Credit unions emerge from downturn as finance winners

Dealership managers like J.T. Laughridge are a big reason credit unions are thriving in automotive lending.

In the past, Laughridge, general manager of Terry Reid Kia in Cartersville, Ga., didn't work with credit unions much. He turned to them only when trying to finance a customer with damaged credit. But all that changed in 2009 after banks clamped down on credit.

"When conventional lending started to tighten up, we were trying to stay in business and find places to take the loans," Laughridge said. "What we found is [credit unions] have stepped up their buying to pick up the slack. That's actually helped us immensely in our business."

Credit unions are emerging from the recession as winners. Collectively, they hold a higher portion of new and used auto loans. They are writing nearly a third of new loans. In the fourth quarter of 2008, credit unions financed more new loans than auto manufacturers' own captive lenders and have continued to do so in every quarter since, according to Experian Information Solutions Inc., which tracks lending data.

Instead of the old-school sniping that used to go on between credit unions and dealerships, the two are partnering more often. Much of the growth by credit unions has been in indirect lending, with loans facilitated in the dealership finance and insurance office by aggregators that have automated the process.

Many credit unions also have benefited by being more liberal in their lending practices. General Motors Co. even promoted other lenders, including credit unions, for a time after former captive GMAC Financial Services cut off all but the most credit-worthy customers in late 2008.

In Madison, Wis., Zimbrick Honda and UW Credit Union have gotten past what Zimbrick's Dave Kreuser once described as "bad blood."

He remembers dealerships being anti-credit union because credit unions bad-mouthed them and because credit unions didn't pay the reserve that banks paid. That explains the reluctance Kreuser initially felt when contemplating a closer relationship with UW in 2008.

But Zimbrick shares a lot of customers in Madison with the huge credit union. It would be "ridiculous" if they didn't try to work together, said Kreuser, general sales manager in charge of the Honda store and four other Zimbrick stores.

Today, the earlier reluctance has been erased.

"They do a good job for us, and we try to do a good job for them," Kreuser said. "They're trying to get their members to close their loans at the dealership. And their reserve payout is better. It's not as good as a bank still, but at least they're competitive."

UW pays a flat 1.25 percent of the loan amount.

Today, more than 10 percent of sales at the five stores Kreuser manages are financed through credit unions, he said. Last June, when the two parties co-promoted Zimbrick's annual birthday sale, the rate topped 25 percent.

UW built market share with dealerships to new heights in 2009, said Mike Long, the institution's chief credit officer. Auto loans were up 13 percent. Indirect auto loans soared more than 50 percent.

Long credits the growth to technology. UW began using Credit Union Direct Lending in 2007. By offering an electronic point-of-sale system in the dealership, the credit union was ready to capitalize when banks began pulling back, he said.

"There's even a bit of a flight to safety for dealers," Long said. "They like the local decision-making and the consistency of the decision-making."

According to Experian Information Solutions, of Los Angeles, credit unions' share of all outstanding auto loans topped 24 percent in the fourth quarter of 2009. That was slightly more than 1 percentage point higher than the same period in 2008.

Credit unions are grabbing even more new loans -- nearly one-third of the market in the last three months of 2009. During the worst of the credit crisis, the fourth quarter of 2008, credit unions' share of new loans reached nearly 36 percent, Experian said. It fell back some, to just under 32 percent in the fourth quarter of 2009, as other lenders became more active.

Competitors are taking notice of the surge by credit unions.

"It's true that credit unions have certain tax advantages, and they've changed so that anyone can join," said Steve Smith, senior vice president of American Honda Finance Corp. "That's put them in indirect lending in a way they weren't before.

"They're a challenge."

Tony Boutelle, CEO of Credit Union Direct Lending, which administers the nation's largest online lending network for credit unions and dealers, said credit unions are now entrenched in auto lending. And, he said, they won't turn back despite the rebound in underwriting from banks.

Credit unions' market share of new-vehicle loans likely will slip a little more from the highs of the past 18 months, Boutelle said, but dealers and credit unions are long past the days of oil and water. Dealers tell him: "Credit unions kept us in business" in 2009.

Laughridge, manager at the Georgia Kia dealership, said he turns to credit unions now as an everyday option. In 2009, about 15 percent of the dealership's volume was financed by credit unions, up from about 5 percent in 2008.

He expects that rate will continue to grow. Many credit unions operate in Terry Reid Kia's rural market, and they have been competitive on rates and dealer advances. In January alone, credit unions financed about a quarter of the store's deals, Laughridge said.

Because credit unions are more likely to finance older, higher-mileage vehicles, Laughridge even has changed his approach to used-car sales. He is keeping more vehicle trades on his lot instead of sending them to auction. He's only sorry he didn't embrace credit unions sooner.

"Everyone's getting a shot, and the playing field has kind of evened out," Laughridge said. "Last month, a lot of the banks said, 'Where's this business going, J.T.?' Well, it's going to credit unions."

Jim Henry contributed to this report