Indirect lending can be an excellent way to enhance your lending program. Certainly, this is a risk-based program with a great risk/reward situation involved. While many credit unions have entered the market with great reward, some have suffered at the hand of the risk involved.
If your CU is considering entering this market or, if you’re already in it and have experienced increased delinquency and charge-offs that have not been rewarded with great returns, then consider this: look at the end of the process and work your way back.
The success of almost any indirect lending program can be linked back to the strength and preparedness of the credit union’s collection operation. Indirect lending is not like the normal lending program with the regular membership. Loyalties are not always maintained with the credit union and relationships may not have been established. In addition, the information received upon approving the loan may not be as high-quality as the loan that came through regular channels.
These factors and others can lead to an increase in delinquency, charge offs, and will, eventually, affect your bottom line. By being prepared and performing some due-diligence a credit union can be successful in this market.
The following are five areas that should be considered with the collection operation either before entering this lending market or even after the fact.
1) Operation and Staffing
Do you have adequate staff or are you in a position to add staff to cover the increase of collection activity that will possibly be forthcoming? Certainly, there is the possibility of an increase in delinquency from this type of lending, however, this can be mitigated with the correct staffing levels. In addition, is your staff trained in up-to-date collection techniques? Is your management staff knowledgeable and able to train current and new staff?
2) Collector Performance, Productivity and Quality
Measurements of collector performance, productivity, and quality are essential to monitor the collection efforts. Do you have these measurements in place? Do you have the capability to monitor ongoing collection efforts for quality? Collections are a daily effort that require a persistent investment to the task at hand and must be monitored continuously.
3) Repossession and Remarketing
With indirect lending comes the possibility of increased repossessions and remarketing. Do you have vendors that can handle an increase in volume? Have you established relationships with a remarketing company or auction house to sell the repossessions? Does your management staff understand what to look for in determining wholesale and retail values and what is considered a good return on the sale?
4) Technology
An increase in delinquent loans calls for a more sophisticated collection system. This system should be capable of distributing accounts correctly in collector queues, be user friendly for efficiency purposes, and be able to handle advanced collection distribution matrices among other things. Does your collection system have the capability of performing these functions and more?
5) Management Reporting and Trend Tracking
Running an effective collection department requires information be gathered in real time, daily, and monthly to detect potential problems trends within the portfolio. Can your core system or your collection program provide these reports? Does your management team know what reports would be helpful in this area?
These are just five or the areas in which due diligence should be undertaken whether you are already in an indirect lending program or if you are considering entering it. There are lending matrix decisions to be made and an appetite for the depth of the program to be considered, however. But once the possible end result is well grounded, then you can be assured of being able to mitigate any potential loss.
Don Gross is SVP of Solutions in Finance, Inc., a San Jose, Calif.-based lending and collections consulting firm. For info: www.solutionsinfinance.com or 888-447-0324 ext. 112.(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com http://www.sourcemedia.com
