Many credit unions have faced the challenge of providing affordable auto loans to those with mid- or sub-prime credit in their fields of membership. While some credit unions have developed their own in-house sub-prime lending programs, others have used strategic partnerships with vendors and CUSOs to effectively serve their members.
Effectively Serving the Sub-Prime Market
Patelco Credit Union ($3.6 billion, San Francisco, CA), originally started
in 1999 with an in-house sub-prime lending program, but dropped the program
within a couple of months because of losses and collection challenges. They,
along with Wescom Credit Union ($3.1 billion, Pasadena, CA), chose instead to
partner with ACC Consumer Finance (ACC), a company focused on helping credit
unions provide sub-prime financing through indirect channels with better financial
results. Both credit unions also made cash investments into the company in order
to have in ownership stake in the results of the business.
“The exposure to the inner workings of the ACC sub-prime servicing operation immediately highlighted our inherent weakness in both origination and servicing of these higher risk assets,” said Chris Oldag, senior vice president of lending at Patelco. By partnering with ACC Consumer Finance, Patelco is able to provide sub-prime auto loans without making a large investment in staffing to originate and service these loans. ACC does a thorough verification of all credit application components, going into such detail as speaking with landlords and employers and seeking the down payment proceeds.
A Partnership Tied to Results
Since partnering, Patelco attracted $46 million in loans through this channel and has a net yield in the mid-6 percent range from several thousand new members. In addition, their charge-off rate on these loans is lower than the rate on its other loans in its auto lending portfolio (see chart below). Finally, Patelco learned many best practices from ACC that it has incorporated into its own lending operations.
Source: Patelco Credit Union