Key Takeaways
- 2023 was a banner year for credit union auto loan ABS issuance, as credit unions almost tripled 2022's volume.
- Credit unions are looking to continue that growth by utilizing securitization for reliable funding and, for some, expanding beyond their local markets.
- S&P Global Ratings uses similar approaches when rating credit union and other auto loan ABS transactions, with some occasional differences due to significant geographic concentration in credit union deals.
Credit Union Issuance Took Off In 2023, With No Slow Down In Sight For 2024
The securitization market has offered credit unions more diversified financing sources than those traditionally available, such as loan participations and deposits. Securitization has also provided them with a more reliable source of capital to fund their business.
The 2023 issuance volume of U.S. auto loan asset-backed securities (ABS) issued by credit unions was $2.03 billion, which was 167% more than the 2022 figure of $760 million (see chart 1). New auto loan ABS issuers, such as ENT Credit Union (ENT), General Electric Credit Union (GECU), Space Coast Credit Union (SCCU), Valley Strong Credit Union (VSTRG), and Veridian Credit Union (VCU), fueled the strong volume in the credit union auto loan ABS sector, along with repeat issuances from GTE Federal Credit Union (GTE) and Oregon Community Credit Union (OCCU). There is no slow down expected in 2024. We expect some repeat transactions from those credit unions that issued in 2023, along with new credit union ABS platforms that are expected to come to market in 2024.
In 2019, credit unions made their first foray into securitization since June 2017 when the National Credit Union Association (NCUA) finalized its safe harbor opinion that, consistent with the Federal Credit Union Act, a federal credit union has the authority to issue and sell securities incidental to its operations. In 2019, GTE (a federally chartered credit union based in Florida) issued the first auto loan ABS transaction since the ruling. Initially, credit union auto loan ABS issuance was slow to gain momentum, with only four transactions issued between 2019 and 2022. It was only in 2023 that credit unions' auto loan ABS issuance increased significantly, with seven transactions in 2023, compared to only two in 2022.
Chart 1
Securitization Provides A Reliable And Stable Source Of Capital
Securitization is a more reliable and stable funding source than those employed by credit unions in the past. Credit unions generally fund their business with deposits and secured federal funding facilities, such as the Federal Home Loan Bank System. Loan participations, another funding source used by credit unions, are agreements in which a credit union will sell a portion of its portfolio to another credit union or buyer. While loan participations continue to be used, they are not always reliable or efficient because the process can be lengthy and depends on finding a sufficient number of ready and willing buyers. Relying on deposit growth to fund a growing loan portfolio can also be limiting because it can vary based on macroeconomic factors, such as economic growth, interest rates, and inflation. Securitization, on the other hand, provides access to an established market that is larger, with a more diverse and liquid investor base. By accessing the ABS securitization market, credit unions can establish a reliable, diverse, and more stable source of funding.
Some Credit Union ABS Issuers Are Looking Beyond The Local Market For Growth Prospects
Most credit unions that have issued auto loan ABS since 2019 represent localized financial institutions with long operating histories, typically tracing back to at least the early 1960s. They are also mostly state-chartered, which, from a regulatory standpoint, permits a more rapid field of membership expansion than for federal-chartered credit unions. Some credit unions that issued auto loan ABS in 2023 have plans to grow their auto loan portfolios by expanding their footprints to either adjacent counties within their state or beyond their home state.
S&P Global Ratings May Use Higher Loss Coverage Multiples When Rating Credit Union ABS Due To Geographic Concentration
Our rating approach for credit union-issued auto loan ABS is similar to our approach for other auto loan ABS transactions (applying our "Global Auto ABS Methodologies And Assumptions," published March 31, 2022). One notable difference is the higher loss coverage multiples that we may apply for those credit unions that have significant geographic concentration in their collateral pools. Geographically concentrated portfolios can be riskier due to the potential for greater localized economic downturns that may adversely impact the pool's performance. To address high geographic concentration and the potential risk it poses, we may assume higher ratings-appropriate stress scenarios that would provide higher levels of loss coverage than those we would normally consider for a more diversified prime pool with similar credit characteristics.
The Credit Quality Of Prime Credit Union Collateral Pools Is Slightly Below That Of Peer Banks
The credit union collateral pools are generally prime, with a weighted average credit score of 736 and loan-to-value (LTV) ratio of 102.5% (see table 1). The 2022-1 transaction from PenFed (a federally chartered credit union) is the highest credit quality pool securitized to date, with a weighted average credit score of 770 and LTV ratio of 86.9%. Among the credit union peers, VSTRG 2023-A stands out with a lower weighted average credit score of 629, primarily due to the inclusion of non-prime obligors, which make up a significant portion of the collateral pool. The auto loans in the VSTRG 2023-A collateral pool were originated and underwritten by Exeter Finance LLC, not by Valley Strong Credit Union.
The credit union collateral pool characteristics are slightly weaker than those of peer banks that issued in the prime auto loan ABS sector and to which S&P Global Ratings assigned ratings in 2023. The peer banks' weighted average credit score is higher at 760, and the LTV ratio is lower at 94.2%. The banks' collateral pools also tend to be more geographically diversified and have a higher percentage of new vehicles than those of credit unions. In addition, most of the credit unions include a higher percentage of longer-term loans (those with an original term greater than 72 months).
Table 1
| Credit union collateral characteristics | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| GTE 2019-1 | UART 2021-1 | PAROT 2022-A | OCCU 2022-1 | GTE 2023-1 | VCU 2023-1 | GECU 2023-1 | OCCU 2023-1 | ENT 2023-1 | VSTRG 2023-A | SCCU 2023-1 | ||||||||||||||
| Receivables balance (mil. $) | 185.27 | 302.93 | 519.82 | 298.51 | 215.92 | 310.55 | 320.62 | 286.45 | 253.17 | 248.95 | 350.04 | |||||||||||||
| No. of receivables | 9,430 | 11,204 | 26,692 | 10,256 | 10,117 | 14,022 | 10,272 | 9,407 | 8,124 | 8,665 | 9,726 | |||||||||||||
| Avg. original loan balance ($) | 23,071 | 35,952 | 19,475 | 29,106 | 21,342 | 22,147 | 32,601 | 30,451 | 32,571 | 28,730 | 37,052 | |||||||||||||
| WA APR (%) | 5.60 | 4.99 | 3.86 | 5.71 | 6.60 | 7.92 | 8.19 | 7.19 | 8.75 | 16.13 | 7.41 | |||||||||||||
| WA original term (mos.) | 74 | 82 | 66 | 77 | 77 | 75 | 81 | 79 | 79 | 77 | 73 | |||||||||||||
| WA remaining term (mos.) | 64 | 64 | 48 | 76 | 64 | 68 | 77 | 70 | 75 | 75 | 70 | |||||||||||||
| WA seasoning (mos.) | 10 | 18 | 18 | 2 | 14 | 7 | 4 | 9 | 4 | 2 | 3 | |||||||||||||
| WA credit score(i) | 726 | 748 | 770 | 730 | 730 | 737 | 743 | 727 | 733 | 629 | 770 | |||||||||||||
| Loans with original term more than 60 mos. (%) | 89.73 | 97.98 | 53.30 | 89.39 | 92.19 | 85.26 | 95.25 | 95.29 | 94.16 | 99.34 | 81.94 | |||||||||||||
| Loans with original term more than 72 mos. (%)(ii) | 30.77 | 84.58 | 9.19 | 59.29 | 55.40 | 59.98 | 84.70 | 66.37 | 75.31 | 88.86 | 50.12 | |||||||||||||
| WA LTV ratio (%) | 93.38 | 108.46 | 86.89 | 109.88 | 102.39 | 105.41 | 104.41 | 104.80 | 109.06 | 120.00 | 95.73 | |||||||||||||
| New vehicles (%) | 32.41 | 55.04 | 44.08 | 29.65 | 29.07 | 20.14 | 33.32 | 33.58 | 24.78 | 5.73 | 45.61 | |||||||||||||
| Used vehicles (%) | 67.59 | 44.96 | 55.92 | 70.35 | 70.93 | 79.86 | 66.68 | 66.42 | 75.22 | 94.27 | 54.39 | |||||||||||||
| Top three state concentrations (%) | ||||||||||||||||||||||||
| FL=98.10 | NV=32.59 | TX=10.15 | WA=46.23 | FL=97.78 | IA=38.37 | OH=59.74 | OR=52.17 | CO=97.42 | TX=23.89 | FL=100.00 | ||||||||||||||
| GA=0.37 | KS=14.96 | CA=9.94 | OR=45.54 | GA=0.38 | NE=17.59 | KY=34.32 | WA=38.51 | WY=0.50 | FL=13.32 | |||||||||||||||
| NC=0.18 | CA=14.93 | FL=9.56 | ID=4.37 | NC=0.18 | MN=11.90 | IN=5.61 | ID=4.54 | NM=0.33 | GA=6.17 | |||||||||||||||
| (i)Represents the VantageScore or FICO score, as appliable. (ii)For GTE 2019-1, UART 2021-1, PAROT 2022-A, OCCU 2022-1, GTE 2023-1, and OCCU 2023-1, this represents an original term of more than 75 months. GTE--GTE Auto Receivables Trust. UART--UNIFY Auto Receivables Trust. PAROT--PenFed Auto Receivables Owner Trust. OCCU--OCCU Auto Receivables Trust. VCU--Veridian Auto Receivables Trust. GECU--GECU Auto Receivables Trust. ENT--Ent Auto Receivables Trust. VSTRG--VStrong Auto Receivables Trust. SCCU--SCCU Auto Receivables Trust. WA--Weighted average. APR--Annual percentage rate. LTV--Loan-to-value. | ||||||||||||||||||||||||
Overall Cumulative Net Loss Performance Is Better Than Expected
Credit union auto loan ABS has performed in line with expectations, with certain exceptions (see table 2 and chart 2). The first two credit union auto loan ABS issuances, in 2019 and 2021, (GTE 2019-1 and Unify 2021-1) performed better than our initial cumulative net loss (CNL) expectations, driven largely by pandemic-related government assistance and record recovery rates. The GTE 2019-1 ABS bonds were fully redeemed last year and experienced lifetime CNLs of 0.72%, compared to our initial expected CNL of 2.95%. PenFed Auto Receivables Owner Trust 2022-1 is the highest credit quality pool securitized to date, and, at month 17 with a 42.15% pool factor, it has experienced CNLs of 0.18% compared to an initial expected CNL of 1.50%. The OCCU 2022-1 transaction stands out as performing worse than initially expected, and its classes C and D are currently on CreditWatch with negative implications. The weaker performance for OCCU's 2022-1 transaction is primarily attributable to the loans originated in Washington state, where the company expanded its origination volume in 2020. For the remaining transactions that closed in 2023, all with no more than six months of performance history, it is still too early to assess performance compared to our initial expectations.
Table 2
| Credit union auto loan ABS collateral characteristics | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Transaction | Performance month | Pool factor | Current CNL (%) | Initial ECNL (%) | Revised ECNL (%) | |||||||
| GTE Auto Receivables Trust 2019-1 | 48 | Paid off | 0.71 | 2.90-3.00 | Up to 1.00 | |||||||
| UNIFY Auto Receivables Trust 2021-1 | 34 | 21.35 | 0.58 | 2.75-3.00 | 0.90 | |||||||
| PenFed Auto Receivables Owner Trust 2022-A | 17 | 42.15 | 0.18 | 1.40-1.60 | 0.70 | |||||||
| OCCU Auto Receivables Trust 2022-1 | 15 | 68.19 | 1.35 | 2.25 | (i) | |||||||
| GTE Auto Receivables Trust 2023-1 | 8 | 73.06 | 0.84 | 2.10 | N/A | |||||||
| Veridian Auto Receivables Trust 2023-1 | 7 | 78.22 | 0.13 | 2.30 | N/A | |||||||
| GECU Auto Receivables Trust 2023-1 | 5 | 90.39 | 0.03 | 2.90 | N/A | |||||||
| OCCU Auto Receivables Trust 2023-1 | 4 | 90.67 | 0.38 | 3.25 | N/A | |||||||
| Ent Auto Receivables 2023-1 | 3 | 90.59 | 0.19 | 2.35 | N/A | |||||||
| VStrong Auto Receivables Trust 2023-A | 3 | 95.36 | 0.10 | 14.25 | N/A | |||||||
| SCCU Auto Receivables Trust 2023-1 | N/A | 0.00 | 0.00 | 2.20 | N/A | |||||||
| (i)The transaction's collateral performance is trending worse than our initial ECNL, but a revised ECNL has not been published. Classes C and D from the transaction are on CreditWatch negative. CNL--Cumulative net loss. ECNL--Expected CNL. N/A--Not applicable. | ||||||||||||
Chart 2
Is The 2023 Credit Union ABS Issuance Level Sustainable?
Not only was the credit unions' level of ABS issuance in 2023 historic, but their share of the auto loan market was strong as well. Experian data of the total auto loan market share through the third quarter of 2023 showed that the credit unions captured 23.11%, which represented the third-highest market share, just below captive finance companies at 30.43% and banks at 25.17%. The strong credit union market share in 2023 came on the heels of credit unions' breakout growth in 2022, when they overtook both the banks and captive finance companies to capture the top market spot at 29.16%. That year, credit unions offered more competitive interest rates than the banks and captive finance companies.
Credit unions continue to represent a key financial provider for auto loans, and there are no indications this will slow down in 2024. Based on the reliable and stable source of capital securitization offers, 2024 is expected to bring repeat and new credit union ABS issuers. However, the substantial administrative and operational pre-work involved with readying a credit union's reporting platform to provide typical securitization data (e.g., static pool or monthly servicer reporting data) could delay new credit union issuers entering the market this year.
Related Research
- Presale: SCCU Auto Receivables Trust 2023-1, Dec. 1, 2023
- Presale: VStrong Auto Receivables Trust 2023-A, Oct. 5, 2023
- Presale: Ent Auto Receivables Trust 2023-1, Sept. 21, 2023
- Presale: OCCU Auto Receivables Trust 2023-1, Sept. 19, 2023
- Presale: GECU Auto Receivables Trust 2023-1, Aug. 3, 2023
- Presale: Veridian Auto Receivables Trust 2023-1, May 18, 2023
- Presale: GTE Auto Receivables Trust 2023-1, April 20, 2023
- Presale: OCCU Auto Receivables Trust 2022-1, Oct. 4, 2022
- Presale: PenFed Auto Receivables Owner Trust 2022-A, Aug. 15, 2022
- Presale: UNIFY Auto Receivables Trust 2021-1, March 11, 2021
- Presale: GTE Auto Receivables Trust 2019-1, Oct. 31, 2019
This report does not constitute a rating action.
| Primary Credit Analyst: | Steve D Martinez, New York + 1 (212) 438 2881; steve.martinez@spglobal.com |
| Secondary Contacts: | Peter W Chang, CFA, New York + 1 (212) 438 1505; peter.chang@spglobal.com |
| Frank J Trick, New York + 1 (212) 438 1108; frank.trick@spglobal.com | |
| Research Contact: | Tom Schopflocher, New York + 1 (212) 438 6722; tom.schopflocher@spglobal.com |
| Aidan Shea, New York; aidan.shea@spglobal.com |
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