Dynamic risk in a dynamic market calls for both prudence and service innovation but there’s little evidence that auto lending is approaching a dive like the housing market experienced several years ago when that bubble burst.
Those were some of the takeaways for me from the recent CU Direct DRIVE conference in beautiful Las Vegas, NV.
The conference kicked off with a keynote presentation from Bob Lutz, retired vice chairman of General Motors. One of the big messages Lutz drove home (pun intended) was that cars are always going to be expensive; in the grand scheme of things, buying a car is the second- or third-largest purchase in a consumer’s life.
Credit unions are uniquely positioned in the market to be the primary financial resource for car buyers because they live and work beside their members. They have the ability to know their market in a way that banks and finance companies do not.
In Lutz’s opinion, one of the major hurdles facing consumers in the car buying process today is the amount of time it takes to close a purchase. He gave a personal story of buying a new car with cash and still having to spend 30 minutes signing documents. In his opinion, this is too long. He says whoever can figure out how to shrink this window is going to have a lot of success.
Finally, he issued a challenge to everyone in the room. There is always room for improvement in business, whether in product design or customer service. Start the innovation process by thinking creatively, and then ask if it’s affordable, not the other way around.
Low Delinquencies Allay Subprime Bubble Fears
This was one of the most information-rich presentations I attended at the conference, and it also was one of my favorites. The session was led by Melinda Zabritzki, senior product director of automotive finance from Experian.
Over the past five years, financing of both new and used cars have increased roughly 10% apiece. Of particular interest was the data relating to credit risk and subprime borrowing in the automotive lending space.
There have been some much-publicized warnings recently about the impending implosion of the subprime automotive bubble. Zabritzki used Experian data to dispel that notion. In 2008 subprime auto loans accounted for 9% of the market, in 2014 they were 10%. For credit unions, in 2014 7% of all auto loans were rated subprime, whereas in 2007 they were 8% of the portfolio. The second surge in subprime auto lending began about three years ago, yet when auto loans become delinquent they typically do so within the first 18 months of the loan.
Thus, it is interesting to note that there has been no deterioration in auto delinquency for the past several years. Additionally, volumes have been increasing across all risk tiers, in fact, growth of prime and superprime borrowers are outpacing the growth of subprime and deep subprime borrowers.
Read more about Experian's report in, "Subprime Bubble? Not In Credit Union Land."
Recently, lenders have seen an increase in the length of financing; specifically, the 73- to 84-month loan tier has increased from 7.4% of the portfolio in 2009 to 24% in 2014. Additionally, average vehicle ownership increased to 96 months, which helps to quell fears that longer-term loans will have higher default rates because people will simply stop paying when they are ready for their next new car.
Dynamic Risk Calls For Consistent Monitoring
Speakers from the three big bureaus led this session. The big message that each reinforced was the need to monitor a variety of credit-related measures, in addition to the traditional credit score. Some of those include:
Graduated college (debt coming due)
Took out loans with higher rates
Have HELOC approaching rate reset
The main concept to take home was that risk is dynamic, and unfortunately, many credit unions and banks make the mistake of thinking it’s static, and book loans and simply file them away. In reality, you need to monitor the creditworthiness of your borrowers on a quarterly or monthly basis to be better prepared for potential issues before they occur.