Credit Unions Make Gains in Auto Financing

Credit unions are becoming a force in auto financing, causing distress and resentment from competing banks.

“Credit unions are making a move,” says Gary Tucker, senior vice president of J.D. Power and Associates.

Long involved in auto financing, credit unions have stepped up their efforts as third-party agents for car loans arranged through dealerships.

“Banks complain the credit unions are stealing prime-plus customers and skimming the top of the A+ tier,” says Tucker. “They are increasing their presence (in auto lending) with their customers and dealers.”

Tension between banks and credit unions has existed since credit unions were first organized in the early 20th century. Actions of late have renewed hostilities.

In a call-to-arms bulletin to members, the Credit Union National Assn. says banks “have undertaken a centrally organized attack on credit unions, calling on both the federal government and many state governments to raise taxes on credit unions.” Citing an earlier battle, the bulletin recalls fighting back “when the bankers sought to destroy credit unions by limiting who could join…We must fight back again.” As not-for profit institutions, credit unions can offer better rates than commercial banks, giving credit unions “a bit of a pricing advantage; about $750 for a 4-year car loan,” says Michael Schenk, the Credit Union National Assn.’s vice president-economics and statistics.

“There is a whole lot more price competition in this business than 20 years ago,” he says. “Margins are thinner than ever.”

Credit union sign advertises auto loan rates.

Credit unions are gaining a “substantial share,” Tucker tells the Consumer Bankers Assn.’s 27th annual auto finance conference in Austin, TX. “They are a force to be reckoned with.”

They always have been, says Robert W. Linkonis Jr., finance and insurance manager at Pearson Infiniti in Richmond, VA.

“Some credit unions even have their own extended service contracts, insurance, appearance and gap products with very competitive pricing,” Linkonis says.

Franchised auto dealers generate $500 billion a year in loan and lease volumes, Tucker says. “It’s a big marketplace.”

Credit unions – cooperative financial institutions owned and controlled by members – are exempt from certain banking restrictions and taxes. Bankers say that gives them an advantage over competing lenders.

Auto loans comprise about 40% of credit unions’ total portfolios, Schenk says.

“We do have a healthy market share,” says Schenk. “It’s a reflection that we have been in this business a long time.”

He adds: “Banks claim credit unions are morphing into commercial banks. But it is banks that are morphing into the credit union business. Much of why credit unions are around is because they make loans that banks won’t.”

In the U.S., credit unions have 86 million members, which is 43.5% of the economically active population, according to the World Council of Credit Unions.

Credit unions’ core members share a common association, typically the same employer. But relaxed regulations allow credit unions to accept associate members within communities.

For instance, Suncoast Schools Federal Credit Union in Charlotte County, FL, is primarily for local school workers. But partnership programs extend membership well beyond that group.

Eligible for membership are employees of various local businesses.

Those include drug stores, restaurants, an exterminator, a rental car agency, real estate office, nail spa, eye clinic, animal hospital – and a car dealership.

Also eligible are members of churches and government agencies, such as tax collector, public defender and sheriff offices.

Despite the easing of membership eligibility, credit unions still operate within a narrow geographical scope, says Schenk.

“Banks can serve whomever they want and wherever they want,” he says. “Credit unions can’t. They are much more limited.”

Schenk calls banks and credit unions “two different animals.” There are about 8,000 of each.

Banks’ median assets are $100 million compared with $12 million for credit unions, he says.

While auto dealers give captive lenders the highest satisfaction scores, credit unions – for the first time – enjoy the highest satisfaction ratings among auto-loan borrowers, says Tucker.

“Credit unions have organized, and they are making a move on indirect lending,” he says. “They have figured out how to do it.”

Some credit unions, usually the larger ones, have expanded their customer base by arranging for auto dealers to sign up car buyers as credit union members through “open memberships.” Then the loans are made through the dealer.

“Dealership F&I managers used to hate credit unions because customers would do the auto loan at the credit union and come to the dealership with the check,” says Harry Douglas, co-owner of Oakridge Chrysler-Dodge-Jeep in Oakridge, TN.

Chilly relations between dealers and credit unions melted about 10 years ago when dealers started arranging the credit union membership and loans right at the dealership.

“A dealership customer would say, ‘I’m not a credit union member,’ and I’d say, ‘You will be when you leave here,’” says Douglas.

Credit unions are big beneficiaries of that, he says. “Dealers sign up the members, arrange the loan and give credit unions new customers they didn’t even meet. It’s a good deal when you’re getting the business and someone else is doing the work.”

Linkonis, in trying to finance car loans for credit-challenged customers turned down by banks, periodically directs them to the local credit union.

“They would then apply for the auto loan as credit union members, presenting the printed buyer’s order I gave them,” he says.

He notes that some credit unions maintain lists of preferred dealers who pay for the listing.

A firm called Credit Union Direct Lending has started a “big trend” of late, says Linkonis.

“It brings a network of credit unions to the dealer, letting the dealership finance department do the delivery on the credit union’s contract and at their interest rate right then,” he says.

“It eliminates the need to let the customer leave the building, drive to the credit union to pick up their check, passing six other dealerships on the way.”

A CBA-commissioned study of auto financing trends shows credit unions expanding into prime-rate auto financing.

“It is creating a competitive and brutal market,” says Walter Cunningham, president of BenchMark Consulting International, which did the study.

Many bankers feel “too many banks are chasing too few dealers,” says Mark Pregmon, an executive vice president for SunTrust Banks Inc.

Meanwhile, he says, dealers and their finance and insurance managers are urging banks to “buy deeper,” approving loans for consumers with imperfect credit histories.

“Dealers want banks to buyer cheaper and deeper, but we have got to explain what we can and can’t do,” says Paul T. Wible, a Bank of the West senior executive vice president.

Because of charter restrictions, credit unions normally steer clear of subprime auto financing.

But some of them indirectly participated in it through an arrangement that seemed to work well for a while – but then ended abruptly and badly for one lender, Centrix Financial, when the rug was pulled out last year.

Denver-based Centrix became a subprime player, enjoying phenomenal growth with an innovative business model of making auto loans through dealers with money secured from credit unions.

Although Centrix had guaranteed repayments, the National Credit Union Admin., a federal agency, issued a “risk alert” disapproving of credit unions funding subprime loans as third parties.

It dried up funding for Centrix, which then went bankrupt.

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