Waiting for the Other Shoe to Fall

As credit unions contemplate the end of 2020, it’s no surprise there is some consternation. The U.S. added 1.4 million jobs in August as employers brought back workers and the unemployment rate fell to 8.4 percent. But for those employees without jobs, the lack of government stimulus has raised the specter of missing payments and potential eviction. Consumer confidence continued to slide, reflected in the Conference Board Consumer Confidence Index®.  The Present Situation Index, based on consumers’ assessment of current business and labor market conditions, decreased sharply from 95.9 to 84.2. The Expectations Index, based on consumers’ short-term outlook for income, business, and labor market conditions, declined from 88.9 in July to 85.2 this month.

On the financial side of the equation, the Federal Deposit Insurance Corporation released its quarterly report recently, showing in stark detail how the pandemic is ensnaring banks big and small. Profit margins hit an all-time low as institutions stashed away reserves to deal with potential future loan trouble. Conversely, fee income hit a record high, as consumers also stashed away cash. The report signaled that financial institutions anticipate a longer, deeper recession than the original forecast. While government stimulus offered a temporary reprieve, it likely just delayed the pain. Many lenders are bracing for a wave of defaults. With the Federal Reserve expected to keep interest rates low for the foreseeable future, lenders will need to increase fees or find other ways to replace some of that income.

Auto Loan Money to be Made

But there were a couple of glimmers of hope as we closed out the summer months. Used-vehicle lending remained a bright spot for credit unions as used-car values continued to climb. While credit unions struggle to compete for new-car consumers with automotive lenders who offer zero percent interest and seven-year notes on new vehicles, credit unions continue to remain in the fight for used-vehicle auto loan volume.


Opportunity for Credit Unions Ahead?

It can be challenging to think strategically when each day brings a new challenge, a new directive, a new mandate, or a new situation impacting your business and the community. The second quarter was a tale of two cities for credit unions. April reflected a precipitous drop in most aspects of the automotive and financial markets, thanks to shelter-in-place mandates and the pandemic sweeping across the country. But May and June told a slightly different – and somewhat better – story. Light vehicle sales were only down 24 percent in June as compared to 2019, year over year. While in a normal year, dealers and lenders would decry that number, this year there was a round of huzzahs! That’s just the world we live in these days.

Credit unions started the year on an upward trend for automotive lending. Average loan amounts continue to increase according to the latest Experian State of Auto Finance Report. In the first quarter, new vehicle loan amounts averaged $33,739, and used vehicle loans totaled $20,723 on average. Buyers also increased vehicle payments, with the average new vehicle payment jumping to $569.

After leveling off through much of May and June, financing rates dropped to their lowest level of the year for the week of July 15 to 4.24 percent, a decrease of 0.09 percent from the week prior. Rates held steady for the week of July 22, but were down 0.36 percent since the beginning of the year and down 0.49 percent from 2019 numbers.


Recognizing Bad Actors

The Association of Certified Fraud Examiners (ACFE) calls it the Fraud Triangle – pressure, opportunity and rationalization. But dealers and auto lenders call it, “Yet one more thing to deal with during the pandemic.” As economic stressors continue and employees are increasingly burdened with coronavirus countermeasures, the risk of auto lending fraud slipping through the cracks grows.  

How can you keep your credit union – and your dealer partners safe? Keep an eye out for the traditional bad actors as well as the new tricks these bad actors are deploying.

During the early days of the pandemic, dealership doors were shuttered and consumers remained sheltered-in-place. The trend toward digital sales accelerated, with dealerships forced to conduct business online and via phone. For Group 1, one of the largest auto retailers in the nation, online-generated sales tripled in May compared to pre-COVID-19 usage.

An online-only platform means verifying financial details and detecting fraud before the deal is passed to the lender has become more challenging. According to a recent report from Javelin Strategy & Research, total identity fraud losses reached $16.9 billion in 2019.  Account takeovers rose 72 percent in 2019, with the criminal taking over a full account in more than half of the instances. When taking over an account, criminals assume an identity with multiple account updates such as: