A bumpy road ahead for credit union auto lending

Vehicle prices and interest rates are both on the rise — as are fears of a recession — causing many consumers to put the brakes on their desire to take out an auto loan from their credit union.

Vehicle loans account for roughly a third of credit unions' lending portfolios, making any dropoff a potential problem for institutions that are active in this market. At the end of the third quarter of  2022, auto loans at credit unions totalled $472.1 billion, and total loans outstanding were $1.46 trillion, according to the National Credit Union Administration.

Banks are feeling the pressure too, but in many cases banks have more diversified portfolios and can better absorb the lending lull. Credit unions have different levers to pull, such as making more loans to thin-file borrowers, and improving their application process to remove friction for applicants.

Speaking at the Credit Union National Association's Governmental Affairs Conference in Washington last week, Tony Boutelle, president and CEO of Origence — which connects automotive dealers to credit union financing — said the company averaged $6.5 billion in auto loans funded monthly in 2022, but that figure had fallen below $4 billion in February. 

"We're definitely seeing a slowdown," Boutelle said.

At the same time, auto sales declined by 1.1 million or 6.7% month-over-month in February, according to the National Association of Federally-Insured Credit Unions. On a seasonally adjusted basis, total vehicle sales declined from 16.4 million annualized sales in January, to 15.3 million in February.

"In conjunction with rising vehicle prices, these data points suggest affordability remains the greatest challenge for retailers heading into the spring selling season, as rising interest rates, elevated commodity prices as well as soaring labor costs permeate final price tags and hamper demand," said NAFCU Economist Noah Yosif in a press release.

Still, some CEOs said they expect steady loan growth in 2023, including auto loans. And some of that optimism may come from a willingness to think outside the box.

Jim Nussle, CUNA's president and CEO, said the trade group's research shows that credit unions are 1.5 times more likely than banks to give an auto loan to non-prime borrowers.

Nutmeg State Financial Credit Union in Rocky Hill, Connecticut, for example, rolled out a program called "working wheels" that helps members without credit or with poor credit get loans, as long as they have been employed for at least six months. 

"There are some limitations, but that program has really taken off," said Nutmeg State President and CEO John Holt in an interview. 

The $553 million-asset institution has also partnered up with AAA and gets a lot of loans through that partnership, Holt said.

Nutmeg State will also be aggressive this year in bringing in auto loans through pinpoint marketing to the communities that it serves, Holt said. And the credit union recently upgraded its auto loan application tech to make the process much easier.

"I wouldn't say our rates are the lowest, but I'd like to think that our service along with our new application helps," Holt said.

Some lenders said they are also keeping a close eye on auto loan delinquencies.

Ray Lindley, chief operating officer for Elevations Credit Union in Boulder, Colorado, said that  according to data provided by the major credit reporting agencies, credit union members continued to take out loans at longer terms and higher loan-to-value ratios in 2021 and 2022. Now in early 2023, auto loan delinquencies are on the rise.

The $3.3 billion-asset Elevations has seen a slight rise in auto loan delinquencies, Lindley said.

"We've always been cautious lending at higher loan-to-value ratios and longer terms as we strive to inform our members about the ramifications of both, such as negative equity at trade-in time," Lindley said.

Holt from Nutmeg State said those problem loans "seem to be under control" at his institution, and they have not yet seen any red flags. 

Aaron Goff, president and CEO of Embold Credit Union in Milwaukie, Oregon, said it has experienced an uptick in delinquencies, which he said is "interesting" because wage and unemployment levels are strong in Embold's markets.

The $613 million-asset credit union put a lot of accommodative measures into place for members throughout the pandemic, and it was "very generous" with loan payment skips in particular, which may have masked some problems, he said.

"We had near-zero delinquencies and charge offs for 18 months, so we expected the pendulum to swing back in 2022 and 2023, and it has," Goff said. 

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But the bigger, more immediate challenge for credit unions — including  Embold — may be on the deposit side, Goff said. Members are spending down the deposits they accumulated during COVID-19 at a rapid rate, and that has changed the equation for determining how competitive the credit union could or should be on auto loan rates, he said.

"We had a record indirect auto loan year last year, but that really started slowing down over the past few months. I suspect things will level out as we get into [the second quarter]," Goff said.