As Americans with cabin fever look for safe ways to
travel during the pandemic, sales of recreational vehicles (RVs) are soaring by
as 170% in some areas of the country. Drawn by the ease of social
distancing in the outdoors, travelers see the many benefits of owning a second home
on wheels, where they have significant control overexposure to COVID-19. In
fact, approximately 46 million Americans plan to take an RV trip in the next 12
months, according to Ipsos
This trend points to twoopportunities for credit
unions: the first and most obvious is the ability to provide financing for RV
purchases. The second opportunity may be less apparent: By purchasing RV loans
in the secondary market from other credit unions, institutions can drive value
for members. Tapping into the experience of an established credit union eliminates
the need to build a sales force, develop a specialized underwriting team and
establish servicing capabilities.
Following are four factors that credit union
executives should take seriously as they consider entering this niche market.
The #vanlife movement has staying power beyond
While COVID-19 may be spurring a sudden bump in
sales, the rising popularity of RVs is not a new phenomenon. A 2019
study by the RV Industry Association (RVIA) indicated that it’s a $114
Over the last decade, more Americans have begun
embracing a minimalist, outdoorsy life on the road, inspired by the #vanlife
lifestyle movement started on Instagram. Social media influencers have
injected a “cool factor” into mobile living, and that’s translated into
increased sales for RVs. In fact, the number of RV wholesale shipments soared
to record breaking numbers over the last four years, according to the RVIA, which
annually tracks industry production.
Social distancing may be spotlighting the appeal of
RVs, but the movement is likely to stick long after we emerge from the
pandemic. In fact, the growing acceptance for knowledge workers to work from
home—or anywhere—may entice even more people to try out the nomadic lifestyle.
RV loans offer credit unions a balance sheet
opportunity:it’s a new way toput rising deposits to work.
The increased demand for RV financing coincides
with a time when credit unions are flush with deposits that need to be
deployed. Credit unions
saw a year-to-date 12% increase in deposit growththrough May, according to CUNA
Mutual Group’s Credit Union Trends Report. Community banks and other
institutions are seeing a similar deposit growth as COVID fears and government
stimulus checks prompt consumers to pull back spending and park their money
someplace safe. Since January, U.S. bank deposits have grown by more than $2 trillion,
according to the Federal Deposit Insurance Corp.
the same time, declining consumer confidence has taken a toll on loan growth. CUNA expects loan balances to
grow only 2%
in 2020. While loan growth ticked up in May, overall credit union loan-to-share ratiohit a four-year low of 76.9%,
down from 84.4% in January.
unions should not expect these trends to reverse any time soon. CUNA expects aggregate
loan growth to drop by 46% in 2021. Clearly credit unions can benefit from
exploring new paths to deploy member deposits outside of typical treasury
investments, and RV lending is one niche way to do that.
Portfolio diversification is key to managing risk and
In today’s environment of immense uncertainty, typical
consumer borrowing patterns have transformed. Consider for example, demand for
auto loans, which tanked during the first few months of the coronavirus
shutdown. Overall, auto research firms estimate sales fell by about 34% in the second quarter.
While sales are gradually recovering, cautious consumer
sentiment does not bode well for the auto industry for the near term. The
market will recover and in the meantime credit unions may offset some of the
slowdown by encouraging auto loan refinancing, but it’s a good idea to consider
new product types as well.
A recent Moody’s webinar on key drivers of auto and RV lending uncovered some interesting statistics about expected losses in RVs and autos, which is driven by the probability of default multiplied by the loss given default and exposure at default. In a randomly generated portfolio,current expected credit losses (CECL) of autos increased from February to June by 79%, while RVs increased by 81%, as shown in Figure 1 below.
Moody’s analysis also sheds light on prime and super prime borrowers.CECL lifetime losses for borrowers with a VantageScore greater than 800 increased from February to June by 428% for autos loans;meanwhile during the same period expected losses for RVs increased by only157%, as illustrated in Figure 2.
In addition to the diversification an RV portfolio can
provide, RV coupons for similar credit-worthy borrowers yield roughly150-250
basis points greater than comparable autos. These increased yields more than
compensate a lender forincreased expected losses within RV loans. Typical analysis
on probability of default of autos versus RVs finds only a small increase in
probability of default in RVs versusautos for comparable FICO borrowers. Higher
expected losses in RVs generally comes from increased loss given defaults in RVs,
which primarily occursbecause historically RV recovery rates at auctions tended
to be lower than autos. Given the current demand for RVs due to COVID-19,weexpect
recovery rates to improve, driving RV loan performance on a relative basis.
No new origination is needed to build an RV loan portfolio.
While the prospect of foraying into RV financing is
appealing to some credit unions, executives may see a challenge: how can they
quickly ramp up the origination and marketing teams to enter the market? As
mentioned above, credit unions don’t need to invest in internal originations to
take advantage of the RV lending opportunity. Purchasing a pool of loans from a
trusted credit union partner can be anefficient way to put funds to work,
Loan trading is sometimes overlooked
as a path for credit unions to experiment with new products, drive loan growth and
manage risk. It’s worth a second look. Purchasing and selling loans with
trusted credit union partners can help an organization quickly expand in asset
types that are driving loan growth when other loan demand is soft.
If you’re considering loan trading as a path to
venture into RV financing, an important first step is to develop a purchase
plan that outlines the types and sizes of loans you are looking to trade. It’s
also important to develop a pricing model—credit unions experienced in the
secondary markets can be anexcellent source of knowledge and performance
many executives, talking with counterparts within your existing credit union
network can be a clear path to finding a trusted partner for your loan trading
program. If you’re looking to broaden your contacts in the age of social
distancing, online forums offer a good venue for initiating conversations
around loan trading. For example, participants in the CUNA finance and lending councils
are receptive to discussions on this topic.
Embark on your journey into RV financing
It’s clear that the challenges of the pandemic will
have lasting impacts for credit unions. As consumer behavior and finances
shift throughout the recession and the age of social distancing, new
opportunities will emerge. The organizations that are able to quickly identify
and seize those opportunities will be well-positioned to best serve their
members in the future.
David Hoffer, Manager, Loan Trading Desk, Alliant Credit Union.