CUs Explore The Pros And Cons of Indirect Lending

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Indirect automobile lending can help build loan volume, bring in new members and keep current members happy. On the other hand, it is not for every credit union due to its challenges, complexity and need for vigilant attention.

Those were the messages at an educational session on the pros and cons of indirect learning at NAFCUs' annual meeting here. Of note is the fact both viewpoints were from the person assigned to illustrate the "pro" side of the discussion.

Brad Beal, CEO of Nevada FCU told attendees they should not expect a "wrestling match" or "blood on the floor," because he and Kyle Markland, CEO of Affinity Plus FCU-the "con" presenter-were not far apart in their views.

"Even though I am doing the 'pro,' I can say indirect lending is very difficult to do well," Beal began. "It is challenging and complex, and it requires a lot of risk management."

Beal said NCUA recently issued a risk alert on indirect lending. He urged any CU considering getting into this form of lending to visit NCUA's website for more details.

Nevada FCU, which serves fast-growing Clark County, is 55 years old, Beal said. For the past 15 years, it has participated in indirect lending. For the first 13 years, it did so on its own, but in the most recent two years, it used a third-party vendor to handle documentation.

The credit union's portfolio currently holds $96 million in loans, with a delinquency rate of just 0.04%, and a chargeoff rate of 0.1%. Beal attributed those low numbers mostly to the CU's policy of taking "A" credit only.

"We are very cautious with it. And, the local Las Vegas economy is very strong-the strongest I've seen in 18 years here."

Beal said Nevada FCU does not allow dealers to mark up the interest rate, which lets members trust they are getting the best loan available.

"We have had a lot of success with indirect lending, and we put a lot of effort into it," he said.

Markland said the $1-billion Affinity Plus FCU based in St. Paul, Minn., had been involved in indirect lending from 1994 until its recent decision to phase out its program. He said it began as a member convenience at point of sale, and grew rapidly by more than $20 million per year.

The biggest change, he said, occurred in 1999, when Affinity Plus decided to become a wholesaler to compete in the indirect lending market.

"Our portfolio grew from $60 million to $280 million. We had 32,000 loans on the books at our peak," he recalled. "We decided to get out because of the strategic fit. We were spending a disproportionate amount of resources and not getting a lot out of it."

Affinity Plus still has indirect loans on its books, though the number is declining. The CU's loan-to-share ratio the past two years has been 104%, even after getting out of indirect lending, Markland noted. "We got back to a one-to-one relationship with our members."

Now that Affinity Plus is out of indirect lending, what is the one thing it would do different? "Monitor, monitor, monitor," Markland said. "We would monitor volume by dealer, service by dealer, default by dealer, everything."

TOP 10 PROS

In a nod to late night talk show host David Letterman's popular "Top 10 Lists," Nevada FCU CEO Brad Beal offered up this countdown of the top 10 reasons to get into indirect lending.

10. Improves operational efficiency. Participating in indirect lending allows the branch staff to better serve members, he said.

9. Keeps infrastructure current. Nevada FCU has a big investment in the systems required to support its auto lending program.

8. Source of volume. Indirect lending generates "a lot" of volume, Beal said. NFCU is on track to book $70 million in loans in 2005 thanks to a larger sales force and an increased emphasis on the program.

7. Allows us to compete with factory finance companies. NFCU has long recognized lenders such as Ford Motor Credit and GMAC as its "primary competition," he explained.

6. Facilitates market segmentation. The auto dealers help NFCU focus on people with credit scores of 700 or higher.

5. Allows us to participate in the dominant delivery channel. In Las Vegas, as much as 50% of new car loans are being financed at dealerships-up from approximately 33% just a few years ago, Beal said. "About 70% of our auto loan volume comes from dealers."

4. Introduction for new members. With indirect lending, the credit union has an opportunity to establish a relationship with many people who would not otherwise hear of Nevada FCU.

3. Members expect it. "After 15 years of being involved in indirect lending, they expect to get a Nevada Federal Credit Union loan at a dealer," he said.

2. Dealers will attempt to place financing, anyway. Even if a CU member walks in with a pre-approval for an auto loan, dealers do a "real good job" of signing them up for loans, Beal said.

1. Member convenience. It saves the hassle of running back and forth from the dealership to the CU branch.

TOP 6 CONS

Affinity Plus FCU CEO Kyle Markland presented a list of six myths connected with indirect lending.

1. Indirect lending generates loan volume. When Affinity Plus' program was going strong, the credit union was processing 1,000 loans per month. However, Markland said the high volume became a negative. "It took the personal nature out of loans. We were punching numbers into a computer."

2. Buy a car, change entire financial relationship one Saturday morning. Indirect lending might be an opportunity, but it yields relatively few new members over time because people don't change their financial institution simply because of their auto loan.

3. Credit unions can get more business from indirect members. This is closely related to Myth No. 2, Markland said. "We tried hard to indirect members, but many people still didn't know who we were. We spent a disproportionate amount of resources trying to build relationships."

4. CUs can make money at indirect lending. In the 1990s, yes, he acknowledged. "But remember, the stock market was riding high back then. After 2001, interest rates plummeted and the economy slowed. After factoring in all costs, we discovered we were not making money." Part of the reason for this is, approximately 30 days after indirect members pay off their auto loan, they typically close their obligatory share account with the CU, he added.

5. CUs can be very selective in who they finance. Dealers can be very creative in making "B" or "C" credit look like "A" credit, Markland warned.

6. Dealers will take care of the CU's members. Quite simply: no, they don't, he said.

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