Spared the worst effects of the recession, Nebraska-based Centris Federal Credit Union ($506M, Omaha, NE) recently took the initiative to re-examine its auto lending practices and, as a result, has reaped substantial reward.
“Our growth has come about almost entirely as a result of retooling our indirect lending program,” says Dan Palmquist, vice president of indirect lending and merchant lending for Centris.
As the credit union regrouped at the beginning of this year, it took the time to analyze what its competition was doing — a process which yielded several key insights as well as some structural changes in the loan process itself.
For example, the credit union was able to confirm that 90% of all loan sales were happening at the dealership.
“This showed us that though we had an indirect program, we hadn’t emphasized it enough to our members,” Palmquist says. As a result, the credit union began combing through all of the policies it had used to make in-house loans and merging them with its indirect policies.
Now, when members come to a branch seeking financing, they’re encouraged to obtain pre-approval for an auto loan through the SMART Approval system so they can take those documents with them to the dealer.
Centris’ analysis also revealed another fact that many credit union officers may instinctively know but may not fully appreciate.
“I can’t stress this enough — most car sales don’t happen during business hours,” Palmquist says. Because sales often occur in the evening hours during the week, or over the weekend, it is critical that the credit union be available in order to capture that business.
There are approximately sixty dealers in the Omaha/Lincoln region, according to Palmquist, and Centris relies on proactive outreach and collaborative programs to help encourage these groups to seek a mutually beneficial relationship rather than an adversarial one.
“Of those sixty, perhaps thirty so far really see the value of a productive partnership with a credit union,” Palmquist says. “SMART Approval and AutoSMART are two strong components that we’re promoting to our members, so we can then hand them off to our dealers, they can get the sale, and we can still be part of that equation.”
Palmquist also points to a loan sale that the credit union is currently conducting with those thirty top dealers, which helps demonstrate its loyalty and commitment to those relationships.
So far, these strategic changes and investments are paying dividends on the balance sheet.
“To date, our growth has been more than 120% of last year,” Palmquist says.
Yet not all auto lending challenges come from the lackluster economy. As Kevin Collins, senior vice president of loan services at Star One Credit Union ($6.4B, Sunnyvale, CA) notes, attempts to dominate the auto lending market by captives took a twist this year.
“The Japanese manufacturers, especially Toyota and Honda, have been extremely aggressive about offering big incentives on financing at their dealerships,” Collins says. “It wasn’t unusual for American companies to do this in the past, but Toyota and Honda have been really working hard to grow their market.”
In order to meet this challenge, Star One began targeting likely auto buyers by combining Experian’s In-the-Market auto score of customers throughout the region with the credit union’s own pre-approval process. Then, it used a direct mail campaign to notify potential buyers that they were pre-approved up to a certain amount for an auto loan and identify dealers in the area who were part of the credit union’s indirect network.
As a result, by July new car loans of $35,000 or more had topped the previous quarter’s performance levels by about 140%.
Tapping Into Retail
Many credit unions have also adapted the indirect model to the retail lending market, and one of the pioneers in this approach is SACU ($2.9B, San Antonio, TX).
“One of the originators of our program had been shopping for a TV at an electronics store and asked about financing,” says SACU Direct Lending Manager Sam Rocha. “The store gave him several options, all with high rates, so he came back to the office and asked, ‘Why can’t we do that?’”
In March 2008, CU Direct to put together a retail program for the credit union, which has grown every year by about 20%.
“Our goal this year was to hit a million dollars a month and we accomplished that by June,” Rocha says.
The approach that SACU is taking to retail lending is simple and straightforward. When a customer wants to make a purchase, the merchant will offer them the option to finance it through the credit union.
“The merchant enters the information from their office and, if approved, the response is almost instantaneous. Once qualified, the contractor can begin the work,” Rocha says. “In this way, we expect to get something like 1,500 new members this year alone.”
Right now, SACU will lend for just about anything under $10K and since it started the retail program, it has signed up more than 50 merchants. The credit union’s most active retail categories currently include home improvements, spas, portable buildings, air conditioning, golf carts, and water softeners.
“We have two to three merchants in each category, and we’ve also approved loans for garage remodeling and even playground equipment,” Rocha says. “The one caveat we have is that we look more favorably on products that provide real benefit to the consumer, and that the owner will have for a while.”
New To Indirect
The story of California-based Cooperative Center Federal Credit Union ($103M, Berkeley, CA) — a relative newcomer to indirect lending — is a model illustration of how the tools of the digital age can level the playing field for lending institutions.
Chartered in 1942 to serve the employees and members of the Consumers Cooperative of Berkeley, Inc., a co-op food market chain that is no longer in business, CCFCU has grown and thrived through its core membership.
Since introducing indirect lending less than three years ago, loan growth has been nothing short of remarkable, leading the credit union to eventually earn a CUNA Excellence in Lending Award.
CCFCU's growth from June 2010 through June 2011 was up about 170%, and growth from June 2011 through June 2012 was 160% above that, with around 90% of activity coming from auto lending.
“We’re a small shop with only one branch and we’ve only been involved in indirect lending for about two and a half years, but CUDL’s lending programs have enabled us to grow at this amazing rate – and all without increasing staff or building our own in-house infrastructure,” says CEO Gary Bell.
“Lending 360, which we also use primarily for auto lending, is helping us even more,” he says. “The automation provides the convenience of 24/7 approval for our membership, and that enables us to compete with the big banks.”
Though their challenges differ, it’s clear that these various credit unions have taken an approach that effectively combines lending creativity and top-notch technology — changes which will help them support their needs and better serve their members today and years into the future.
This is an updated excerpt from an article that originally appeared in the Winter 2012 issue of CU Direct’s Credit Union Lending magazine.