Crack the Credit Union Code

Credit Union Land is a strange and wonderful place for dealerships that are able to crack the code. Credit unions are a tremendous resource that helps those dealers and F&I professionals sell more vehicles, sell more F&I products, and make more money.

If you have yet to crack the code, your local CU is a real thorn in your side. It’s an intractable, obstinate adversary that continually costs you thousands of dollars in blown sales, reduced grosses, and lost F&I product sales. Yet it doesn’t have to be that way.

In 1934, President Roosevelt signed the Federal Credit Union Act to help make credit available through a national system of nonprofit, cooperative credit unions. Credit unions are not-for-profit financial institutions that are owned by their members. That’s why credit unions will typically offer higher savings rates, lower fees, and lower rates on loans than for-profit financial institutions like banks. Unlike banks and other retail businesses, credit unions are focused on serving their members rather than maximizing profits — the antithesis of what most automobile dealers focus on.

It’s also why many dealers and credit unions constantly butt heads.

1. Understand the Code Behind the Code.
Edward Filene, considered to be the founding father of the American credit union, once said: “Credit unions are not for profit, not for charity, but for service.” This is why credit union members are some of the most loyal customers you will ever find. They love their credit union.

For a dealer, turning that local credit union from an adversary into an ally is going to be immensely more profitable for both the sales department and the F&I department than endlessly trying to beat their rate. That’s hard to do. Because they do offer consistently low-interest rates, especially to members who don’t have 800-plus credit scores.

Consumers today are infinitely better informed and more financially astute than they were 30 or 40 years ago. Not only do they often begin shopping for vehicles online, studies show consumers also research their financing options online. They can also calculate monthly payments, apply for financing, and make their car payment right on their phone. They also talk to their credit union and ask for their advice when it comes to buying a car and obtaining financing. They know their credit union is there to serve them, not sell them. So, they trust their credit union.

Car dealers, not so much.

2. Test the Limits of Loyalty.
Fortunately for us, when it comes to financing and interest rates, member loyalty to their credit union normally only extends up to about one-quarter of a point. Even long-term credit union members will compare multiple finance sources in an effort to obtain the best rate available when it comes to financing their new or used vehicle. Everyone wants to be an informed consumer and get a good deal.

The improved availability of credit information and the introduction of credit scoring has also made it faster, easier, and less costly for all lenders to gauge a consumer’s creditworthiness. With information on financing and interest rates readily available, every dealer and credit source has to offer competitive rates or risk alienating potential customers. There are basically five types of noncaptive finance sources that most dealerships work with:

• Superprime: These are usually nationwide banks and finance companies that target customers with credit scores of 781 to 850. While they have stringent lending requirements, they do offer auto approval programs with ultracompetitive rates.
• Prime: These finance sources have a relatively large geographical lending authority, target customers with credit scores of 661 to 780, and their rates are very competitive. They also typically allow paper buyers some flexibility with the tier level.
• Nonprime: These sources, which include most credit unions, are often regional and typically target customers with credit scores of 601 to 660. Credit unions are a great source for nonprime customers, as their rates are especially competitive.
• Subprime: These lenders focus on customers with credit scores of 501 to 600. Credit unions are also a possibility with subprime customers, especially if the customer is local and they have an existing relationship with the customer.
• Deep subprime: These are customers who have credit scores of 300 to 500 and are typically buy-here, pay-here customers. Unless the customer is already a member, they are probably not a good fit for a credit union.

With the manufacturer’s captive finance companies, there are plenty of finance sources available to dealers for those superprime and prime credit customers. It’s the nonprime and subprime customers for which most dealers want and need more finance sources, especially when it comes to used vehicles.

As it happens, these are precisely the customers who are also the sweet spot for most credit unions. In fact, in virtually every credit union’s charter, you will find this exact verbiage, since their mission is to “provide provident credit for people of modest means.” Credit unions were not created to provide cheap money for wealthy people with great credit. Those people can get money anywhere. A credit union’s mission is to provide low-cost, easy-to-obtain loans for people of modest means.

According to the National Credit Union Association, approximately 84% of credit unions are involved in some form of indirect lending, and another 8% are considering becoming involved. In a recent survey by TransUnion, credit unions ranked auto loans as their highest growth opportunity over the next 12 months. Members appreciate having their credit union available as an option when and where they need financing. If their credit union is an available source at the point of sale, it can be a win-win-win situation for you, your customer, and their credit union.

3. Get on the Phone.
So how do you turn those credit unions you compete against into reliable sources you can count on when you have a nonprime customer? Well, you can always contact Credit Union Direct Lending or Credit Union Direct Connect to see if the customer’s credit union is in CUDL’s or CUDC’s network. Failing that, you can determine whether they might have other credit unions in your area that are part of their network. If so, they’ve already done the heavy lifting in creating mutually beneficial relationships between dealers and those credit unions in their network.

If not, the first step is to start a relationship with that credit union. That means going to the credit union and meeting the people who work there. If you want to become a trusted partner, they first have to meet you face-to-face. If possible, open an account with the credit union. Contact the head of lending. Find out what’s important to the credit union.

Do NOT lead with increasing CU profits. If you lead with increasing their profit or more loan volume, that’s a non-starter with every credit union, because they are not-for-profit financial institutions. As the retired CEO of one of largest CUs in Texas explained in no uncertain terms, “I know of no credit union CEO who has profit or ROI in his or her annual performance or compensation plan.”

Rather, you need to find out what is important to the CEO. What is important to the credit union’s board? Is it membership growth? Protecting their members from being ripped off by unscrupulous dealers? Helping their members by offering added benefits, special pricing or discounts not available to non-credit union members?

Your focus and primary reason for meeting with the credit union CEO should be based on answering one question: “How can we work together to help your members get the car they want with the loan and the protections they need?”

Credit unions are not homogenous in their focus, their operations, or their priorities. You have to develop a personal relationship with the credit union CEO and the other credit union execs, as well as all the different stakeholders. Take them to lunch occasionally. Small spiffs or special pricing for credit union members is usually far more important, motivating and more effective in building that relationship than increasing the credit union’s profits.

Everyone at the credit union needs a face to put with the dealership, someone they know they can contact if they have an issue — especially those dealer haters at the credit union who could attempt to squelch a better relationship with your dealership. If a member ever has a problem with your dealership, they need to know whom they can call.

4. Earn Trust One Deal at a Time.
With any credit union, member satisfaction is vastly more important than generating additional revenue. Honesty, consistency and guaranteeing the credit union members will always be treated fairly by your dealership is the key to turning a credit union into a new finance source. For a credit union, becoming a trusted partner is not something you buy; it’s something you earn — one member, one transaction, one loan at a time.

The CEO’s greatest fear is that someone from the dealership is going to take advantage of his or her members by marking up the service contract or other F&I products by an exorbitant amount. This is especially true if the CU has recommended your dealership to its member. If that ever happens, there will be no second chances. If anyone at the dealership takes advantage of a member or the member has a bad experience, that relationship is over.

A credit union CEO cannot stand “noise” from the board or complaints from the organization’s members.

Any relationship a CU executive enters into with a dealer has to be sold to the board. It has to be viewed by all stakeholders as mutually beneficial. The CEO has to be able to go before the organization’s board, its staff, and its members and say, “Look what we did for our members.” It could be a one night each month for CU members, a special credit union hotline, a free lunch, or a door prize for the monthly chapter meeting. It could be providing the CU with ATM or deposit slips with a coupon on the back for a free car wash, oil change, or tire rotation.

And, yes, it also means you’re probably going to have to make some concessions for credit union members on F&I product prices. Your prices will need to be both fair and consistent for all members. You may not be able to mark up the interest rate, but you will be able to receive a flat — either a set dollar amount or a percentage of the amount financed. Bottom line, rather than make a lot of money on a few members, you’re going to make a little less money on a lot of members.

Cracking the code begins with first having a conversation with the CEO, building a relationship, and finding a middle ground that works for both parties. The credit union wants to retain the loan and protect its member. Your dealership wants to sell the car and make money on the financing by helping the CU’s members get the F&I products they need. How can we work together to help your members, the credit union, and the dealership?

As an F&I professional, you have a responsibility to your dealer, your customers, and all your finance partners to maintain ethical standards that are beyond reproach. The overriding consideration must be the development of a long-term, mutually beneficial relationship between all of your finance sources and the dealership.

In Credit Union Land, it’s not about the money. It’s about honesty, trust, transparency, and helping members.

What’s the secret code for developing a new finance source and creating a mutually beneficial relationship with a credit union? It’s answering that all-important question: How will this partnership with your dealership help their members?

Ron Reahard is president of Reahard & Associates Inc. and ranks among the industry’s leading F&I trainers, authors, consultants, and speakers. Contact him at [email protected].