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April 4, 2016

CT credit unions’ auto-loan gamble

Credit unions nationwide for some time have been gaining in members, with deposits in these member-owned credit cooperatives cresting above $1 trillion in 2015, according to new federal data.

However, within that National Credit Union Administration (NCUA) fourth-quarter industry financial performance report there is one red flag. NCUA is the federal insurer of credit-union deposits and regulates federally chartered CUs.

According to NCUA's year-end report on Connecticut's 109 state- and federally chartered CUs, their combined volume of new and used auto loans originated by third parties, such as dealerships, has increased along with their overall delinquency rate. Categorized as “indirect loans,'' these totaled $415.1 million, or 8 percent of all outstanding loans on their books, at Dec. 31, 2014, vs. $536.9 million, or 10 percent of all loans outstanding as of Dec. 31, 2015.

A growing percentage of indirect-loan borrowers are 60 days or more behind on their payments — 0.82 percent in the fourth quarter of 2015 vs. 0.69 percent in the fourth quarter of 2014. Though a relatively small number of past-due loans, it's potentially troublesome given the trend of CUs expanding their “indirect-loan'' portfolios.

Connecticut Banking Department Commissioner Jorge L. Perez, chief regulator of state-chartered CUs along with most other financial-services providers operating in this state, says his agency is aware of the rise in indirect loans and continues to monitor state CUs' underwriting and collections related to them.

Perez cautioned, however, that lenders' and regulators' financial reports are merely snapshots in time, and don't always accurately reflect what's trending among CUs' financial performance. Perez agreed that a clearer picture of Connecticut CUs' lending performance will emerge with time.

“We're not aware of any Connecticut-chartered credit unions that are keeping us up at night with their indirect lending,'' Perez said.

Nationally, the rate of seriously delinquent subprime car loans soared above 5 percent in February, according to Fitch Ratings. That's worse than during the Great Recession and the highest level since 1996.

It was a surprising development given the relative health of the overall economy. Fitch blamed it on a dramatic rise in loans with lax borrowing standards that have helped fuel the recent boom in auto sales. More Americans bought new cars last year than ever before and the amount of auto loans soared beyond $1 trillion.

Fitch also said auto loans to borrowers who have better credit scores remain “stable.”

The good news in Connecticut, however, is that credit unions' profitability and overall assets increased in 2015. The state's not-for-profit cooperatives posted a combined $28.6 million surplus in 2015, compared to a $24.5 million surplus a year earlier. Their collective assets rose slightly to $9.6 billion, up from $9.3 billion in 2014. Connecticut credit unions also reversed two years of membership declines, increasing their customer base about 1 percent to 851,579 members

– Gregory Seay, CNNMoney


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