How To Tell Risk From Reward In Loan Programs
Indirect auto lending is well-known for delivering both risk and reward. One group of credit unions here was given advice on how to tell the difference.
Seventy percent of the top 500 credit unions now do indirect lending. In the first quarter of 2005, 54% of their auto lending was indirect, up from 48% in the fourth quarter of 2004, said Bill Klewin, assistant vice president, Lending Solutions, with CUNA Mutual Group, in remarks before CUNA's Future Forum. That was a 12.5% increase in just three months.
"There is no doubt indirect auto lending can produce a new revenue stream and also increase a credit union's membership base," said Klewin. "But, it's difficult to get members to take other services. You have little or no contact with them and, in many cases, they may not even know you are their auto lender."
CUs should view relationships with an auto dealer or a third-party vendor very carefully, said Klewin. He recommended spelling out exact terms for the dealer/vendor to follow and having a signed agreement, including a termination clause. Klewin said the dealer is not your friend, but a business partner who wants to make a sale.
Indirect lending has caught the attention of the NCUA. In June, the agency published a risk alert on subprime indirect lending, warning credit unions to take a closer look at their relationships with third-party auto lenders (CU Journal, Oct. 3). Although the NCUA alert specifically addressed subprime lending, the advice holds true for all indirect lending: have controls in place with the dealer/vendor, said Klewin.
Reasons & Risks
The reasons for having an indirect lending program are what make the risks worthwhile, Klewin said. "You have increased loan volume, membership growth, and you are providing a valuable member service. Members want to get their loans where they buy products, and they want the loan in a timely fashion."
Klewin noted the application process between the dealer and the credit union must be as simple as possible, and that being competitive is not just about price. As an example, he said dealer research indicates they think credit unions have better rates, but slower processing and approval time, and dealers will often go with the first loan accepted. "You must build a strong relationship with the dealer and the staff, because the better the relationship, the more likely they are to work for you and work fairly," said Klewin. "There is a high turnover rate in the auto sales industry, so it might take some extra work to keep the relationship ongoing."
Indirect lending is not something a credit union should undertake unless there is a full commitment. Klewin said credit unions should treat and track indirect lending separately from direct lending. He said there will be a need for additional staff, and these people should know the indirect lending industry.