Although a recent survey said one-third of lenders nationwide expect sales for the three major automakers and their North American suppliers to be weak over the next three months, local credit unions are not overly alarmed and say auto lending activity will ebb and flow as usual in Massachusetts.
Phoenix Management Services, a Philadelphia-based firm that assists companies encountering financial, operational or management difficulties, recently conducted its quarterly “Lending Climate in America” survey to gauge shifts in lenders’ attitudes toward the economy. The automobile industry was a major concern.
“The American auto industry and its supplier base are in the midst of a major restructuring and that has lenders nervous,” said E. Talbot Briddell, managing director of Phoenix Management Services. “High prices for steel and other raw materials, rising health and labor costs, increasing competition from overseas and now the skyrocketing fuel prices in the wake of Hurricane Katrina have slammed U.S. automakers and their suppliers.”
For credit unions, which rely heavily on auto lending business, that could be bad news.
“[Auto lending] is very much a part of what credit unions rely on in terms of their loan portfolio,” according to Robert B. Kimmett, senior vice president of the Massachusetts Credit Union League.
But despite the survey’s results, local credit unions have seen positive results with auto lending over the summer months and expect only a slight slowdown this fall. Credit union leaders said they were not expecting drastic reductions in auto loan volume.
“This year has been a strong year for auto lending, most especially with new cars,” said Eugene Foley, president and chief executive officer of Cambridge-based Harvard University Employees Credit Union.
Overall, there has been a 40 percent increase in loans for new car purchases at Foley’s credit union in 2005, with borrowing increasing for most makes and models, he said.
With many of the major car manufacturers offering employee discounts, few are offering deeply discounted financing and many customers have headed to their credit union to find the best available rate, Foley said.
Meanwhile, another credit union official said his institution experienced a recent dip in auto loan origination in the last month because of the employee discounts.
Jim Blake, president and chief executive officer of Brockton-based HarborOne Credit Union, said car sales that typically take place in September and October happened in August because of the employee discount deals being offered by the major manufacturers, which recently have been making the discounted prices they offer their workers available to all car buyers. Several of those programs have ended or will end soon, however.
Phil Maniaci, regional director for the Northeast for Credit Union Direct Lending, said July and August were very good car lending months for credit unions in the area, but things have slowed a bit since.
“September took a dip, as expected, with franchise dealer inventories being reduced due to the employee pricing incentives,” he said.
In the recent past, there also has been a high percentage of home mortgage refinances, with many customers cashing out.
“People were using some of that [home] equity to purchase a new car,” Blake said.
With less refinancing happening these days, Blake expects more people will look to traditional auto loans again.
Indirect Approach
Some of the concerning issues mentioned in the national survey have crossed the minds of local credit union leaders, however. Blake said the industry is expecting to feel the impact from hurricanes Katrina and Rita and noted that consumer confidence has dropped as oil prices have risen.
“It’s got people anxious and [many are] probably reassessing major purchases they were going to make,” said Blake.
There will be still be car purchases, of course, but Blake said lenders should expect to see a shift toward smaller, fuel-efficient cars instead of sport utility vehicles.
“We are seeing early signs that SUV sales are slowing a bit,” said Blake.
Maniaci noted that several factors will contribute to the pace of auto lending activity but this is typically the beginning of a slow time of year as the weather cools.
“Traditionally, auto sales and loans slow down in the waning months of the year in the Northeast,” said Maniaci. “Most [lenders] expect that to be the case this year as well. The employee discount pricing from this summer and higher gas prices are two other factors that have affected consumer spending in this arena.”
Workers’ Credit Union in Fitchburg has benefited from some of the issues that other lenders cited as problems: high gas prices and car manufacturer employee discount programs. Thomas Gray, senior vice president of lending at Workers’ Credit Union, said the employee discounts at dealerships have played a role in new car purchases.
“We were seeing more deals coming from car dealers,” said Gray.
High gas prices have also been good for the credit union because many customers are trading in large vehicles for smaller cars.
But there will inevitably be a slowdown at Workers’ Credit Union, too, Gray predicted.
“There’s nothing out there going on in the market,” said Gray. “I don’t really see a lot of increased business over the next few months.”
As the market fluctuates, credit unions are obligated to find other sources of income, especially if there is no substantial growth or even a slowdown in auto loans.
“Credit unions have a number of loan products to offer and shift their emphasis when the market moves in any particular direction, as with any product” said Maniaci. For instance, if auto lending slows, a credit union might feature its home-purchase mortgages, refinancing or home equity products more prominently, he said.
“Credit unions are a savvy group of lenders and know what it takes to keep loan growth positive to satisfy their members,” Maniaci said.
When there is a shift in lending activity, Kimmett said auto loans are usually affected.
“As the number of loan categories narrow, auto loans lag,” Kimmett said.
Blake said his institution will likely market personal and home equity loans to a greater extent. Another option for HarborOne is to “kick up” the marketing program to make consumers aware of the credit union’s entire line of loan offerings.
Kimmett said credit unions are also well known for offering “second chance” auto loans, which allow a member to refinance their car loan at a better rate. That, Kimmett said, is another way for credit unions to bring in business when new car sales slow down.
For many credit unions, indirect lending has been and will continue to be a good source of auto lending business. Indirect lending is when a lender gives a car dealership the authority to make a loan within the parameters the credit union provides.
Blake noted that the bulk of auto loan growth is due to indirect lending.
“It allows us to generate business more efficiently Â… and in higher volume,” Blake said.
Workers’ Credit Union and Harvard University Employees Credit Union also participate in indirect lending with nearby dealerships. Gray said it has become more popular as customers look for convenience. Members can finance their car at the dealership at the same time they make their purchase instead of applying at the branch.
“It [car loan origination] is getting more indirect,” Gray said, estimating that 50 percent of auto loans are generated through indirect lending conduits.
Even if there is a slowdown in auto sales in the coming months, Blake said it won’t be a “dramatic shutdown.”
“Consumers have been on a spending spree for the last 10 years,” said Blake, and there is little to indicate that will change drastically.
For now, the credit unions will do their best to maintain their lending activity and wait to see what car companies will do next. Some manufacturer promotions stimulate indirect lending while others – zero percent manufacturer financing promotions, for example – hinder loan prospects for credit unions, but anything that stimulates new car sales generally helps increase loan volume.
“It will be interesting to see what the auto manufacturers bring to the table to stimulate sales at year-end,” said Maniaci.
