Where Indirect, Subprime Lending Fits Within Credit Unions
With my background as both a former credit union CEO and NCUA Chairman, I am approached frequently by credit union executives who ask my thoughts as to whether they should be involved in indirect lending in general, and third-party, subprime indirect lending in particular.
Auto lending has been the bread and butter of credit unions for many years, but the days of hoping a member will walk out of the dealer financing office to come down to the credit union branch to see a loan officer are basically over. Once they've experienced that new car smell, the member wants to finance it and drive it off the lot today.
Many credit unions feel they must have a presence in the dealer financing office to have a competitive chance to get their fair share of the auto loans their credit unions need.
And what others call subprime auto lending, they ask, isn't that just the risk-based lending product credit unions have been offering for years to match pricing with risk?
Well, these are legitimate questions.
Admittedly, the question recently seems to stem from the NCUA's June guidance on such lending practices, which outlined several areas of caution for credit unions involved in indirect lending while also stating, "subprime lending is an activity that, if properly implemented and controlled, can be an acceptable segment of your lending portfolio."
Within that very statement, it seems to me, would lie the answer to that oft-asked question. If a credit union has done its due-diligence on an indirect lending program and has found it complies with the appropriate regulatory standards for safety and soundness, is meeting the needs of its members, and is delivering proper yields as a part of a balanced asset-liability management program, there is no reason why a CU should not offer such a program.
Remember that to be successful, a credit union must manage risk, not avoid it altogether. When it comes to indirect lending, it is imperative that credit unions perform their due-diligence on the program, manage it with safety and soundness as its overriding priority, and communicate with the NCUA directly about their experience and oversight of the program. But they should not run from risk that is appropriately managed.
As a credit union CEO, when I had concerns about an NCUA proposal and felt the need to write a comment letter or contact the regional office to share my thoughts, my board chairman would often discourage me saying, "Dennis, the NCUA is kind of like the IRS. You don't want to draw attention to yourself with those guys."
Well, when I joined the NCUA board, I found that was not the case at all. The NCUA, as well as state supervisory authorities, are like the referees in a football game. It's their job to make sure the rules are followed, to make sure a player doesn't clip, hold, or jump offsides. In a nutshell, it is their job to protect the integrity of the game. It is not their job, however, to get in the huddle and call the plays for each team.
It is my view that with thorough and appropriate due diligence, third-party subprime indirect lending can be a winning play for many credit unions-certainly not all, but many.
With captives having such a tight hold on the market, credit unions need to find innovative ways to stay in the game, and I dare say that the complete absence of auto lending would be disastrous to the bottom lines of most credit unions. One of the ways to stay in the game is to work in partnership with a reputable dealer, or a solid third party with proven dealer relationships, to offer a program the captive does not. In most cases, the very thing a captive is not willing to do is to offer financing to those who have less than perfect credit.
Having this indirect relationship also affords the credit union a new way to grow membership. National credit union membership growth was only 1.48% in 2004, the lowest growth rate in a number of years.
Interest income and membership numbers are vitally important, but they're not the exclusive reason credit unions exist. Credit unions are part of a larger movement, endowed with a common mission to build their long-term financial viability even as they reach out to serve their communities, meet the financial needs of their members and lend a helping hand up to folks from all walks of life in gaining the American dream.
One of the most financially underserved individuals in American society today is the person who has had some past credit problems, many times outside of their control through a health crisis, employer shutdown or natural disaster, and can't finance a car to get to work. Often it is good folks who have just had a bad turn and need someone to help them get back on track.
If a credit union won't help them turn their financial lives around, who else will be the source of that second chance?
Risk-based, or subprime, indirect lending is without question an option that should at least remain in the playbook for those CUs that can perform the due diligence, manage the risk and demonstrate the benefits for their credit unions and members.
Dennis Dollar is founder of Dollar Associates, LLC, and former NCUA chairman and CEO of Gulfport VA FCU. Among Mr. Dollar's clients is CENTRIX Financial, which provides subprime auto lending services. Mr. Dollar can be reached at www.dollarassociates.com.