WASHINGTON — The credit union auto loan portfolio is down “fractionally” over the last several months, according to CUNA Mutual Group's January CU Trends Report.

No surprise there, as new vehicle sales have slipped for several months. But a marginal slice of the auto loan market–that of sub-prime financing–remains fresh for credit unions that have developed tested business models and best practices that make for successful and profitable programs.

What if a greater number of credit unions had access to those programs? A successful lending strategy might be adapted by others and could help bolster a slumping auto sector.

Exploring out how it's done and how it can be replicated is the purpose behind The National Credit Union Foundation's partnership with the Annie E. Casey Foundation of Baltimore, Md., and the Aspen Institute in Washington, D.C.

The Aspen Institute was founded in 1950 to promote dialogue and leadership through seminars, policy programs, conferences and development initiatives. The Annie E. Casey Foundation was created in 1948 with a mission to pursue public policies that meet the needs of children and families. The NCUF makes grants

for innovative, cost-effective responses to fulfill those goals.

The NCUF hopes to expand its REAL Solutions program–which has been successful in offering an array of mortgage lending options, tax preparation, and payday lending alternatives–to foster new and better ways for America's CUs to serve low-wealth and modest-income members with used car loans. In its draft proposal to the Casey Foundation, the NCUF states: “If more credit unions provide affordable used car loans to consumers with credit scores under 550, CUs could open a world of opportunities for more than half of those consumers who are underserved by regulated and insured financial institutions.”

Two-Phase Effort

The project has a budget of $99,680 that will be funded two-thirds by the NCUF and a grant of $37,600 from the Casey Foundation to help develop the research, the concept paper, and hold a colloquium in the early part of next year. That will allow the findings to be shared and provide a forum for CUs with successful programs to show others how to get started.

Phase I of the project entails collecting the research and written documentation. Bill Myers, a fellow at the Aspen Institute and former CEO of Alternatives FCU, has begun conducting the research. The Aspen Institute is contributing Myers' time and services. Thus, only his travel expenses will be reimbursed from grant dollars.

“Our focus is to first collect the best practices and profile those credit unions,” Myers said. “Beyond that, we want to develop a 'tool kit' so that other CUs can follow and expand their bottom lines. I see this a 'How-to' from Real Solutions and it won't just be features of these loans, but all the associated aspects that make these programs work effectively, including marketing, staffing and even possible changes in regulations that affect them.”

CUs contemplating such an expansion into subprime auto lending must also know how to communicate to the board of directors as to how such operations will impact the organization. “This will be a methodology applied to a new marketplace,” asserted Myers. “It requires a full buy-in and support.” Although car lending has been a credit union's bread and butter for so long, relatively few credit unions have included a solution to predatory used car loans in their mix of products. Myers asked that CUs participate in a broad survey on auto lending so that the largest database of information can be amassed. The survey link is: http://tinyurl.com/2x3heh.

“Buying a car is the second largest consumer investment members make, and the simple truth is that you can't hold a job without transportation. So it's essential to the member's financial well-being. And it's equally important that the credit union makes sure they make loans on reliable cars. It has to be a good deal for both,” Myers said.

The documented cases of CUs that do exemplary work in this area will provide the tested business models and best practices, he said. And there is an audience of interested CUs with a willingness to offer lower-cost, used car loans, he noted. They are just waiting for program models with a track record that they can 'plug and play.'

Once those CUs with sustainable, socially responsible programs are identified, on-site visits will be done and those showing the most promise (favorable pricing and terms and conditions for borrowers as well as credit unions) will be laid out. Then a draft concept paper identifying best practices from perspectives of borrowers as well as credit unions will be written that contain guidelines for CUs in outreach, underwriting, and loan servicing.

Finally, the colloquium will present models for consideration and discussion and special project activities focused on cities where AECF has relationships will be organized. Key challenges for participating CUs, NCUF, and AECF in the product implementation and how to overcome them will also be discussed.

Phase II will focus on sharing the research findings with all 8,500 of America's credit unions, particularly 10 leading credit unions with significant assets, as well as leagues and CUs with fields of membership serving AECF cities. All will be invited to attend the convening. Lastly, 3-5 affordable auto financing models will be offered to 25 REAL Solutions states.

NCUF will follow through on implementing the project by:

-Conducting a pilot project planning session to set goals, codifying roles and responsibilities, and determine implementation strategies.

-Identifying credit unions that meet the participation criteria (progressive, fiscally/socially responsible) for a national pilot project with a focus on AECF communities.

-Continuing discussions with CUNA Mutual Group to consider an insurance pool designed to help credit unions manage the risk of opening underwriting to lower credit scores.

-Determining success metrics and methods for tracking/storing data needed to quantify impact.

-Committing to putting systems in place to measure results.

-Selecting and creating new vehicles to share the business models with non-pilot credit unions (i.e., REAL Solutions partners meetings, a REAL Solutions knowledge center, an NCUF Web site, an affordable auto financing summit, etc.).

Myers said that a common finding had become evident in the preliminary subprime auto lending research.

“The collection process is much faster,” he said. “The first call is made sooner, and some credit unions even do a 30-day re-po. This protects the credit union from losses and tells members the credit union is serious, and people want to keep their cars so they make the payment.”

Myers added that adding 'bundled services” like mechanical breakdown insurance and coverage in case of job loss is also part of the best strategy. “We're working with CUNA Mutual on that.”

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