Grafton Suburban Credit Union ($122.7M, North Grafton, MA) is hinging its success on its direct auto lending program that can foster greater member value, and CEO Edward Lopes says it’s had no regrets.
In fact, the credit union’s 12-month auto lending program grew 78.5% in 2011 compared with 2010, and Lopes says he expects similar growth this year. Grafton Suburban was in the top 10 credit unions in the country for 12-month auto loan growth in 2010, when it welcomed 107.3% growth as its auto loan portfolio grew to nearly $6 million, according to Callahan & Associates’ 2011 Credit Union Directory. Meanwhile, it's delinquency rate dropped from 2.28% in 2010 to 1.32% in 2011.
“In credit unions as small as ours, not many boards have an appetite for C,D, and E paper,” Lopes says. “Our board was willing to trust management to develop a program.”
Being a smaller credit union, Grafton Suburban could not invest heavily in member business loans or carry a strong real estate portfolio. Instead, it had to bank on its consumer lending program, and in that effort, it had to choose between focusing on either direct lending or indirect lending.
The credit union opted for a direct lending model in which it could spend quality time with members, especially members with riskier credit, and accepts applications online or on the phone instead of in-branch. It also continued to connect with lower risk borrowers. It hired a three-person consumer lending team that included an underwriter, a bilingual salesperson and a processor. It’s moving toward electronic delivery of the loans, Lopes says.
To help lending risk, Grafton Suburban brought on a new internal auditing firm and connected with Dallas-based CU Lending Advice.
Grafton Suburban’s direct lending model is designed to appeal to people who are purchasing or have received indirect car loans at a dealership, where dealers frequently mark up the rate consumers pay.
“In our model, the customer doesn’t finance with the dealer, they work with us directly,” Lopes says. “If we need a particular interest rate on a loan, we don’t mark it up. We give them the best interest rate on the loan that we possibly can. This is an important part of the way we brand this program. Members are our owners. In our opinion, the member-owner is entitled to the highest level of integrity and the best possible price.”
Lopes acknowledges that by taking on direct lending, Grafton Suburban has accepted an opportunity cost as the credit union does not process the same loan volume as indirect lenders. He says the credit union is “prepared to make that investment” in order to build trusting member relationships by talking with the members directly.
“Especially for those C, D, and E members – they don’t just need a loan,” Lopes says. “They need a little bit of financial literacy training, a little bit of help getting their FICO scores up. … We spend a lot more time with our members.”
Grafton Suburban’s average auto loan balance has been increasing since the second quarter of 2009, about when the program began. It’s average auto balance was $10,871 in 4Q 2011, up 87.6% from $5,796 as of 2Q 2009, according to Callahan & Associates’ Peer-to-Peer data. During that time, its peer group of credit unions with assets between $100 million and $250 million maintained a fairly unchanged average auto loan balance, dropping slightly from $10,830 to $10,513.
“We invested over the course of a couple years, a lot of time, a lot of people, a lot of financial commitment,” Lopes says. “Direct lending at the lowest possible cost to the member is the right way to go. And that is one of the reasons our program has been so successful."