New Year Offers New Auto Lending Opportunities for CUs; Three Keys to Success in 2006

Credit unions have never been in a stronger market position in auto lending, but they’ll have to leverage new opportunities to maintain their strong position in 2006. Consider the following: * Third quarter results show that new auto loans outstanding rose 19.5% from September 2004, with a record $7.1 billion in new auto loans added to the books in the third quarter. * Credit union auto lending market share reached an all-time high of 20.5% in August, according to information from AutoCount USA. * In four states – New Mexico, Oregon, Utah, and Washington – a credit union is the number one auto lender, topping all competitors including captive finance companies The market share in auto lending is the highest held by credit unions in any product in which they compete. Auto lending remains a staple of credit union balance sheets, with the $175 billion in auto loans held accounting for 39% of all credit union loans and 25% of assets. In addition, an auto loan is often the first loan a member has with their credit union and thus provides the foundation for a long-term relationship. Looking Ahead to 2006 Sales of new cars in the U.S. continue to be strong. The National Automobile Dealers Association forecasts that new car sales will reach 16.8 million in 2006, down slightly from 2005′s 16.9 million level. If forecasts hold true, it will be the eighth consecutive year over the 16 million mark after crossing that benchmark only once prior to 1999. The Big Three auto manufacturers will likely continue to offer incentives to lure buyers into the market. Consumers have come to expect these as a purchase consideration, with the average incentive reaching $3,000 per vehicle in December. This provides credit unions with ample opportunities for auto lending success this year, especially with 0% financing options disappearing. So how can credit unions build on their momentum in 2006? Here are three recommendations: * Look for opportunities to help members in their purchase decision: Many credit unions have started to offer auto buying services that help members identify, locate and price the car of their choice. These programs are valuable add-on services that benefit members by having dealers compete for the sale by offering their best price. The credit union wins by tying the program to the use of credit union financing for the vehicle purchase. Some credit unions manage an in-house program, though most partner with a third party provider. Results of a recent auto lending survey by Callahan & Associates indicated that nearly 80% of credit unions that manage a purchase program utilize web-based tools that members can use to select options for their vehicle. With over 62% of consumers utilizing the web when researching for a new car purchase according to Forrester, such tools are a natural for credit unions to integrate into their Web site. * Look for opportunities that offer more than “one loan at a time”: Instead of competing for one loan at a time, look for opportunities that offer the potential of a large number of loans. There are three ways this can be accomplished: * Indirect lending: With 9 out of 10 auto loans financed at the dealership, indirect lending can be an important part of your credit union’s member service network. Whether using a dealer network to attract new members or to provide point-of-sale lending to existing members, the growth potential is compelling. Over 1,600 credit unions have an indirect lending program in place today, and their 13.0% auto loan portfolio growth rate almost doubles the 7.5% rate posted by credit unions without an indirect program. Participating in an indirect lending network that combines the market power of multiple credit unions can provide even greater market leverage. * Participations: Credit unions are increasingly active in the participation market for both consumer and member business loans. Purchasing participations in auto loans is a way to mitigate the ups and downs of local auto lending markets while easing liquidity constraints in partner credit unions. Participations are also a way to gain an introduction to, and hands-on knowledge of, new markets that your credit union may be looking to enter, such as serving mid- or sub-prime members. * Unique partnerships: There may be opportunities to develop new relationships with organizations that can provide a new market to your credit union. One example of this is GTE Federal Credit Union’s partnership with AAA in which they are the preferred financer for AAA members. The partnership has been a win-win for both organizations, providing a significant boost to GTE’s auto lending efforts while giving AAA members outstanding value and service when they finance a car purchase. Of course, with any of these options, it is important that the appropriate controls are in place to ensure that risk is properly managed. * Look for existing opportunities with your own members: Members with auto loans from another institution may be an excellent source of auto loan growth. Results from a recent Callahan & Associates’ auto lending survey indicated that credit unions that had established a program to recapture auto loans from current members were able to generate significant auto loan volume. Over one-quarter of the survey respondents indicated that recapture programs accounted for more than 20% of their auto loan origination volume. Letting members know that they can benefit from a lower rate at their credit union reinforces the credit union’s value proposition. Fort Campbell FCU generated over 30% of their auto loan volume through a program that offered members a 2% discount on their existing auto loan rate from another institution as long as it did not go below the floor rate established by the credit union. These loans were often refinanced at rates that were higher than the current rates offered by the credit union. A Competitive Market Although credit unions’ auto lending market share is on the rise, the market is always competitive. Credit unions’ visibility in the market is sure to attract the attention of not only banks, but captive finance companies as well. Staying ahead of these competitors by ensuring that members receive the best value and service will be the ultimate key success factor in 2006.