Some of the Open Lending team had a very pleasant time in Ocean City, Maryland, this week at the Maryland & DC Credit Union Association Annual Meeting, but it wasn’t all sun and crabs. There was a lot of great information about the economy and auto lending we can’t wait to share, so let’s get to it!
Dr. Elliot Eisenberg of Graphs and Laughs – excellent speaker by the way, especially for an economist! – shared that consumer spending is good, government spending is weakening but still good and overall, with those two things in mind, it’s difficult to see a recession on the horizon, but his prediction is up to a 35% to 40% change for a recession by 2020. Even at that, he expects it will likely be mild.
Even as consumer debt rises, it’s nothing like 2007 when it skyrocketed and no one really knew what or where the debt, or the quality of it, was, Eisenberg explained. It was hidden in the shenanigans of the no-doc and liar loans of the housing crisis. Now, he said, at least we know student debt and affordable housing are chronic problems. Auto loan defaults are growing but the primary culprits are finance companies getting deep into non-prime loans, not banks and credit unions. (If you’re looking to safely help members with near-prime auto loans, definitely contact Open Lending; we ensure – and insure – strong loans for credit-challenged consumers.) As far as the effects of potential tariffs, he added, it’s hard to say how consumers will react because nothing like this has happened since the 1930s, but that as well as geopolitical issues could be what tips the US into recession.
But rates won’t be doing credit unions any favors, because the Fed is likely done with rate increases for the time being to avoid inversion, according to Eisenberg. However, they also can’t afford to drop them until they have to with only a couple hundred to play with. He concluded the recession may be mild, but it will be difficult to dig out because of the already low Fed rates. Even after an inversion it will take nearly a year for a recession to hit, he advised.
Karim Habib of CUNA Mutual got down into the nitty-gritty of credit unions’ data. He pointed out that credit union auto loan balances are at record highs, experiencing 9.4% CAGR between 2012 and 2017. Credit unions have grown the most market share at 14.8%, with 20.1% of the growth coming through indirect loans and direct loans trailing behind in growth at 8.7%.
Auto loans are projected to continue growing as a percentage of credit union loans to 61% by 2021, according to Habib, and with most of that growth coming from indirects, which can be difficult for credit unions to build deeper relationships, that will affect profitability in these times of already cramped margins.
Between 2015 and 2017, credit unions grew auto loans by 22%, but consumers who consider their credit union their primary financial institution only increase 7%, meaning the non-PFI members of this segment grew 44%. Overall, Habib explained, non PFI members are up 13 percentage points, but share of wallet is down 3 percentage points, negatively impacting profitability.