Credit union pilot aims at subprime business

Many credit unions still shy away from subprime auto loans.

But a national trade group is trying to remedy that with a pilot program involving 14 credit unions interested in starting up or increasing subprime auto loan penetration.

The program is aimed at serving as a model for other credit unions to follow, says Mark Lynch, field coach for the National Credit Union Foundation’s Real Solutions program.

The subprime pilot is one of several Real Solutions initiatives aimed at "helping credit unions better serve people of modest means, in a way that is both good for the members and good for the credit union," Lynch said. The foundation is based in Madison, Wis.

“Credit unions are doing more of these [subprime] loans,” Lynch told Automotive News in a phone interview this week. “However, there are still a large number of credit unions that aren’t.”

Lynch said some credit unions that don’t currently offer subprime loans need to start with the ABCs, including implementing risk-based pricing, a model in which customers with the lowest credit scores and the highest likelihood of default pay the highest rates. As part of the pilot program, the National Credit Union Foundation is offering training.

“A lot of credit unions historically said all members are equal. Regardless of credit score, all members paid the same rate,” Lynch said. “Most credit unions are moving to risk-based lending.”

Less demand early on

The single-rate philosophy fit with the early nature of credit unions, which typically were workplace-based. By definition, all members of a workplace-based credit union had a steady job. There was less demand for subprime financing, although Lynch pointed out that even those credit unions still have some members with poor credit.

But since the early 2000s, credit union membership opened up to make people eligible based on where they live. That change helped create demand among credit union members for subprime loans, Lynch said. “Now anybody, or virtually anyone, can walk in,” he said. “It’s not the same as when everybody works at IBM or the Caterpillar factory.”

In the subprime pilot program, the foundation encourages, but does not require, some form of reward for customers with subprime credit that make on-time payments consistently, such as a reduction in the interest rate after, say, one year’s worth of timely payments, Lynch said.

Old hat, for some

There are plenty of credit unions that do offer subprime auto loans. Credit unions have a fifth of the overall lending market for used cars, a segment in which subprime loans are much more common, according to Experian Automotive. Credit unions had a 9.3 percent share of new-vehicle loans in the first quarter and a 20.8 percent share of used-car loans, Experian said

Overall, credit unions were roughly in line with banks and captive finance companies in the first quarter in terms of how much of their financing is to customers with subprime credit. In fact, Experian Automotive said that, proportionally, credit unions had a greater share of what Experian calls nonprime loans -- or loans to customers with credit scores of 620 to 679, which the company considers to be at the high end of the subprime spectrum -- than banks or captives.

However, credit unions had the lowest overall delinquencies and the lowest repossession rate among credit unions, banks, captive finance companies and independent finance companies for the first quarter this year. Those numbers suggest credit unions aren’t making a lot of high-risk loans.

The repo rate for credit unions was only 0.15 percent in the first quarter, down from 0.16 percent in the 2013 period, Experian said. The industry average was 0.68 percent, up from 0.5 percent in the year-earlier period.

‘Benefiting’ members

The pilot program, which was designed by the Filene Research Institute and National Credit Union Foundation, is expected to last 18 months, Lynch said.

He said credit unions want to retain customers who otherwise would have to go somewhere else to get an auto loan. At the same time, he said, credit unions could probably offer lower rates than other established subprime lenders.

“The main reason for us doing this pilot is that some credit unions that are doing these loans and doing them well are benefiting their members, and it’s also good business for the credit unions,” Lynch said. “If a credit union says no, that member is probably going to go somewhere and pay, like, 18 percent. If a credit union does it for less than 18 percent, they’re doing them a favor.”

You can reach Jim Henry at

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