Interview with Charley McQueen:
Credit unions kicked auto lending up a notch in 2017. In the second quarter of last year, the NCUA reported that new auto loans had risen 16.3% from the year before – a continuation of what had been a long term acceleration over the preceding several quarters. However, while the numbers may look good overall, there are a number of warning signs that this growth may not be sustainable at this rate, and that perhaps credit unions should grab the wheel and correct course before the road ahead gets treacherous.
THE CHECK ENGINE LIGHT IS ON Some of the warning lights are already flashing, according to Charley McQueen, the president of McQueen Financial Advisors, and many credit unions aren’t heeding to the signs. “The growth of auto lending at credit unions is not sustainable,” McQueen believes. “One of the things people don’t pay enough attention to in the credit union industry is return on equity.”
While return on equity (ROE) governs growth in the long run, there are signs that credit unions are growing above their long-term ROE levels. McQueen says his clients report losing an average of $12,000 a loan, up from $3,000 several years ago. “What we’re seeing is that a lot of the lending is financing in some substantial negative equity positions at the time of acquisition,” McQueen says. “I think the losses are up because of that negative equity being put in and people not looking at risk appropriately. Not many people are looking at real loss rates correctly.”
Other warning signs include the majority of loan growth coming from indirect car loans, and lengthy loan terms wherein the car’s depreciation outpaces the amortization term. In November, the Consumer Financial Protection Bureau reported that 42% of new auto loans now carry a term of six years or longer, a steep rise from just 26% in 2009. Having recognized the growing dangers, some lenders are already taking a step back from indirect lending.