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Indirect Lending
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By Sheri Rothman © 2003 Credit Union National Association Inc. Reprinted with permission. Creative tweaking boosts CUs' auto lending at the point of sale When it comes to successful auto lending, it's all about the gas cards and teddy bears. At least that's how Northwest Resource Federal Credit Union, Portland, Ore., supplemented its indirect auto-lending program to cope in an environment fraught with 0% financing offers, sagging consumer confidence, and a lukewarm economy. When it comes to successful auto lending, it's all about the gas cards and teddy bears. At least that's how Northwest Resource Federal Credit Union, Portland, Ore., supplemented its indirect auto-lending program to cope in an environment fraught with 0% financing offers, sagging consumer confidence, and a lukewarm economy. Although slightly better than in 2001, credit unions' overall auto-loan growth was tepid during the first six months of 2002 at 3.45% (up from 3.12% during the same period in 2001), reports CUNA & Affiliates' economics and statistics department. New-auto loans outstanding, however, grew only 1.59% during the first half of 2002, while used-auto loans grew 5.14%. Many credit unions are coping by tweaking their indirect auto-lending programs with a variety of measures_additional staff, low loan rates, special car sales, new business development positions, awards recognizing top auto dealers, subprime lending_and, of course, gigantic teddy bears. Such tactics strengthen traditional marketing campaigns, such as statement inserts, banners, special sections on Web sites, and newsletter articles. WHAT'S WITH THE BEAR? Northwest Resource Federal's strategy for its "Get in Gear" campaign, designed to boost awareness of its indirect lending program, involved dressing a five-foot teddy bear in a CUDL polo shirt and decorating the lobby with balloons weighted down by miniature race cars. Free Teddy Grahams cookies finished the theme. "Clancy the CUDL Bear" achieved its mission of piquing members' interest. As they passed Clancy, members often asked, "What's with the bear?" That provided the perfect cue for staff to discuss CUDL programs and the credit union's loan promotion. While waiting in the teller line, members filled out a short marketing survey for a chance to win auto-related prizes. In addition, Northwest Resource Federal gave members information on how to purchase vehicles via CUDL and a list of participating auto dealerships. For 2 1/2 months, the credit union rewarded members with a $50 gas card for financing a vehicle for more than $10,000. A direct-mail piece highlighted the credit union's low rates and the convenience of buying a car through the CUDL system. It also listed the state's CUDL dealers. Northwest Resource Federal's marketing programs have proved successful in more ways than one. The gas card promotion, slated initially to generate 50 vehicle loans worth $900,000, garnered 67 loans for $1.25 million and won a 2002 CUNA Marketing Council Diamond Award. The credit union continues to track member satisfaction by sending out post-purchase surveys to members financing vehicles through CUDL. Nearly all members indicate they'd recommend the program, and 93% rated their experience as excellent. Plus, 38% of members said they picked dealers specifically because they were on the CUDL system and they wanted a Northwest Resource Federal vehicle loan. SUBPRIME ISN'T SUBPAR The $71 million asset credit union turned to Englewood, Colo.-based Centrix Financial's Portfolio Management Program, a turnkey financing option for credit-impaired members. Centrix markets, underwrites, services, and insures subprime loans against principal loss via a network of more than 1,000 auto dealers. The dealers fax loan applications to Centrix, which assigns approved deals to participating credit unions based on field of membership. The program has four interest-rate tiers ranging from 14.9% to 20.9% based on members' creditworthiness. Credit unions pay a fee of 7% per loan with a $300 minimum. "When we started we had $15 million in liquidity, so there was money to lend," Bezdek recalls. "We thought this program would give people an opportunity to get vehicles who otherwise might not be able to. We also thought the high return would benefit savers because it might allow us to keep our savings rates a little above market." On Oct. 1, 2001, Credit Union 1's board approved $3 million in funding for the program. By the following February, most of this money had been loaned out, and the credit union designated another $3 million in funding. By July, the subprime auto-loan portfolio totaled $4.5 million, and the board authorized the current $8 million limit and the ability to use Centrix's loan participation program to purchase or sell blocks of the loans. On Nov. 1, Credit Union 1 sold off $2 million of the loans to stay below the $8 million ceiling. During the first 10 months of 2002, the credit union funded 483 loans for $7.2 million. Only six of these loans resulted in losses for the credit union, totaling $6,200. "That's much better than the rest of our portfolio, primarily because of the insurance protection," he says. "We were told our loss ratio wouldn't exceed 0.25%, and it hasn't. Our regular portfolio is about twice that." The effect on Credit Union 1's return on assets (ROA) has been dramatic, Bezdek adds. As of Oct. 31, it totaled 1.29%. "In years past, this credit union has struggled to get 0.75% ROA. And our loan-to-share ratio has improved slightly even though our regular loan portfolio has declined. It's definitely something to consider and see if it fits in with your service philosophy." GETTING TO KNOW YOU In the past, auto dealers resented the credit union's efforts to educate members about car prices and an auto-buying service dealers believed took away local sales. Implementing indirect auto lending, therefore, wasn't an easy sell. To win over dealers and credit union staff to its indirect lending program, U Lane O implemented a three-pronged strategy: 1. Gaining staff buy-in. The credit union sold indirect lending to staff by continuously 2. Marketing to members. In addition to newsletter articles, banners, and advertisements in 3. Marketing to auto dealers. Calling on and contacting dealers continuously eliminated These efforts helped U Lane O grow its consumer loan portfolio $35.5 million during 2001. Since starting the program, the credit union also has obtained loans from members who otherwise would have financed elsewhere. An estimated 90% of new-auto loans and 77% of used-auto loans made indirectly were to these members. Through the first three quarters of 2002, Liudahl adds, loans outstanding grew 21%_largely due to indirect lending. Persistence in building relationships with auto dealers also paid off for Great Basin Federal Credit Union, says Elisabeth Cunning, business development specialist for the Reno, Nev.-based credit union. She visits participating auto dealers at least monthly; twice a month for the top five dealers. "When the dealership has a recognizable face to connect with the credit union, it remembers Great Basin and the personal relationship we provide," Cunning says. During her house calls, Cunning comes armed with updated finance programs, rate sheets, candy, pens, business cards, and marketing materials. In addition, she distributes a monthly newsletter featuring the top five dealers for the previous month and any program updates. The credit union also hosts a dealer appreciation luncheon each year to recognize all local participating dealerships. At the luncheon, the year's top three dealers receive engraved plaques. Great Basin Federal also features a different participating dealer on the main branch's lobby kiosk each month. Cunning is pleased with the results. "The fact that [indirect lending] makes up to 50% of our overall loan volume proves the effectiveness of our commitment to relationship building."
Some CUs buck the trend By Jim Jerving Consumer lending has been called credit unions' bread and butter_but the breadbasket is wearing thin. Some credit unions, however, are bucking this trend, including two winners of the CUNA Lending Council's Excellence in Lending Award_Forum Credit Union, Fishers, Ind., and Family Trust Federal Credit Union, Rock Hill, S.C. Family Trust Federal's lending theme in 2001 was "Getting a Bigger Piece of a Smaller Lending Pie." Special promotions held at various times of the year helped the credit union succeed. A spring clearance sale featured a two-month auto-loan promotion emphasizing preferred dealers and discounted rates. The credit union set aside $5 million in low-rate funding. Promotions stressed to members that once those funds were gone so were the special rates. The credit union invited established auto dealers to buy a package of benefits, which included having their names placed in newspaper advertising, member newsletters, branch posters, and on the credit union Web site. The cost to the dealer was $1,000 for one month and $500 for the following month. Family Trust Federal earned $12,500 in fee income from the dealers and closed $5.5 million in a two-month period. The credit union held another successful promotion after Sept. 11, 2001, when loan demand fell dramatically for most financial institutions. The "Rates Are Falling" auto promotion focused on offering the lowest rates in the Rock Hill market area. The credit union offered four interest-rate tiers, based on a member's credit score. At the end of four months, Family Trust Federal closed $10.5 million in new loans; 75% were used-auto loans refinanced from other institutions. Consumer loan growth at Family Trust Federal totaled $15.3 million in 2001, far surpassing the anticipated 5.8% growth. Forum Credit Union also experienced impressive vehicle loan growth in 2001: $302 million vs. a budgeted $255 million. Aiming to attract high-quality, secured loans in the face of rising delinquencies and charge-offs due to increasing bankruptcies, Forum embraced several initiatives: ¥ It tightened lending policies for unsecured and indirect loans, and devoted marketing and staff training efforts to boost secured lines of credit. Doing so lowered the credit union's delinquency and charge-off ratios 15% and 9%, respectively. ¥ It implemented service innovations, including a 25-basis-point auto-loan discount for members maintaining a checking account with the credit union. ¥ It guaranteed 10-minute decisions on auto-loan requests, granting the credit union member $10 if the pledge wasn't fulfilled. ¥ It collaborated with Lending Solutions Inc., Elgin, Ill., to create an outbound calling campaign targeting 4,000 members. This generated 61 new-auto loans for $700,000. ¥ It held its first annual Membership Fair and Car Sale at the main branch. Twelve dealers participated, bringing more than 160 vehicles to the credit union. The fair resulted in 30 vehicle sales totaling $525,000 in new-auto loans. The fair had a carnival atmosphere with a variety of events, including a cookout, Frisbee-catching dogs, and booths touting credit union services.
Lending 'a challenge' in 2003 The lowest federal-funds rate in 40 years (1.25%) won't stave off slow loan growth in 2003, predicts Mike Schenk, vice president of CUNA & Affiliates' economics and statistics department. The culprits: Weak employment growth, the prospect of war with Iraq, falling consumer confidence, and highly leveraged consumers. "The economy looks relatively weak in the face of all the interest-rate cuts we've had in the past year and a half," he says. "Usually by this time all of the rate cuts have had their full effect on the economy. Yet the economic growth we'd expect--changes in exchange rates and subsequent foreign trade, stock market improvement, and increased business investment--haven't come about. My guess is consumer confidence will fall even more and holiday spending won't be that great. This recession hasn't been like others, where people stopped spending. So there's no pent-up demand. People spent their way through this recession, so there won't be a big uptick in spending early in 2003. How many more 0% auto loans do people need?" Lending in 2003 "will be a challenge," Schenk adds. He predicts loan growth will fall from 9% in 2002 to 7.5% in 2003. Credit cards, unsecured loans, and new-auto loans likely will suffer due to paydowns from mortgage refinancings and captive auto finance companies' 0% financing offers. But if the captives back away from their 0% offers due to losses, credit unions might pick up some auto financing. "We've had almost a year of 0% offers, so I'm guessing that the people in that market have been satisfied," Schenk says. Two potential bright spots are first mortgages and used-auto loans, he adds. Record-low rates will keep mortgage refinancing activity strong as consumers refinance their homes for the second--sometimes third--time within the past few years. The poor economy and related uncertainty will boost used-auto lending. "All else equal, when there's uncertainty and low consumer confidence, people are less likely to buy an expensive new car, even at 0% interest," Schenk explains. In this environment of uncertainty and low interest rates, credit unions will do better than other providers on the savings side due to the safety factor and their competitive rates. "The average credit union money market rate is higher than the money market mutual fund average, which isn't the case historically," Schenk notes, adding savers will favor short-term, higher-yielding accounts such as money market accounts over share certificates because they won't want to lock in low rates. Despite their relative success on the deposit side, credit unions' savings growth will fall from 13% in 2002 to 11% during 2003, Schenk predicts. Other lending-related issues in 2003: ¥ Interest rates. Few expected the federal-funds rate to dip 50 basis points on Nov. 6, Schenk says. "It makes you wonder how worried the Fed is about what it knows and what we don't know. At the very least it shows tremendous Fed constraint leading up to the election" last fall--meaning the agency waited until after the elections to make the rate cut to avoid looking like it favored a certain political party. He believes the federal-funds rate will increase during 2003, reaching 2% by year's end. ¥ Asset quality. Credit unions' overall loan delinquency (60+ days) will fall from 0.75% in 2002 to 0.7% in 2003, according to CUNA forecasts. Net charge-offs, however, may drift up during this period from 0.5% to 0.55%, especially if bankruptcy abuse reform legislation passes and consumers rush to file before reform becomes law. Although many consumers are highly leveraged, much of the debt is in low-risk mortgage products rather than in higher-risk unsecured loans. And due to increased liquidity, credit unions have replaced unsecured credit with low-risk, short-term investments such as Treasury securities. So asset quality likely will remain strong in 2003. ¥ Mortgage lending. There's a disparity between credit unions that offer mortgages and those that don't. "Credit unions that don't offer mortgages have seen anemic loan growth, or their loan portfolios actually have contracted," Schenk says. "So I'd guess a lot of these credit unions are discussing whether they should get into the mortgage business. This is the third time in the past decade that these credit unions have suffered through the ups and downs of extensive mortgage refinancings." Credit unions may want to hold some first mortgages in portfolio despite their low yield, due to even lower investment yields, Schenk says. "If you're making mortgages just to service them, you have some income. But what do you do with the cash? A 6% mortgage looks a lot nicer than 1.25% or 1.5% yield in overnight money or short-term investments. The key if you get into that field is to be able to measure, monitor, and control the risk." Focus Resources ¥ Technology reports from TowerGroup and CUNA. Reports address topics such as delivery and distribution strategies, small-business markets, customer relationship management, payment systems, and Internet strategies. They're available for $75 apiece. To read abstracts or download reports, visit www.cuna.org, click on "E-commerce & Technology," and then "Applied Technology Research." ¥ CUNA Mutual Group's Lending Lab, Madison, Wis. Call 800-333-2644 or visit www.cunamutual.com. ¥ Centrix Financial, Englewood, Colo. Call 877-236-8749 or visit www.centrixfinancial.com. ¥ Lending Solutions Inc., Elgin, Ill. Call 888-574-6572 or visit www.nlpc.com. ¥ CU Direct Corp., Rancho Cucamonga, Calif. Call 909-481-2352 or visit www.cudirect.com. |
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