U.S. credit unions are making fewer loans for new cars due to a change in consumer behavior combined with a shortage of inventory.
New-car loans at credit unions fell by $5 billion, or 3.4%, in the first quarter from a year earlier, according to data recently released by the National Credit Union Administration. By contrast, used-car loans at credit unions grew by $11.4 billion, or nearly 5% in the same period, signaling that the new-car segment is subject to pressures that don't affect adjacent categories.
The COVID-19 pandemic prompted buyers to purchase cars online instead of at a dealership, increasing the chance that the loan stays in-house with captives such as American Honda Finance, said Geoff Bacino, a credit union consultant and former NCUA board member.
“Credit unions wanting to be part of this new paradigm must navigate the online financing model or push prequalifying for members looking for a new car,” Bacino said. “Auto lending can be a good book of business for credit unions, but the model is changing and credit unions will have to adjust.”
The reality is that dealers control the majority of the auto lending business today, said Tim Scholten, president of the credit union consultancy Visible Progress.
Dealers have programs with specific lenders, who tend to be larger banks that specialize in auto lending, so unless a credit union is part of a dealer program it will get a shot at only a few loans, Scholten said.
“Dealer financing has become very fast and easy,” he said. “There is no wait for approvals. Deals go out to multiple lenders automatically, and he who responds first with the best deal wins. Dealer direct is winning most of the new and used business today.”
Overall, credit union auto loans increased $6.4 billion, or 1.7% on a year-over-year basis in the first quarter, compared with growth of 2.1% in the first quarter of 2020.
For banks, auto lending rose 2.5% in the first quarter from a year earlier, to $499.2 billion, according to the Federal Deposit Insurance Corp.
Pacific Service Credit Union in Concord, California, had nearly $100 million in new-car loans on its books at the end of the first quarter compared to $126 million a year earlier.
The $1.4 billion-asset company is “definitely struggling” with attracting and retaining auto loans, said Jenna Lampson, president and CEO of Pacific Service.
The pandemic clearly played a role, first with consumers being reluctant to buy during the economic uncertainty that pervaded last year, and now with inventory shortages and higher prices, Lampson said.
Credit unions miss out because they are not offering loans at the point of the decision, such as the checkout page of a dealer's website. "If we could preapprove our members and pay the dealer without the intervention of the finance department … then we’d get far more business," Lampson said.
As purchasing activity picks up, credit unions may still have trouble competing with the aggressive rates set by their competitors.
“We’re losing deals to other banks and CUs as well, mostly on rate. We’re not willing to reduce our rate enough to win the business for non-members,” Lampson said.
Some credit unions lowered their auto loan rates to sub-2%, and Lampson said that’s simply not profitable. “We have no interest in competing with irrational pricing,” she said.
It is also difficult for Pacific Service to get dealers to send deals its way, even for its own members. Pacific Service pays dealers a 2% incentive and funds loans quickly, “but they still seem to have more incentives to route the deals elsewhere,” Lampson said.
Matt Selke, CEO of the $86 million-asset Pinnacle Credit Union in Atlanta, said the credit union had slightly more than $7.3 million in new car loans on its books at the end of the first quarter, up about $500,000 compared to a year ago.
But even with the tepid growth, Selke said the issue is one the credit union talks about every day.
“Long story short, we lose the loan at the dealership either through an indirect program or dealer financing. Unless the member has a check in hand at the time of sale, credit unions lose just about every time,” he said.
If a credit union has a good indirect lending program it should do "OK" at capturing new auto loans, Selke said. Still, Pinnacle is researching the impact of online new-auto sales and how much of a part it is playing in changing consumer behavior, especially during the pandemic, he said.
“Our credit union's bread and butter has always been used autos, and that's where we focus,” he said.
It will be interesting to see what auto sales look like through the rest of the year, Selke said, and he is already hearing complaints about lack of inventory and long wait lists for new autos.
Those empty dealer lots may be the key to the whole issue, said Shane London, president and CEO of Deseret First Credit Union in West Valley City, Utah.
The $914 million-asset company had slightly more than $32 million in new car loans on its books at the end of the first quarter, versus nearly $34 million a year earlier.
“Driving by auto dealerships, you are seeing fewer cars on their lots due in a large part to them not being able to get inventory,” London said. “The manufacturers are producing the cars but can’t get the computer chips to finish the product and get them to the dealer’s lots.”
Some auto manufacturers, including Ford, have shut down factories and laid off workers because of the shortage of computer chips. “Limited inventory is definitely a major component to the auto loan declines,” London said.
Add to that the fact that more people are working from home, and the need for a car is not what it once was for many American families.
“I’m always optimistic that things will improve, but the computer chip shortage is real and impacting FIs on a number of levels. Car inventories will continue to be slow until they can get them to put in produced cars,” London said.
Rush-hour traffic is beginning to return in Salt Lake City, although not yet to pre-pandemic levels, London said.
Forecasts are optimistic. New-vehicle retail sales are expected to be the highest ever for the month of May, according to a joint forecast from J.D. Power and LMC Automotive. Sales of new vehicles are projected to reach 1,388,600 units, which would be a 34% increase compared with last year.
Lampson at Pacific Service says she has seen signs of that improvement.
The credit union experienced a small lending spike the last two months following increased auto production, which she said is encouraging. In May, the company saw its first net growth in direct auto loans since the start of the pandemic.
“I attribute the [loan] production to pent-up demand,” Lampson said. “People are more optimistic about the economic recovery and are willing to spend again.”
