Credit Unions and Auto Lending: Unpacking the Risks
Point Predictive’s latest report, “Credit Unions’ Share of Auto is Rising But Their Risk Profile Is Too,” delves into the evolving landscape of credit unions in the auto lending space. The report identifies and explains some recent and ongoing trends, including consolidation, fraud vulnerabilities, and delinquency trends.
A Decade of Transformation
Over the past decade, the credit union landscape has undergone a significant metamorphosis, largely driven by consolidations and acquisitions. Since 2014, the total number of credit unions in the United States has dwindled by 27%, while assets under management (AUM) have surged by over 100%.
The Expansion into Auto Lending is Part of a Larger Shift Among Credit Unions
As Credit Unions’ AUM have increased, so have auto loan originations, recording a staggering 142% growth in recent years. This surge resulted in credit unions collectively becoming the largest issuers of auto loans, originating 27% by the end of 2022, surpassing both banks and captive lenders. What makes this shift more notable is credit unions’ historical focus on deposit and checking products.
The creative expansion of credit unions’ “field of membership” (FOM) criteria has both fueled and compelled the focus on auto lending. Traditionally bound by geographic or occupational boundaries, credit unions have broadened their FOM criteria to attract a more diverse membership. Auto lending has proven to be a natural entry point for reaching borrowers outside their former FOMs.
Factors Fueling Credit Union Expansion
- Market Contraction: The fear of an impending recession has prompted many institutions to reduce their footprint in auto lending. This contraction has created a void in the market, allowing credit unions to expand their portfolios with less competition.
- Inclusion of Subprime Borrowers: Credit unions have adapted their underwriting criteria to include subprime borrowers, enhancing accessibility while managing the associated risks through insurance programs and alternative data.
- Embracing Indirect Lending: Indirect lending has emerged as a preferred expansion method for credit unions, with balances growing by more than 24% in 2022. This shift represents a departure from the traditional credit union model and is facilitated by Credit Union Service Organizations (CUSOs).
Delinquency and Charge-Off Trends
Delinquency rates on credit union auto loans have experienced fluctuations since 2014, peaking in December 2017 and bottoming out in June 2021, during the pandemic. However, since June 2021, there has been an 88% increase in 60-day delinquency rates, with a sharp uptick at the end of 2022. While not yet back to pre-pandemic highs, these rates are trending dangerously close, raising concerns.
When comparing charge-offs to outstanding balances, the trend is on the rise. Larger credit unions exhibit faster charge-off rate increases, indicating potential vulnerabilities in their risk management strategies.
- Overreliance on Credit Scores: Credit unions have been slower to adapt to technology shifts compared to traditional financial institutions, posing risks associated with fraud and the unique risk profiles of underbanked populations.
- Unknown or Miscategorized Fraud Risk: Credit unions’ narrow focus on identity fraud has left them exposed to other types of fraud, contributing to credit losses. These include income misrepresentation, employment misrepresentation, credit washing, and synthetic identities.
- Higher Risks with Indirect Lending: The intermediary role of dealerships in indirect lending introduces new fraud risks. It can take months for credit unions to notice delinquency trends among dealers and other lending partners, leaving them exposed to potential defaults.
Technology Is Key
While their growth in auto lending is strong, it’s vital for credit unions to navigate the associated risks wisely. Overreliance on credit scores, fraud risks, and the challenges of indirect lending demand proactive risk management. By leveraging technology solutions and data-driven insights, such as those provided by Point Predictive, credit unions can continue their growth journey sustainably while protecting the interests of their members and communities.
To learn more about how Point Predictive solutions can help credit unions and other lenders mitigate these risks, please contact us.