Riding the Refi Wave: How Credit Unions Can Capture the Moment

0:00 Only large credit unions can compete in the auto refi space. Capital at fiction. Yes, there will be a surge coming once rates come down. I think the question is when a rate's going to come down. A lot of people don't necessarily know about can you refinance or auto loan? Like it still seems like there's a little bit of education out there. You think the consumer even knows what their rate is? Most often probably not they know what the payment is. Welcome to leaders in lending. This episode was recorded in mid August, so some of the content today is subject to change. Today we're going to talk about this auto refinance surge that could be coming. Right. The FED really hasn't moved rates for quite some time now, but there's talks depending upon which paper comes out each week of when they will reduce the FED rate. So there's this refinance surge that could be coming. Is this asset category is near and dear to credit union? So I would love to get your post perspective on what is driving that outside of you know, the FED potentially reducing rates.

1:03 Is it we're already in a refinance crunch or is it coming? How are we going to support it? So i'd love to get your perspective on when it's coming or is it already here? Sure? Did you intentionally say driving by the way because we're talking about a noun anyhow, So you're right, Drew. It's been about a year since we last saw a FED fund's decrease. In fact, we saw three decreases the last year of one hundred basis points total. And what did that do to the interest rate environment? I mean, the market didn't change at all. In fact, if you look at the tenure rate today is roughly the same as what it was two years ago. So that tells me that we haven't necessarily seen any sort of change in auto loan rates in the past two years. And yet the majority of originations and auto loans have been in some time between now and say, the last three four years. So yes, there will be a surge coming once rates come down. I think the question is when a rate's going to come down, Because those last three rate cuts really didn't have any impact on the interest rate environment. I don't know if the ones that are contemplated this fall, with everything else going on in the economy, are really going to have that intended effect on loan rates as well.

2:11 Yeah, and I definitely think that you know, we all saw during obviously during COVID what happened to the auto markets, and you know that new cars were hard to find, use cars sold at increasingly high prices. And I think that what we've been seeing then in the last few years is more new cars are actually the ones that are being financed while they're now back available. There's less use cars available, and so people are generally then going through a dealership buying a new car, and so may have loans that are more attracted or refinance and a car that has taken less depreciation over time because it's nowhere. That's a good point, you know, around the new cars the evaluations are holding three four years ago. I remember in our Credit Union looking at these new auto loans coming through because they were overvalued used cars just because there was less supply available, and thinking, how are we going to collect on this in three or four years given more values were at the time. And I think that sort of happened, is that valuations dropped so much for used vehicles in the past three four years that doesn't necessarily have as much of an impact. Now, now what that means from an auto refive perspective for those loans that were originally two three years ago is you're going to have to really be very clear on valuations and if that makes any sort of change your policy around the loan to value that you be willing to accept, or if that impacts your pricing in some way, if you want to have some sort of a premium placed on that high loan to value auto.

3:34 On It's a near and dear subject to my heart because about not quite four years ago, I had one of my children got her driver's license and we had to buy her a car in the midst of historically high used car prices. And now my youngest is about to turn sixteen, and things look much better in the middle one, maybe a little jealous of the youngest is going to get potentially a nicer car that's a lot less money, a brand new car maybe most likely a brand new versus a couple of years old. So on that, Linn, you touched on that. The in the auto space right now, there's more new vehicles that are being purchased at dealerships. It's no longer kind of this used versus new type of mentality. If you think about though, people that got into a car such as there they bought their daughter a vehicle or so. The rates that they were offered back then were decent in a sense, probably somewhere between the high sixes mid eights, depending upon credit quality, things of that nature. But the newer vehicles that they're now selling are much higher trim packages, higher payments at aprs right now that are still fairly high.

4:39 What do you think moves the needle for people to go back to purchasing new vehicles or refinance there existing? And how many basis points does the FED reducing Does it make sense for them to go into a comfortable payment if they were to buy a used or versus. New, Yeah, I mean in a refin deal if there's no other sort of fees associated with it, and typically there aren't. If I can reduce my payment by twenty five dollars, why wouldn't I do that? You know, if I'm able to even stretch out the term a little bit. Your cars are lasting a lot longer now too, right, So what's the average age of vehicles on the road right now? It's over ten years just because quality I think is way better than it was a generation to go.

5:19 So maybe I'm willing to extend that term out a little bit in order to get a little bit of a lower payment, even if my rate isn't necessarily all that different. Well, I certainly know. I know on one of our prior episodes, we had some of the folks from Experience on who specifically lead their auto market in the credit report and credit scoring area, and they're seeing a lot more of that, like those longer terms, that people are taking a longer term now, whether or not they hold that car for very long, they're willing to take a longer term in exchange for a lower payment, And I think that is a big focus at payment versus rate is ill for most people the biggest number that they look at, even though the rate long term can mean more, but it depends how long they're going to keep that car, or if they're going to trade it in in three years, or they plan to actually.

6:12 Pay it off. Our Credit Unis even did ninety six month loans for new vehicles, and we could even charge a little bit of a premium for that ninety six month loan and make a little more yield off its So and what's stopping you from doing that? In the refine market, you can do the same sort of pricing approach and take a few more basis points to make that to improve the profitability. Of the product. The refied surge is coming. We're kind of aligned there. You think about the macro though right now inflation, who knows. Delinquencies are up across all different asset classes. But for people that are coming through in this refinance surge, and this being the bread and butter of credit unions of auto lending, do you think they're going to have tighter policies? Is going to be more of an open book with valuations and terms so on and so forth. What are your general thoughts on how tight things become or is it going to be kind of an open book.

7:01 I'm really interested. I'm really interested in Barrie's answer on this. But you know, I know, particularly with tariffs as we were, you know, they've been on again, off again, on again, off again. As it relates to cars, as it relates to it to automotive parts, there was a surge of new car purchasing that happened towards the enda last year earlier this year, and where people were probably buying ahead of when they really wanted to buy a car because they were afraid that if I wait six months or three months even this car is going to cost me thousands of dollars more than if I buy it right now. And you saw dealerships out there pushing that too, saying, hey, buy what's on the lot right now, no tariffs on these vehicles. And so I do think you have a lot of people who probably paid more and took higher rates than they would have because they were worried about the macro changing. And so doesn't really kind of answer that specific question, but something I'm thinking about just in general about the macro environment.

7:53 Yeah, we're going to see how resilient the American consumer is with this. The cost of tariff's going to be passed on to the buy or are the manufacturers and the dealerships eating a bit of that? And if so, then doesn't that mean it that we might see the return of zero percent for seventy two months at some of the captives and so on. So I'll say that the macro could fundamentally shift a lot of the demand for auto loans, maybe even away from banks and credit Unis that's possible. It's kind of a wait and see attitude. I think what you do need to have, though, is a very flexible policy and a very flexible pricing structure.

8:34 You know, we used to set and forget it auto loans when rates didn't move all that much, and that was the wrong approach then. I think it's really the wrong approach now. I think you've got to be so on top of what's happening in the marketplace, what's happening with consumer behavior, and make sure that the loans you're bringing on are actually going to be profitable for your program, and maybe you make that choice to not try and be as competitive in the marketplace. I was talking to a ANY partner last week in Texas and they're just seeing where in a very highly competitive, large metropolitan market, they just couldn't see a way that they could remain competitive in that aut alone space. So they've actually backed out a little bit and they're doing a lot more sort of internally with their own membership because they're a fairly large credit union, but they're not chasing a lot of that indirect business today. That doesn't mean that's going to be that way a month from now or even two weeks from now, but they've made that conscious decision we're not going to chase rate right now, with valuations perhaps being a little higher than what they would be the residual value if it ever did come to repo.

9:40 Well, maybe that's a good opportunity for them on REFI though, right that, if they're not going to chase rates on indirect they could potentially, though, make that deal on refi. You've got some payment history on the same car, you could offer a better rate there. And I do think it's just a product that a lot of people don't necessarily know about too, is that can you refinance your auto loans? Seems like there's a little bit of education out there. I think some people do know that, right. I have a really good example. A friend of mine purchased a vehicle back in January the tariff unknown right, walked out of their super prime borrower with probably a nine percent type of APR. Knew he could refinance that, of course, but he just wanted to get that trim package of that color off the lot that day. Then was able to refinance, you know, fifteen thirty days later at much more favorable types of terms. Do you think there's a lot of consumers out there that are knowledgeable that they can go do that because credit unions, of course offer somewhere between two three hundred basis points lower than what they're offering in the dealership.

10:35 There's danger with that approach, though, right, I mean, how many people do you know got into houses thinking oh, yeah this is the howth that wanted? Yeah, yeah, Rechel turn this is six and a half. Value will stay the same. But right, and where are we now? You know, thirties are still above so we haven't seen a thirty above or below six percent in quite some time, right, And or maybe things change for their financial profile. Now you're not as super prime as as you were before. So I think that is a bit of a risky proposition to answer your question, Drew, though, yes, I think there are there's a segment of borders that that inherently understand that. And in your friend's case, he's like, no, this is one I want. I'm not gonna wait. I'm going to get it now while I can, because who knows that that particular model with that trim package is going to be available when I'm ready to pull the trigger six twelve months from now.

11:22 On that going back to a point that you made, Barry that credit unions are kind of pulling out of the interrex space not chasing rate. However, credit unions are now matching market share of that of banks. Why do you think that is if they're not chasing rate knowing that credit unions have more competitive rate offerings because they're more member based rather than shareholder base. Yeah, I'll say, look, some have made the choice to maybe not chase rates, whereas for others it's the bread and butter, and it's sort of a maybe a fundamental or the primary product that helps them front a profitability. But look, you and I know from our credit union experience that you may not necess really make a whole lot of profit off of the loan itself. It's those add on products, it's gap, it's it's the mechanical breakdownsurch things like that that in an indirect relationship for the for the credit union, that's where I think the real value comes from. And then of course, now you've got that brand new member that you can maybe sell that second third product to.

12:20 As well, or you can start them out with a personal loan and then refiy their auto into a better deal. Now to get to that which is first and second, Yeah, sure, definitely, definitely, all right, so thinking about this surge of auto refinance demand, right, we've heard this for the past two or three years, this this l word of liquidity and it being an issue for credit unions and even in banks. In some aspect, things are starting to come back in line, but we still hear quite often that there's liquidity pressures and concerns. If we have this surge of demand, how do you think credit unions are going to be able to take their capital and put it to work, or they're gonna have different avenue of being able to going back to no pun intend to drive additional auto loan growth.

13:04 Liquid is still a concern out There's certainly not like it was two years ago after some a couple of spectacular bank failures that occurred. Like when you're seeing in that Lending Professionals chair, there's a little bit of a hope of a prayer that perhaps if you if you come to an inflection point in your balance sheet, that you're able to either bring new deposits in at a lower rate, or perhaps fed funds rates are a little lower, so your boring costs are a little bit less. My credit unions we tended to maybe take more of an approach of let's try and get as much as we can now at what rates that we feel are going to be meaningful and desirable for the credit union, and sort of worry about how to sort of fund it after knowing that you can sort of turn that spigot off, especially on the indirect On the direct side, it's a little more difficult. You want to have you want to have dollars available for those direct members who are coming to you. They want to deal with with your institution for an auto loan, so you better make sure we've got some dry powder to be able to fund those.

14:08 Yeah, And I definitely think the efficiency of underwriting products like auto refy is helping, right, Like the cost of customer acquisition isn't as high with digital channels that you know, kind of cost per funded loan to convert a REFI application, particularly if you're partnering with a vendor that can offer a digital experience and you know, remove as much kind of manual intervention with both the refi, the retitling. The increase of electronic lean and titling in states and how that's continuing to grow, whether it's electronic leans or whether it's EEno rise and remote online notary sorts of services that the cost to originate each whetherether it's an indirect loan or a direct loan or or an auto refinance.

14:54 I think the cost to originate each loan is depending on how you're doing it, concern be declining and on that. When you think this, when you think of when this surge does come from an operational perspective, you have to probably put more FTE towards all the operational pieces of lean transfer, payoff things of that nature. Right to credit unions. Are they going to automate that in some fashion through third party vendors? Are they going to have to hire more staff to be able to support this? What's the overall cost going to look like from that perspective with third party vendor versus you know, in in office staff in house. Yeah, And I think it's one of those things that you know, we've talked about a lot with a variety of other products, like you can certainly choose to partner to do that. I mean, you don't have to build it all yourself, but if you are building it and running it in house, you can theoretically do it with less people than you would have had to do ten years ago, you may not have the need to, you know, vault paper copies in office, but there's any number of vendors that they could partner with at this point, even if you're doing the originations yourself to do that electronically and transfer, titling, maintenance, middleware solutions, ELT vendors specially that know the rules in various states, especially if you have a national footprint and you know that you know, Michigan just switched to take E notary and now you know they used to require a paper signature. Those sorts of very specific even county specific rules sometimes get very nuanced, and so I think, like you really have to make that decision. Do you want to build and staff for

16:24 all of those things and then try to monitor all of them or is that a better option to partner with a vendor who who does that as their kind of core competency. Yeah, ten years ago that was people systems tasks, then auditing of that right the whole risk management compliance elements of it, and now those resources can be allocate for other operational aspects of the the lenning relationship. It's not to chase down titles, it's not to deal with DMV it's no longer necessary in some of these states. And that speed gives the member of good experience of refinancing my loan. Do I make my payment with this banker credit union that I already had my loan with.

17:06 Now I know that things are happening much quicker, and you're just more comfortable going back to the whole point of this surge coming and having the capital. What are your thoughts. I know we talked a little bit about kind of margins being very thin with captive rates. Do you think most credit unions or many credit unions are going to try to off what's on balance sheet right now, not yielding much from a sale perspective, participation perspective, and then front loading with these higher aprs than what they were, you know, two or three years ago. Love to get your perspective on is that kind of a combo of a capital mix or. I mean, that's a great strategy if your liquidity challenge it's a it's an excellent strategy, especially in that case.

17:49 You know, a lot of consumer lending professionals I think sort of look at the like, I've got that loan, I don't necessarily want to give it up. Not. Many are sort of churning their folios in a way from both a risk management and a pretty management perspective to sort of make sure that what's on the balance sheet is really sort of hitting what the income statement requires right now. I think that's that's kind of an elevated approach that all credit us should be considering because there's certainly a market for it. While some creditings professionals that I've spoken to are having no problem with growth this year, twenty five has been abundant for auto loans.

18:31 In fact, in some cases they're like, no, no, we're good, We're way ahead of planning. Wow, m Q one teriff unknown Right. Well, maybe, and so maybe that was part of it why there was a bit more demand. And you know, creditings traditionally, as you get into third and fourth quarter, it's like, gee, we should pack our balance sheet a little bit more. So, let's get out and buy some of the secondary market. And the secondary market always gets a lot more active sort of in the second half of the year. But yeah, I think that strategy, Drew is a really really sound one. Well, if today's episode got you thinking differently about auto REFI connect with myself, Lynn or Berry on LinkedIn. We're always up for continuing the conversation and hearing how credit unions like yours are putting ideas into action. All right, it's time for factor fiction, where we're breaking down real opinions about auto refinancing and deciding if we're on board or not.

19:19 So. First question, there's probably some differences of opinions here. Only large credit unions can compete in the auto refi space capital f fiction. It's a little harder and new and used auto. Let's be honest in the indirect space, at least, you know, in my foreign geographic mark in southern California, there were just some large institutions, both banking credit unions that would tend to sort of buy buy rates in the indirect side, on the auto refi side. No, this is this is game for everyone if you have the right partner, if you have the right processes and systems in place to sort of not only find those refi opportunities but price them accordingly. I think this could be profitable. Whether you're a fifty million dollar crediting or a fifty billion dollar crediting, you could do it.

20:05 Yeah. I think the second part of that is what I I'd probably lean into like if you can either find the right partner or build the scalability, like even for Refi if you you know, I think interact direct much. You've got to have the relationships with the dealers and and you know, different for a smaller organization, but even for a smaller organization that maybe that bread and butter auto Refi product where they're offering it to their members or marketing it to their whether it's their selecting player groups or their community. Being able to then actually build the operational efficiency, and whether you do that yourself or your partnering, I think that's going to be key for them to be successful, to make the margins work all right. Second one, we've talked a little bit about this with potential of chasing rates, not chasing rates. Rate shopping has made auto Refy a race to the bottom.

20:53 I think I'd. Actually challenge that and say fiction, because I'm not confident that people consumer behavior really like, really they shop around that much? Are you offering them a lower You only need to beat the rate that they have today. You don't need to beat every rate in the market. And if you have that relationship, particularly if you have a relationship with the member and you're doing this campaign out to kind of cross sell deep in relationship through your existing members. Are your rates better than what they already have? And can use data to answer that question? Right like you presumably may have their DDA data you can do you know, soft credit polls. Can you get an idea of what the average rate is on your consumer base and then market below That doesn't have to be the actual bear market minimum, but it has to be below where they are today.

21:42 Yeah, agreed. I also agree it's fiction. On the deposit side, I can go and find rates very easily through some simple Google searches. It's a little more opaque. On the autoifi side. I almost have to go institution my institution because of risk based pricing and because of the value the vehicle and the LTV and you know, there's a lot of different factors as opposed to here's a CD, here's here's the term I'm looking for. So I think that that that consumer that border is a less rate sensitive. It's more about are we are we providing that offer to them in the right method that they're looking for at the right time of what they're looking for, and is there enough value either in a lower rate, maybe a lower payment, or maybe a lower term. Maybe I want to pay this off a little faster.

22:32 It's just about to ask, do you think the consumer even knows what their rate is? Most often probably not. They know what the payment is, yeah, yeah, they know their payment, but even yeah, even term like they like I said, yeah, thirty eight, thirty six, forty eight. Yeah, who cares at that point? Right? Yeah? Yeah, So on that rates, rate offers beat trust in attracting refi customers. Rate offers beat trust in attracting refi customers. I would say, fat, I think while you don't need to race to the bottom on rate because to berries when it's more opaque and harder to get to a kind of general refine market rate number. If a consumer believes that they can get a better loan, whether it's a lower rate, some sort of better terms, lower payment, even if that extends maybe the term of the loan, if they don't know your organization, well, they still may accept that offer if you've presented it in a way that's compelling and then made even that relationship with you.

23:31 I don't think they need to start with that relationship to then select the auto refive product. Yeah, not a lot of credit unions are contacting their members and saying, hey, we can lower your auto rate auto loan rate for a loan that's already on their books. That tends to not happen unless there's some compelling reason to do it internally, whether it's from a relationship building perspective that hey, Drew, you're paying eight percent, Now I can get you down to seven, even though in some respects I'm sort of I'm canpibalizing a little bit of my own income stream. But maybe there's a reason for that. Maybe it's to deepen that relationship, or maybe there's a spiff for Drew, like hey, if you take this product or you know, like a second productor or some other ways or of building that relationship. There's got to be value in it for the credit union to do that.

24:21 But the refine market, let's face it, it's basically I'm taking your loan and then Lynn's going to take my loan, you know, the next time rates. That's kind of the way the market works predominantly. My last one here is auto refi is a valume play, not a retention play. I would say that's a fact. I think that someone who's looking to refy their loan. It certainly isn't loyal to the whoever originated that loan in the first place. So on the buy side, as I'm trying to get more auto loans into my credit union, yeah, that's just the more volume I can get that's gonna be profitable.

25:02 Then it really is more of a volume play. Yeah, I'll second Bary. Nothing to add on that one. Awesome. Well, thank you for tuning in to this episode of Leaders in Lending. We will see you next time.