strategy served Digital well in the past, the growing recession began to impact the quality of the loans the credit union received from the dealerships. “We first noticed the problem in California,” says Richard. “We noticed a number of issues tracking down vehicle titles in that state, and once the quality of the dealer packets stopped being up to par, we shut down certain dealers, and then whole regions in the state.”
Shutting down different regions in California allowed the California representative to focus on a smaller number of dealerships and more in-depth performance tracking. “We narrowed the relationships’ radius to 50 miles, but in the end, our representative still spent a majority of his time just chasing titles.” With the market turning down and much of the dealer representatives’ time spent solving problems, rather than managing relationships, Digital made the decision to pull out of California entirely in the fourth quarter of 2008, and by the end of February, they had pulled out of all other markets outside of New England.
By working solely on the New England market, Digital now spends more time with each dealer tracking performance in more detail and can stay ahead of any issues that might arise with their dealers. “Our New England dealer representative is still on the phone constantly and making dealership visits,” says Richard. “We have various reports that are pulled and continuously monitored to help us manage those relationships and avoid any problem areas.”
Creating “Preferred Dealer” Relationships
Working with a smaller base of dealers, Digital has ramped up focus on other strategies to help maintain their auto loan balances. “One thing that I would recommend to any credit union is setting up a class of ‘preferred dealer’,” says Richard. “This is something that has really helped our relationships, because they know they can trust you, and that you trust them.” Digital structured the program to give preferred dealers same day funding, priority on certain deals, and even special staffing when they have key vehicle sales promotions. “We keep our people available to help the dealers finance deals during those sales. For certain dealers we have even remained available on Sundays and holidays,” says Richard.
The first step to qualify as a preferred dealer is for the credit union’s representative to verify that the dealer’s look-to-book ratio is above 30%. The credit union also monitors the quality of the loans in each package the dealership sends, looks for any funds delays, and checks to make sure there are no “straw deals,” where the individual with their name on the deal is not the one responsible for making the payments. “The one item we’ve added in the last few months was requiring perfected liens on each deal before we fund the next package,” says Richard. “If we have any issues getting perfected liens, we stop doing business with that dealer until the issue is resolved. [A perfected lien protects the credit union from losses by granting priority over other creditors on the collateral in question in the event of bankruptcy or charge-off.] Similarly, if delinquency or charge-off rates exceed 1% of that dealer’s portfolio, we may stop doing business with them until those issues have been resolved. By working with the dealers individually and setting this criteria before they can become a preferred dealer, it has increased the quality of the loans coming from our dealerships. It has also helped deepen the relationships, resulting in a greater number of loans as well.”
Staying Ahead of Emerging Market Troubles
To drive in additional business, many credit unions have continued to increase the number of dealerships they are working with, but Digital has found success by scaling back. By working with a smaller number of dealers in a more concentrated area, the credit union and its dealer representatives have the ability to provide more individualized attention to each of their dealers. For Digital, this has resulted in a more targeted focus, the ability to stay ahead of any potential issues, and stronger relationships with local automotive dealers.
“The number of dealers we are working with right now is just about right,” says Richard. “But we are still keeping our nose to the pavement. We know that a lot of dealers across the U.S. have been closing down and we’re monitoring that issue very closely. So far, dealers in our area have not been hit as hard, but we’re keeping a close eye on the issue so that we aren’t caught behind the eight ball if closures in the New England area pick up.”