Indirect Lending: Weighing In-House Vs. Outsourcing Program

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Credit unions around the country realize that one of the most efficient and effective ways to grow their loan portfolio and potentially their membership is to build a successful indirect lending program. Although such programs offer tremendous promise to budding CUs, getting to the pot of gold at the end of the rainbow can be harder than it looks.

At Amplify Federal Credit Union, we experienced first-hand the struggle of deciding to build an in-house indirect program from scratch or by outsourcing it. Like many CUs starting out, we looked long and hard at turn-key options that would help us get our program quickly off the ground. This approach is popular among smaller CUs, because we often lack the internal resources or experience necessary to build a solid program along with establishing positive relationships with local auto dealers. Handing off these responsibilities to someone else can be a great time saver.

However, for many credit unions, there are also drawbacks to this strategy. The first is the difficulties they will face down the road when inevitable problems arise, such as loan delinquency, charge offs and repossessions. Not to mention the added cost of paying for the service in addition to the dealer costs and ongoing maintenance of the program. Another problem of giving someone else responsibility of your indirect lending program is you don't own the relationships with local auto dealers. These relationships are a key part of any successful lending program. Without them, it's harder to secure loans from dealers in your area and transition the relationships to in-house staff down the road.

Outsourcing your program also raises concerns about developing consistency in your underwriting through all lending channels, such as face-to-face, call center and Internet. And if you want to have the ability to make changes at the drop of a hat or have your underwriters understand and make solid, risk-adjusted decisions on loans, outsourcing can present added challenges.

Lastly, as the old saying goes, "Give a man a fish, feed him for a day. Teach a man to fish, feed him forever." This also rings true as you build your indirect lending program. Developing in-house indirect expertise means that down the road, you'll be prepared to manage and make solid strategic decisions based on your own understanding of the local market. So what can a small CU do? Well, the good news is there are other options. With a little help from an innovative indirect lending software package and short-term consultants, (if needed) you can build an indirect lending program without breaking the bank.

You're probably thinking: "It'd be nice to have an indirect lending software system but there's no way to afford the thousands of dollars in up-front investment-especially if you're a smaller credit union." At Amplify, we found a system from Teres Solutions called SAIL Indirect that offers software-licensing options that give smaller CUs the freedom to grow. The first option is the typical software license fee you pay upfront. It gives you complete ownership of the system but the expense can be difficult for a small CU to justify.

The other option is to rent the software. Instead of paying the license fee, you pay a small transaction fee for each loan you run through the system. The good news is when you've reached a certain loan volume and want to switch to a standard software license model, you can do so without any penalties. It's a great way to get the benefits of a lending system that integrates with your core system and the DealerTrack electronic auto loan network, without having to pay big bucks upfront.

But technology is just one part of building a successful lending program. You also need people with the know-how to set up and teach you to run the program until your staff catches on. If you don't have that expertise or cannot afford to hire someone new, I recommend using short-term consultants. These consultants can help you structure an indirect lending program and establish relationships and contracts with local auto dealers. Once these are in place and you begin to see your loan volume build, the consultants can help you monitor and track your program to make sure it is headed in the right direction. At the same time they can train your own staff to grow to become your future experts in indirect. They will be fishing with the best of them.

So if you're looking to build a successful indirect lending program, remember it doesn't have to be an "either, or" decision when it comes to outsourcing or doing it yourself. With a little hard work, the right technology and short-term consultants, you can have a successful program up and running in no time.

Pierre Cardenas is the Vice President of Retail at Amplify FCU in Austin, Texas. He can be reached at 800-237-5087 or

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