Funds At Risk
WASHINGTON-An uptick in indirect auto lending losses has NCUA and its field staff paying closer attention to CU partnerships with car dealerships.
Noting that auto loans from credit unions with indirect programs more than triple car loan volume from CUs without dealer relationships, NCUA Regional Director Melinda Love said stressed, "We understand indirect is a very critical book of business for credit unions. But we have seen an uptick in problems in indirect lending portfolios. We went through a period of time from 2003 to 2005 where a lot of credit unions struggled putting together their indirect lending portfolios and then things leveled off. Over the last couple years, much due to the economy, we are seeing lots of losses starting to bubble up again."
The regulator shared that direction during a recent NCUA webinar that examined trends in indirect lending, outlined red flags CUs should be watching for (see related story), and covered best practices.
Marcus Vander Wall, program officer in the Office of Examination and Insurance, shared what NCUA views as indirect lending best practices. "Management should have documented business rationale for entering into indirect lending and should reassess the business case for continuing indirect lending programs on a regular basis. This is a sound business practice examiners will be checking for."
The agency is recommending credit unions establish short-term growth, performance, and profitability goals based on market conditions, while these same goals long term should be based upon the credit union's strategic growth plans and risk tolerance. Equal attention to staffing should be paid to collections as to lending, added Vander Wall. "Indirect lending can result in significant growth, which can be overwhelming," he said. "Credit unions new to indirect lending often underestimate their collection resources."
Vander Wall emphasized the importance of clearly understanding profitability-net loan charge-offs, staff compensation for the area, and cost of funds-and contract review. "Contracts with each dealer or indirect lending vendor should be reviewed by qualified counsel to ensure credit union interests are protected. Contracts outlining third-party arrangements are often complex and credit unions should understand and ensure compliance with state and federal laws and regulations, and then contractually bind the third parties to compliance with these laws."
Other Critical Issues
Just as critical as guidelines for managing growth are identifying scenarios that would prompt the credit union to wind down business with a dealership or vendor. "Credit unions need to be prepared to take action when the program's risk profile increases."
Managing risk is largely about the credit union knowing their dealers well, stressed Vander Wall. "Credit unions should be able to pull a lot of information on each dealership, such as applications submitted approved, conditioned, or denied; loan outstandings, delinquencies, first payment default, repossessions, charge-offs, average loan to value, average term, and average credit score."
Victoria Bennett, regional lending specialist in NCUA's Region V office, encouraged credit unions to get their hands on exception and audit reports from third-party vendors. Bennett emphasized that credit unions should look at the reports to see what changes dealers make once an application is finalized. "If they make a change after the fact, why did they make that change and what was that change? Credit unions should be able to get that kind of report and the dealership should provide justification for what exactly occurred."