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From Credit Union Journal – Credit unions may hit a few bumps with their recreational loan portfolios this year.
Loans for RVs tend to form a small part of a credit union’s overall portfolio. But by offering these loans, institutions can build member loyalty by serving a niche market and garner higher interests and longer terms.
But there are concerns that an economic slowdown in 2019 might hurt sales of these kinds of products. That could spell trouble for credit unions that make loans for RV purchases.
Credit unions have generally turned to making loans for members to buy RVs as a “member-relationship strategy, and, if done right, can be a high-performing loan offering,” said Daryl Jones, senior director with Cornerstone Advisors.
“The credit union then develops an expertise at structuring and managing the loans for the uncommon purchase item (in this case, RVs), thereby creating a barrier to entry for other institutions which would have to develop matching infrastructure and expertise from square one,” said Steven Reider, president of the Bancography, a consulting firm.
But there is also a financial case to be made for offering RV loans.
Since the Great Recession, sales of RVs have been generally strong. Sales peaked in 2017 at 504,600, according to the RV Industry Association. RV shipments in 2019 are expected to total about 453,200 units, down about 5.4 percent from 2018, according to the RV Industry Association.
Loans for RVs are attractive because credit unions can usually charge higher interest rates for them than other types of auto loans. For instance, the $1.5 billion-asset Rogue Credit Union in Medford, Ore., offers RV loans starting at about 6 percent for 15 years. These loans are about 22 percent of its auto loans, and demand has remained “steady” in recent years, a credit union spokesman said.
“Income, employment and household wealth will continue to exert a positive force in RV sales, although these factors are expected to be slightly less favorable in the year ahead,” Richard Curtin, an RV industry analyst, said in a statement.
RV loans make up about a quarter of Mountain America Credit Union’s auto loan portfolio. The Sandy, Utah-based institution has a minimum fixed rate of more than 6 percent for up to 12 years for an RV with the averaging loan being around $35,000. The $8 billion-asset Mountain America’s car loans are as low as 4.5 percent and are up to six years.
“With a prominent presence in the Intermountain West region, we see high interest in outdoor activities that results in demand for RVs,” said Jade Beckman, vice president of consumer loans at Mountain America. “In the early 2000s, Mountain America recognized the need to develop a dedicated indirect RV loan team.”
But there are some risks associated with making RV loans. For one, Beckman cautioned that RVs depreciate much faster than other types of vehicles. RVs depreciate about 30 percent when they are driven off the lot, “so it is not unusual for the [loan value] to be greater than the market value of the RV held as collateral,” Thompson said.
Demand for these loans typically fall as the overall economy falters, experts said. That could become problematic as many expect that the U.S. could hit a recession this year or next.
Higher underwriting standards for RVs could help stave off default rates when a recession hits, said Alan R. Thompson, senior managing partner at BSG Solutions Group. Additionally, the average RV borrower has stronger credit than the average auto borrower.
“There are obviously fewer RV borrowers, so the quality of borrower is stronger; auto loans are available to almost all borrowers and RV loans are available to a subset of those borrowers,” Thompson said.
The biggest challenge with an RV loan is repossessing it in the event of default, said Scott Harriman, president and CEO of the $260 million-asset Cumberland County Federal Credit Union in Falmouth, Maine. RV loans make up only 5 percent of the $260 million-asset credit union’s total loan volume, though they provide a higher yield than car loans.
“We do underwrite our RV loans differently than our auto loans,” Harriman said. “Everyone needs a car in Maine, so we do all we can to approve a car loan regardless of credit. In fact, over 20 percent of our auto loans are [low] credit [scores]. Not everyone needs an RV, so we do require [high credit scores] on our RV loans.”
RV loans also tend to be for longer terms, up to 15 years in some cases, unlike car loans, which tend to be for no more than seven years. But that also makes RV loans riskier.
“One, the financial well-being of the member could change drastically in a negative way over the course of fifteen years,” said Jana Erny, senior vice president of retail experience and operations at the $2.3 billion-asset Numerica Credit Union in Spokane Valley, Wash. “Two, in a rising rate environment, the credit union could have a low interest rate loan locked in on the books for an extended period, therefore potentially decreasing the overall value of the loan.”
Thompson added that while RV loans can be a good product for credit unions, without a large enough loan volume portfolio it is difficult to justify the expense to have the expertise to monitor them.
Jones of Cornerstone asserted that with the decline in indirect auto lending, banks and credit unions are exploring other product options such as equity loans and RV loans as an opportunity to “fill the loan production gap, which could improve the near-term outlook for such loans.”
Harriman of Cumberland County said his credit union has a “very positive outlook” for RV loans in 2019. He expects Cumberland County to make close to $3.3 million in RV loans this year, up 10 percent from 2018.
“Consumer confidence remains high and unemployment remains low,” Harriman said.