According to CO-OP Member Center, a subsidiary of CO-OP Financial Services, more and more credit unions have begun offering subprime auto loans at higher rates to buyers with credit issues.
"Most credit unions view subprime lending differently from subprime lenders, which thrive on the subprime market," John Caddell, credit and lending services manager for CO-OP Member Center, said. "On the direct side, credit unions may 'buy deep' all day, because they are making loans to their own members. On the indirect side, though, credit unions are starting to buy a little deeper than they normally would, but they still realize that it is a bit riskier."
One way credit unions are protecting themselves as they make subprime loans is by increasing their rates.
"They may increase their rates from 8% or 9% to 12% or 13%," he said.
Many credit unions are also availing themselves of a new insurance product, called lenders protection, which provides credit unions with protection against losses associated with these types of higher-risk loans.
"With one insurance company that insures these loans, each deal from a credit union is run through that company's decision engine, which comes up with its own loan structure," Caddell said. "This allows the credit union to earn interest on the loan and still have the loan protected."
One credit union involved in subprime auto lending is the $2.3 billion, Madison, Wis.-based Summit Credit Union.
"We have been involved in risk-based pricing since about 2007, maybe even earlier than that," Penny Armagost, vice president of lending, analytics and credit risk, said. "Being a credit union, we are looking at the person who is a member, not just what that person's credit score is. Different members have different situations, and we can determine what kind of a risk we can take to help someone out who is credit challenged."
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The trend is growing. In early 2014, the National Credit Union Foundation, in partnership with the Madison, Wis.-based think tank Filene Research Institute, launched the Non-Prime Auto Lending Pilot Program with 11 credit union participants. The program's product, called Non-Prime Auto Loans, is offered by Foundation REAL Solutions and is one of five products in Filene's accessible financial services incubator, which is funded by the Ford Foundation.
The pilot program was designed to help credit unions fairly price and manage non-prime auto loans.
"The pilot program is coming to a close," Mark Lynch, senior program manager for the Foundation, said. "Filene is now in the process of preparing the final report. The report will show that the pilot reinforced that the original program that we came up with six years ago related to non-prime auto lending is a sound strategy."
The Foundation's program is called the Non-Prime Auto Lending Toolkit.
The next step, according to Lynch, is to work out ways to get more credit unions to hear the message and to start offering non-prime auto loans.
"We are trying as much as possible to get on the agendas of conferences so we can talk about it," he said. "In fact, any time we do stand up and talk about it to a group of credit union CEOs, all the lights start coming on."
The CEOs at these conferences tend to report two problems, according to Lynch. One is having more money available than they can lend, and the second is that they aren't making enough money on the money that they do lend.
"Non-prime auto lending helps to address both of these problems," Lynch said.
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