Experts Share Tips On Avoiding Crashes In Indirect Auto Loans
It was simultaneously described as a "savior" and as "scary," which pretty well sums up the credit unions' sometimes-tempestuous love affair with it: indirect auto lending.
"We were on the brink, and then along came indirect lending," San Antonio FCU First Vice President Chuck Smith told attendees of the Financial Solutions Symposium co-hosted by Callahan & Associates and WesCorp. "Indirect lending saved our credit union. But it can be scary. We've had a couple of hiccups along the way, but we've kept it on track."
The $1.8-billion credit union has approximately $1.6 billion in loans outstanding, of which, some $800 million are indirectly-financed auto loans. In fact, since SACU is nearly 100% loaned out, it sells some of its indirect loans to other credit unions, Smith said.
"Indirect lending is like riding a motorcycle," he related. "It looks very fun, but it's very dangerous."
Smith was part of a three-person panel on indirect lending. He was joined by Jim Sturdy, COO of South Florida Acceptance Company, an indirect lending CUSO, and Randy Luchsinger, VP-lending at HAPO Community CU, Richland, Wash.
During their presentations, a number of common themes emerged:
* Indirect lending must be a dedicated program with personnel dedicated specifically to it and nothing else.
* Dealerships should have a single contact point at the CU to keep consistency of underwriting as well as to develop and maintain a good relationship between dealer and credit union.
* Relationships are king in indirect lending and must be carefully groomed. "You have to feel their pain," Smith suggested. "You have to be out there with them." Luchsinger added that getting to know dealers on a personal basis-taking them out to lunch, for example-is very important.
* Breaking up is hard-but important-to do if a relationship with a dealer turns sour. Keep firm tabs on what sort of loans the dealer is sending your way. "We keep track of when we do dealers 'favors,'" Luchsinger noted. "That's when maybe we agree to make a loan we normally would have turned down. We make sure to let dealers know when we're all 'favored' out."
* Keep relationships from becoming adversarial. "There's a natural adversarial relationship between dealers and credit unions," observed Sturdy, who noted that the CUSO, South Florida Acceptance Co., was established to mitigate that potentially difficult relationship. "We provide an interface that softens that natural combative relationship."
* Maximize technology and automation. "We used to be proud when we could turn around a loan in a couple of hours using phones and fax machines," Smith related. "Now, the dealerships want to hear back from you in minutes. You can only do this if you've got the proper technology in place."
* Make it easy for dealers to do business with the credit union-offer multiple reserve options, for example. Both Smith and Luchsinger discussed how they ensure there's a CU underwriter available during retail hours instead of only during "banking" hours.
* Direct and indirect lending should not compete with each other. Smith related how one its partner CUs was offering a free vacation to promote its direct lending program, which put it in direct competition with the indirect lending program, and the dealer and CU were arguing over it. SACU told the dealer to close the deal then told the other credit union that SACU wouldn't charge its regular fee for the indirect deal so that the CU could still offer the free vacation to the member.
* Turning a member who joined via indirect lending into something more than a "one-trick pony" is the Holy Grail of indirect lending. "It's going to take more than just a letter of welcome," Sturdy noted. "You have to be a whole lot more proactive with this type of member. Concentrate on members who are within three miles of your branch, because if you can get them into your branch, it deepens the relationship."
* Keep the engine primed. Why does SACU farm out so many indirect loans? To keep from having to back off on too many loans coming in from the dealers. "It's very hard to start the train back up again once you've stopped," Smith noted. Sturdy agreed, adding that if a credit union starts backing off on its indirect lending program, the dealer feels "duped" and will stop feeding good deals to the credit union.