Credit unions urged to begin leasing

DALLAS -- If credit unions want to finance vehicles for ride-sharing or subscription services in the future, they should prepare now by getting into leasing.

That was the pitch to credit union representatives last week at the "Leasing and New Financing Models" session during a conference here sponsored by CU Direct, which runs a platform linking credit unions and dealerships to facilitate vehicle financing.

"Leasing is the entry point" for financing new vehicle-ownership models, in part because it's a way to learn how to set projected residual values for a vehicle at the end of a lease, said John Thomas, CEO of Credit Union Leasing of America.

CULA's indirect leasing program, run in partnership with CU Direct Connect and Centennial Lending, has originated 100,000 leases over the company's 30 years, its website says.

In the aggregate, credit unions have grown steadily and significantly in auto lending in recent years. In 2017, credit unions on CU Direct's network together ranked No. 1 in auto loan market share, followed by Toyota Financial Services and Capital One Auto Finance. Wells Fargo Dealer Services, which ranked No. 1 in 2016, fell to No. 9 after curbing loan originations in recent quarters. That figure tallies vehicle lending only; it excludes leases.

Credit unions largely have stayed out of leasing, even as leasing's share of the overall U.S. vehicle finance market has grown to around 30 percent.

"Less than 5 percent" of the more than 5,500 credit unions in the U.S. do any vehicle leases, said Thomas.

That is unlikely to change anytime soon, judging from the sparse attendance at the session he led.

There are several reasons credit unions have eschewed leasing.

Automakers' captive finance arms predominate in leasing, in part because of subvented leases supported by their parents.

Credit unions are especially strong in used-vehicle financing, and few lenders have successfully and consistently figured out how to lease used vehicles. Used-vehicle lease originations made up just 4 percent of the total lease market in the first quarter, according to Experian.

Leasing is especially strong among luxury brands, which have not traditionally been a major part of credit unions' portfolios.

Credit unions are, in general, extremely local operations, while leasing patterns vary enormously by region. For example, Thomas said leases make up about 65 percent of the market in Michigan. They also are strong in New England, but they are negligible in states such as Texas or Wyoming, largely due to the mileage limits that most leases impose.

Few credit unions have been able to build up the critical mass to make leasing viable, Thomas said. "If you're only doing 20 vehicles a month, you don't have the scale," he said. "It doesn't pencil."

In addition, "A lot of it is due to nefarious activities 20 or 25 years ago," he said. Lenders that had jumped into leasing at the time were badly burned when residual values proved far below the rosy projections they had made. That has made credit unions wary.

But that need not happen again, Thomas added. "Today, the analytics have come so far that it's not even the same game."

Given that lack of leasing history among credit unions, the conference session at times resembled an intro to leasing seminar. It covered such basics as why leasing appeals to some consumers, how monthly lease payments compare to monthly loan payments, the importance of setting accurate residual values for leased vehicles and what remarketing off-lease vehicles entails.

But Thomas and Mason Trullinger, CULA's vice president of residual risk management, also argued that leasing might be attractive to a credit union. Among the points made:

Leasing tends to appeal to more financially savvy and stable consumers. The average FICO score for a lease is 740, Thomas said.

There is "usually an 80 to 100 [basis] point increase in yield" on a lease over a loan, he said.

Leases also have lower default rates, typically less than 5 percent, he said.

"We say this, and people don't believe us," Thomas said. "But we have our credit union base to back that up."