A Look at the Future of Automobile Financing

Experts predict a drastic drop in vehicles on U.S. roads within the next 10 years.

10/16/18

Cars speed by on a freeway.

Where is the future of credit union auto lending headed? Your Association’s Director of Compliance Services, David Curtis, dives into the subject and offers some interesting insight on how credit unions may plan for a decrease in demand.

Today’s article will not focus on recently released announcements from the regulators, but is intended to spark thoughts about where the future of vehicle lending might be heading and serve as a cautionary tale for credit unions in the Northwest.

I recently came across two different articles that sparked the thoughts behind today’s compliance article.

The first was a Credit Union Times article written by Jim DuPlessis. In the article, “Credit Union Loan Growth Might Top 10% – Again,” DuPlessis reviews the Fed’s G-19 Consumer Credit Report, which showed accelerating growth in vehicle and other non-revolving loans for credit unions in August.

“The Fed found credit unions held $391.5 billion in non-revolving debt on Aug. 31, up 9.5% from a year earlier,” DuPlessis wrote. “Vehicle loans account for about 94% of non-revolving loans at credit unions, while they account for 31% of loans among other lenders in June, the last Fed report with motor vehicle loan estimates.”

It’s great news that credit unions are making more loans to finance member vehicle purchases – or is it?

This brings me to the second article, “Why you have (probably) already bought your last car,” written by Justin Rowlatt for the BBC News. Rowlatt’s article took a look into claims from tech analysts who are predicting that in less than 20 years, most people will stop owning cars.

While the article is very compelling, what might even be more compelling are a couple of photographs Rowlatt included in his article. Both show New York’s 5th Avenue. The first was taken in 1900 and if you look hard you can find the one horseless carriage in the busy street filled with horse drawn carriages and carts.

The second photograph was taken just 13 years later in 1913 and if you look hard you might locate the one horse drawn cart in the street filled with cars. How did this happen so quickly? Take into account that Henry Ford rolled the first Model-T off his production line in 1908.

The efficiency of the new mass production methods coupled with the new internal combustion engine changed things as they were known.

Now fast forward to today. Rowlatt discusses the new driverless ride sharing technology and how the efficiencies of these models coupled with advances in electric cars could mean the United States will go from around 250 million privately owned automobiles to about 45 million within a 10 year timeframe once the technology becomes accepted by the mainstream.

Once it becomes more cost effective to just use a driverless ride share the change will happen almost overnight. Why keep a car in your garage that you pay insurance and license fees on if you can use one of these driverless rideshares for less than it would cost you in fuel to commute in to work? And you can use that commute time to read, work, sleep, etc.

This is where these two articles come together. While credit unions are doing fast business with vehicle financing, this market may dry up in a short fashion. Has your credit union started to think about other lending opportunities if these do dry up? There might be a new market in home improvement loans as people convert those two car garages into additional living space if they no longer need to park their cars.

One other thing to keep in mind: the NCUA’s Supervisory Priorities for 2018 included Automobile Lending. Examiners are focusing on material exposure to higher risk forms of lending, including:

  • Extended loan maturities of over seven years
  • High loan-to-value
  • Near-prime or subprime
  • Indirect programs

The NCUA also pointed credit unions to Letter to Credit Unions 10CU-03 regarding concentration risk.  Has your credit union recently looked at the make-up of your loan portfolio, and do you have a large concentration of vehicle loans?

The time to start asking questions and make plans is now.

Question of the Week

Does the credit union have to give adverse action notices to joint applicants and co-signers?

If your credit union denies a loan based on credit report information, the credit union must provide an adverse action notice to each “consumer” involved in the denial of the loan. A consumer includes joint applicants, but not co-signers because “only an applicant can experience adverse action.” Therefore, if your credit union denies a loan based on a credit report, it must send an adverse action notice to all joint applicants, but not to any co-signers.

This is the case even though the Equal Credit Opportunity Act states that adverse action notices must only be sent to the primary applicant. Any denial based on a credit report requires compliance with the Fair Credit Reporting Act, which is the regulation stating that the notice be sent to each “consumer” involved in the loan denial.

In addition, if your denial of credit was in any way based on the credit score of the members, you must send a separate adverse action notice to each person with their credit score on it.

Related Links:

FCRA § 615 (a)

FTC Staff Opinion Letter

12 CFR 1002.9(f)

Legal Briefs

National Credit Union Administration (NCUA)

The NCUA announced that it will host a webinar to discuss using a narrative for a community charter application. The webinar will be held on Oct. 24 and credit unions that wish to participate can register here.

Bureau of Consumer Financial Protection (BCFP)

The BCFP issued a proposed rule that would adjust civil penalties assessed by the BCFP for inflation.

Federal Reserve Board (FRB)

The FRB released its updated Strategies for Improving the U.S. Payment System October 2018 Progress Report.

Social Security Administration (SSA)

The SSA has issued a proposed rule that would prohibit certain criminals from serving as representative payees.

Office of Foreign Assets Control (OFAC)

OFAC has updated the SDN list as of Oct. 4. The last update prior to this was Oct. 2.

Questions? Contact the Compliance Hotline: 1.800.546.4465; compliance@nwcua.org.