NCUA Concerned Over Third-Party, Indirect Lending
Credit unions have increasingly been betting on subprime indirect lending, and in many cases, the gamble has paid off. But NCUA has issued a Risk Alert to ensure that credit unions are doing more than just pulling on a one-armed bandit and hoping for a win, especially when entering into contracts with third-party vendors.
In the Risk Alert NCUA said it has seen "a sharp increase" in the number of credit unions engaged in outsourced, indirect, subprime automobile lending, in addition to loan participation activity in such loans, and expressed "heightened concern" that CUs engaged in these activities may not have effective controls and monitoring systems in place.
"NCUA has seen an increase in problems related to indirect subprime auto lending," said NCUA Spokesperson Nick Owens. "One of the most common red flags is insufficient credit union due-diligence before entering into this type of activity with a third-party vendor and insufficient controls to adequately monitor the vendor after entering into a contract."
While the risk is there even when the credit union handles these specialized lending activities in-house, NCUA said it is the outsourced contracts that are of the greatest concern. Among the unsafe and unsound policies Owens said NCUA is concerned about:
* Insufficient analysis of the indirect subprime auto lending program's impact on the credit union's net worth.
* Adoption of vendor underwriting criteria without careful evaluation and understanding.
* Entering into servicing agreements that allow a third-party vendor authority to change due dates, grant payment deferrals, grant loan extensions, and enter into settlements without notifying the credit union in advance or obtaining the credit union's prior approval.
* Entering into servicing agreements without servicer performance standards and a mechanism to replace an unsatisfactory servicer.
* Insufficient credit union monitoring and testing to ensure accuracy of servicer reports.
NCUA's concern on this topic is so strong that credit unions can expect to hear from their examiners to discuss what controls and practices are in place.
The two major national credit union trade groups generally supported what the regulator had to say.
"Federally insured credit unions strive to offer safe, affordable automobile loans to those who may be faced with a less than favorable credit history; and the National Association of Federal Credit Unions strongly supports this practice that helps those of lesser income who would otherwise have to find alternative means of transportation," NAFCU's Gwen Baker offered. "NAFCU does agree, however, with the recent Risk Alert from NCUA that indicates that close controls must be kept over third-party vendors where automobile lending is concerned."
Throwing Out The Baby
CUNA's Mary Dunn agreed, but noted the regulator's Risk Alert could have a chilling effect that keeps CUs from offering programs that could be good for their members.
"You don't want to throw out the baby with the bath water," Dunn told The Credit Union Journal. "As long as credit unions are making good assessments of their vendors and doing all the due-diligence, they shouldn't be encouraged to refrain from entering into a program that would serve their members well."
Still, the potential for such a chilling effect could be a cause for concern for the other side of the equation: the third-party vendors.
Take, for example, Credit Union Acceptance Co., LLC, a CUSO that offers indirect lending programs to CUs. "You'll see some of that fallout," CUAC CEO Adrian Dominguez told The Credit Union Journal. "You'll see some credit unions deciding not to get into indirect lending as a result of the Risk Alert."
Even though the Houston-based CUSO only offers indirect lending programs, not the subprime indirect lending programs NCUA cited, CUAC sent its credit union clients a letter outlining how CUAC helps its customers protect against risk.
"As a credit union owned company, CUAC has always focused on controlling risk and providing your credit union with quality loans," Dominguez wrote, noting that a recent initiative has been taken on to build a data base of delinquency information and experience related to the performance of CUAC loans.
Moreover, CUAC recently went through a voluntary exam by NCUA. "We are not required to undergo NCUA examination, but since we are owned by credit unions and we were one of the first in the nation to offer indirect lending, NCUA wanted to look at our underwriting," Dominguez explained. "They found no flaws in our business, and they gave us a summary of the exam to share with our clients. We have a good relationship with the local NCUA examiner, and we keep up to date with what they're looking for. The fact is, indirect lending is a risky business because the member isn't right in front of you like with direct lending."
The bottom line, said CUNA's Dunn, is that "CUNA strongly supports that credit unions have to do the due diligence required when dealing with outside parties," Dunn noted. "The Risk Alert is thorough and comprehensive. It's a useful tool credit unions can use to assess their agreements."