Credit unions account for more than half of the loan volume at Dick Hannah Dealerships in the Pacific Northwest, says F&I director Ralph Larson.
High credit union penetration is typical for the region, and Larson says the dealership group, which has 13 locations and 19 franchises and is based in Vancouver, Wash., takes that historical link to credit unions a step further.
If a customer financed his or her last vehicle with a credit union, Larson said, the dealership group's policy is to send the credit application for the new vehicle to that credit union first.
Before the group did that, customers often refinanced their new cars with their old credit unions days after a sale. When those deals got undone, the dealership group had to refund a lot of its profits from F&I products, which really hurt, he says.
Larson, 38, spoke with Automotive News Special Correspondent Jim Henry.
Tell me about your setup with credit unions.
At first we did it out of necessity. More than anything else, we were trying to solve a rise in chargebacks. We couldn't understand why we were getting cancellations for F&I products two, three, four days after the sale.
When that happens, it could be a problem with the disclosures. We videotape every transaction, so I looked back and reviewed every sale. And no, the disclosure was not a problem. People knew what they were buying. They knew what they were paying.
But we're sitting there signing checks for "Refund of service contact," "Refund of GAP."
What was the problem?
We started asking people: "Why was it a good idea on Tuesday but on Thursday you're canceling?" And people said, "I refinanced the car at my credit union. They called me up and gave me a rate, gave me a term."
We got upset about it. Why are they trying to steal our customers? And then we looked at it from their point of view, and, no, they were just trying to keep their customers. I couldn't really be mad at them.
What do you do about it?
We came up with the idea to give the existing credit union the first shot at the deal. Before, a lot of times the customer would go to a different credit union at our choice. If I can place somebody at XYZ Credit Union for a quarter-point lower, at a lower monthly payment, I'm going to do it, right?
The problem is the customer's loyalty is deeper than a quarter percent. They have their checking, their savings, their mortgage, at their credit union at work. They don't want to be placed at a different credit union they're not used to.
Not even to save money?
You'd be surprised. Some people will pay more to stick to their credit union. And for a good enough customer, the credit union might match somebody else's offer.
Going back to chargebacks, if the deal gets undone, don't you lose the dealer reserve, too?
No, we really don't make a profit on the loan itself. We're not in a geographical area where people allow us to make a big profit on the loan. The days of making two or three percentage points of rate just don't exist for us.
We do 53 percent of the loans we do through credit unions. Most of the time people walk in and say, "Hi, I'm preapproved. I know the rate. I know the term. I know what the payment is if I spend the maximum I'm prequalified for."
People aren't walking in without a real good idea of how good their credit is, asking, "Hey, I don't really know what I want, let's shop around a little and find out." It's the other way around.
How much is a typical flat fee?
You don't really care about losing the flat fee, which is probably going to be 1 percent of the amount financed. So if it's $30,000, that's $300. It wasn't the reserves going away that bothered us. We weren't concerned about the $150 or the $300. It was the $1,200 to $1,500 back end, because when they refinance, you lose everything.
Does the customer's credit union have a "right of first refusal," or is it more like they have a right to bid at the same time as every other lender?
If the customer is trading out of ABC Credit Union, ABC is going to get first shot at the deal -- even if Honda has a special rate of 0.9 percent.
And you haven't sent the credit app to Honda Finance or whoever?
How do you know the customer will qualify for the subvented rate?
We tell the credit union: "This customer is asking for the advertised 0.9 percent rate, would you like to match it?" We know the credit union is probably not going to take it. But they have the opportunity to take it.
This is not entirely unselfish on our part. Without credit unions, we wouldn't be as successful as we are. Plus, we want to keep that back end.