Perhaps this morning’s most dour news comes from the great state of Texas. A just released paper from Emily Ryder Perlmeter, Anna Crockett and Garrett Groves at the Federal Reserve Bank of Dallas examined the consumer use and timely payment of “four major loan types in Texas: mortgage, credit card, auto and student.” After analyzing an Equifax data set, the paper’s authors conclude that “although there has been a decline in overall serious delinquencies since the Great Recession, recent years have seen increases in significantly late payments for car and student loans in the state.”
Overall Credit in Texas
According to the study, 86.6 percent of Texas adults had a credit file and credit score in the Equifax dataset as of 2017. This is down from 92 percent in 2006. Of course, the absence of a credit score with one of the three major credit bureaus can exclude an individual from credit access and from full participation in the economy. The authors surmise that Texas’ higher rate of credit invisibility is likely due to its “comparatively young and racially diverse demographics, large immigrant population, relatively high poverty rate and southern geographic location.”
Full participation should have particular resonance for credit unions. Just this week, Chairman Hood offered that his own guiding principle is: "What can we do in Washington to help federally insured credit unions to serve your members better; to improve your product lines; and make a difference in the lives of your people and your communities?"
According to Equifax’ risk scoring in the state, summarized in Chart  below, the majority of Texans with a credit report are prime borrowers, with just under 30 percent considered in the riskier subprime or deep subprime categories, with scores below 620.
Historically, Texas has enjoyed a relatively low delinquency rate on auto loans. Since about 2015, however, the serious delinquency rate for car loans in Texas has slowly risen. And, the Dallas Fed study finds that, as of Q4 2018, rates are nearing their recession peaks. Because consumers often prioritize car loan payments above other loans, a rise in delinquencies can be cause for concern. The study’s authors offer that “this trend implies that some consumers are still struggling despite an otherwise strong economic climate.”
According to the study, the Texas subprime serious delinquency rate reached 16.7 percent at year end 2018. This is eerily close to the 2010 recessionary peak of 18.2 percent. And, it is quite alarming in light of the relative health of the overall economy. According to a recent Wilary Winn study, auto loans, which comprised 5.82% of the US’ total consumer debt at Q1 2010, increased to 9.36% of total consumer debt by Q1 2019. Yet, New York Fed researchers noted that, in the midst of a healthier economy, a rise in auto delinquencies suggests that “not all Americans have benefited from the strong labor market.”
As Chart  below illustrates, total auto loan growth has been slowing across Texas credit unions over the past several years.
As Chart  shows, the overall auto delinquency rate among Texas CUs is yet to show signs of any troubling increase. In fact, at the end of the second quarter, the auto loan delinquency rate for Texas CUs stood at 0.5%, well in line with historical norms.
Delinquencies vary significantly by lender type. For example, according to Wilary Winn estimates, as of Q1 2019, credit unions held 29.75% of the outstanding auto loan debt, but only a 10.15% share of 60-day delinquent auto loans. Finance companies, by contrast, held a 17.06% share of these loans and more than 4 in ten (41.49%) of such loans more than 60 days delinquent. The auto loan 60-day delinquency rates were 0.23% for credit union lenders, 0.63% for bank auto loans, 0.59% for captive auto division loans, and 1.64% for alternative finance auto loans. These rates make sense when one considers that alternative finance lenders have a propensity for lending to riskier subprime borrowers.
Any uptick in auto delinquencies will warrant very careful monitoring by Texas credit unions, however. As Chart  below illustrates, as of June 30, 2019, the average credit union in the state had 49.76% of its loans in autos. For 335 of the state’s 448 CUs, auto loans comprise the majority of the loan book. More broadly, the share of all auto loans — both new and used — in the average credit union loan portfolio across the country dropped to 34.7% in Q2 2019, down from 39.8% in Q2 2000.
Aside from the concentration risk, the average auto loan in Texas is now more than $17,200 and the yield on loans has been steadily decreasing in the state in recent years.
As a whole, the state’s CUs sport a healthy 11% net worth ratio (NWR), which suggests that there are rather ample stores of capital to weather a little auto storm. A prolonged deterioration might be a whole other story. And, for those CUs with a less robust NWR, additional capital could shore up the balance sheet.
Finally, because so many experts view car loan delinquencies as a bellweather for the overall economy, further observation of these trends is certainly warranted beyond the great state of Texas.