SAN ANTONIO—The days of low auto loan delinquencies may be ending, predicts SWBC, citing two primary reasons to be concerned for portfolios in 2018.
“We’re going to start seeing is an increase in loan delinquencies,” said Mark Hein, CEO of SWBC’s Financial Institutions Group. “The first reason for the increase is because a lot of our credit unions started buying deeper—meaning, offering auto loans to more credit-challenged people, and those delinquencies are starting to increase. At all of our larger credit unions, they are starting to see that increase”
The second reason, said Hein, is increasing auto loan terms—an issue raised by several analysts last year as car buyers seek to keep the monthly payment down.
Long Loan Terms
“A June 2017 Edmunds report found that the average loan term is 69 months,” said Hein. “This is an increase of nearly 7% from 2012. The lengthening of loan repayment increases the risk factor for CUs. If a borrower has nearly six years to pay off their loan, there’s greater potential for any life event to happen causing repayment to be an issue.”
To respond to the overall delinquency increase, credit unions have a couple of choices Hein said.
“They can increase their collections staff, which increases costs, or they can outsource collections efforts,” he said.
Mark Hein
SWBC client credit unions experienced strong loan growth last year, said Hein, due largely to aggressive marketing and pricing.
“Competition has really fueled this exponential growth going as far back as 2016, as people felt more confident in the economy,” Hein said. “Due to the increased competition from financial institutions all going after the same market share of people, credit unions had to get aggressive as well. They cut their rates, cut their margins, bought a little deeper, and worked to gain an increased level of trust from the car dealers they were lending through. A result of those improved dealer relationships, we saw a lot of our credit unions expanding their indirect lending efforts.”
Hein noted that while indirect auto lending has grown, the pendulum may be swinging back, somewhat, to direct loans.
“Many of the larger credit unions are beginning to look at that spread between direct and indirect lending,” he said. “We’re finding that they’re coming to the conclusion that they need to diversify their portfolios. As a result, you see credit unions becoming more aggressive in real estate lending or working to secure more direct loans. Our clients recognize they can increase their margins when they lend directly to a member. When a member walks in, searches online, or calls directly for a loan, the credit union can sell those ancillary products directly, as opposed to losing that ability through indirect lending, since many dealerships sell their own add-ons.”
Regs May Loosen
Turning to compliance, with changes happening at the CFPB Hein believes there’s potential for some loosening of regulations.
“Currently, everyone is really feeling the pinch on the amount of regulations imposed on credit unions,” Hein noted. “In a few years, new regulations regarding how credit unions are supposed to be treating loan losses will go live. So that’s just one more compliance layer to factor in. I think credit unions are working hard to stay as compliant as possible, but it’s tough. It’s probably why some are looking to outsource compliance services.”