BY JEFF JOHNSON
I have read articles recently describing the potential rise in auto delinquencies and charge offs. I often wonder to myself as to how applicable these numbers are to credit unions or to a specific credit union. Historically credit unions have trends that differ, or that may not be as pronounced, as other lenders. Also, some trends may only be specific to certain regions. It is important to analyze these trends using credit union and regional data.
I made note of some vehicle delinquency and charge off trends that I found useful. While this data is credit union specific, I cannot go into every credit union’s geographical detail in this article. I will, however, illustrate the importance of doing an analysis on regional data.
Total auto delinquencies and charge offs are on the rise, but much of that may be due to total auto loans increasing at the same time. Looking at the data may calm some concerns or point out where the concern should be concentrated.
For the credit union population as a whole, it appears vehicle delinquency rates, although seasonal, have been almost flat over the last few years. So far, we have not seen the rise in vehicle delinquencies for credit unions. We have, however, seen a rise in vehicle charge off rates as shown below.
Seeing this increase in vehicle charge offs should raise some concern and deserves some further analysis. It is important to look into whether or not this is happening locally as well. Here is the same graph, but I have filtered it by the state of Utah.
In Utah the vehicle charge offs are much flatter, with a slight rise in the used vehicle charge off rate. When I continue to narrow it down to the county level vehicle charge offs even show some decline.
Understanding the trends regionally and how they may differ from national trends helps management to properly serve credit union members. Knowing the regional delinquency and charge offs can be useful in forecasting loan losses, strategy, and pricing.
Going back to the increase in vehicle charge offs nationally, it is important to consider why this may be happening. Is it due macroeconomic conditions? Or is it due to lending practices adopted by credit unions? While we may not be able to see changes in credit scores from call report data, there are some other factors we can look into.
Over the same timeframe as the increase in vehicle charge off rates, the average life of non-real estate loans has been increasing. I have seen many credit unions begin to offer vehicle loans with longer and longer terms. I have even seen one local credit union offer a 9 year auto loan. These longer terms allow for less paydown of the principal each month and may paydown slower than the depreciation of the vehicle. This contributes to collateral risk, where the value of the collateral does not cover the loan principal amount. Another way to assess collateral risk is from loan recovery rates.
As can be seen from this graph, the percentage recovered after a loan is charged off has continued to decline. It also seems credit unions are becoming more willing to lend money on greater than 100% of the vehicle’s value. That carries an inherent amount of collateral risk that could be greatly contributing to the increased charge offs. In contrast, the 1st mortgage recovery rates are increasing dramatically. The increase in housing prices has greatly reduced the collateral risk, at least at the current prices.
Lending practices can have a large effect on vehicle delinquencies and charge offs and may vary from region to region. Reviewing the data trends can give insight into some of the practices that may be contributing to the increase in vehicle charge off rates. The increase may be coming from longer term vehicle loans and lending at above 100% of the value of the vehicle. These practices can be seen as preferential to the member, but may lead to further financial burden. The negative equity the member has in the car also prevents them from being able to purchase a future car. Many times, the negative equity even gets rolled into the next loan which exacerbates and pushes the problem further down the road.
Some of the analysis out there may be deceiving or not applicable to your credit union due to the type of lender or the geography. We have created a new Peer Analysis tool that allows you to customize and filter call report data into meaningful reports for your credit union. It can be filtered geographically, by asset size, and even down to specific credit unions. The graphs in this article were generated from our Loan Loss Peer Analysis tool. We also have Balance Sheet, Income Statement, and Rate Peer Analysis tools. The Peer Analysis suite is easy to use with pre-generated reports and is competitively priced for the smallest of credit unions. The interface is all interactive and accessed online using a username and password. Our goal is to provide every credit union with the ability to have access to meaningful and robust peer analysis reports. We will be launching the Peer Analysis suite at the beginning of 2018. Please let us know if you are interested in more information.