CUDL: Subprime Pullback Opens Door for Credit Unions
June 06, 2017
ONTARIO, Calif. — With banks retreating from all risk tiers, the auto finance market is primed for credit unions to increase their share and broaden their risk spectrum. That was executive Michael Cochrum message to credit union during CU Direct (CUDL)’s June 1 webcast to discuss first-quarter finance trends.
"The suggestion has been made that the banks are lowering their volume because they're giving up or they're walking away from subprime," said Cochrum, who serves as the technology firm’s vice president of analytics and advisory services. "It does appear that they are tightening up across all the spectrums, which gives us, again, a good opportunity to take that market share in an area where we are very strong."
Finance sources across the board retreated from the subprime segment, with even credit unions registering a sharp increase in auto loans extended to prime borrowers. The result, however, was narrow margins, which Cochrum suggested could be rectified if credit unions were to delve more downstream into the high-risk tiers.
"I'm not suggesting that every credit union go out and buy deep and do subprime lending," Cochrum said. "What I am saying is that in order for us to get greater margins on our portfolios, especially as interest rates begin to rise, we need to look at broadening our risk spectrum."
Credit unions did, however, grow their share in the first quarter by 4% from a year ago, while banks decreased their share by 5%. Captive finance companies increased their share by 14%, but Cochrum attributed the surge to the segment attempting to keep pace with manufacturer incentives.
Credit unions on the CUDL platform maintain their No. 2 position on Experian Automotive’s national rankings of auto finance sources, with the segment originating 263,778 auto loans during the period. That was 1,403 more originations than Capital One Auto Finance, which held onto the No. 3 spot during the period.
With the share of leasing growing from 30% at the end of 2016 to 31% in the first quarter, according to Experian Automotive, used-vehicle financing remains a key growth area for credit unions. In the first quarter, used-vehicle financing composed 72% of credit union originations. And that should continue to rise going forward, Cochrum said.
Cash deals, according to Experian Automotive, remained steady at 14% of first-quarter transactions.
Cochrum reiterated his message from the firm’s March 9 webcast — that credit unions can win over more deals and increase their share of the market by improving response and funding times. The executive backed his message by revealing results from an analysis conducted by the technology organization.
According to the analysis, applications that are system approved and never altered resulted in funded deals 93% of the time. The success rate, however, fell to 65% on decisions that were delayed by as little as one to five minutes. Cochrum clarified, however, that he’s not suggesting that credit unions tinker or relax their underwriting guidelines.
“The idea is to simply look at what your underwriters are doing and look for opportunities to turn that manual underwriting into a system decision," he said, adding that system-decisioned applications have risen 16% over the past two years and now compose more than 20% of applications coming through the CUDL platform.