Aug. 24, 2010

Credit Union Management magazine’s Web-only “Loan Zone” column runs the fourth Tuesday of every month.

Experience with indirect auto lending led Schools Financial Credit Union to start offering its Flex-Rate program five years ago.

“We had dealers who would write contracts at a rate lower than ours based on another lender’s rates, but we would end up with the contracts because the other lender refused to buy the contract, or the member wanted to use Schools Financial CU’s financing,” says Tim Marriott, VP/lending for the $1.3 billion credit union in Sacramento, Calif. “In those situations, we allowed dealers to pay us a calculated amount in order for us to book the loan at the contract rate (which was lower than our normal rate).

“So, we had been doing rate buy-downs for many years. But, we thought it could be an attractive thing to dealers to be able to choose what rate they wanted to offer for promotional events or just to be able to close certain deals for rate-conscious consumers. We built a model to be able to determine a buy-down cost for any rate that a dealer wanted to offer and branded the program to be able to publicize it to dealers.”

Initially, the CU mailed information about the program to all the dealers with which it had an indirect lending relationship. In addition, the CU’s business development officer visited the dealers to tell them about the program.

“We continue to send out monthly rate sheets to publicize the program,” says Marriott.

The Flex-Rate program rate sheet gives the dealers examples of what it would cost to buy down various rates, he explains. For example, if a used auto loan rate is 6 percent, the rate sheet would show how much it would cost the dealer to buy down the rate to 4.99 percent, 3.99 percent, 2.99 percent and 1.99 percent.

While Marriott can’t talk about exactly how much dealers pay to buy the rate down, he can say that dealers often look at the “cost per thousand”—how much buying down the rate will cost per thousand dollars financed. For example, if the rate buy-down cost were $20 per thousand, and the amount financed were $20,000, the cost to buy down the rate for that loan would be $400.

“Although dealers are free to write contracts at any rate they want to in the program, the rate sheet we provide monthly has some of the more common rates they might use,” Marriott adds, noting that there are no restrictions on which dealers can participate in the program.

The CU has a $326 million auto loan portfolio, is closing 300 to 400 indirect loans a month this year, with 10 percent being Flex-Rate. Marriott says the program allows the dealers to advertise 0 percent financing, but many deals come in at 1.9 percent or 2.9 percent.

The program also has paved the way for dealers to hold one or two sale events each month, offering low rates.

“As long as the program continues to be useful, we’ll continue to run it,” Marriott says.

Lisa Hochgraf is a CUES editor.