A successful indirect lending program is one of the most effective ways for credit unions to grow their loan portfolios. According to a Callahan & Associates’ report, indirect loans accounted for 43% of all vehicle loans as of June 2011, for a total of $70.9 billion in outstanding indirect loans.
Over 1,900 credit unions participated in indirect lending last year. But despite its popularity, there are still several persistent indirect lending rumors in the credit union community today. Here are four of those myths and why they shouldn’t discourage you from embarking on indirect lending.
Myth #1: Indirect Portfolios Don’t Perform As Well As Direct.
Most indirect loans go to non-members who have no existing relationship with the credit union, which isn’t always a bad thing. If there’s no previous relationship, there are no influencing factors when it comes to underwriting a loan. Most institutions are hesitant to approve borderline loans from non-members, so they end up putting higher-tiered paper on the books with indirect lending. Secondly, credit unions will often choose to offer lower rates or rate discounts on their direct loans to boost that business and member satisfaction. At the same time, this causes credit unions to earn less substantial yields on direct loans, thus diminishing that portfolio’s performance.
“One of the concerns we’ve had with growing our indirect lending program is the effect that it might have on our delinquency and loan losses,” says Tim Crosby, vice president of loan development at Directions Credit Union ($545M, Toledo, OH). “But we have been very pleased with our indirect lending portfolio performance and how it has stacked up against our direct portfolio. In 2011, our indirect charge-offs were even lower than our direct charge-offs, which is great news for our credit union.”
Myth #2: Only Large Credit Unions Can Compete In Indirect Lending.
There are three critical components to a successful indirect lending program: dealer relationships, consistent buying, and efficient funding. If a credit union can effectively handle all three of these areas, regardless of size, they will have a robust program. Smaller credit unions may find that they need support in these areas. An indirect lending program takes know-how that smaller institutions may not be able to afford to have on staff, so outsourcing some or all of these indirect lending functions can create a competitive solution.
Myth #3: Examiners Don’t Like Indirect Lending.
In many cases, it isn’t that examiners don’t like indirect auto lending. It’s that they don’t like walking into your credit union to see that you don’t have any program processes in place, you’re making too many exceptions to your credit policy, you don’t have any on-staff program expertise, or you’re getting all of your business from one dealership. These are all very legitimate red flags to raise, and can be reasons to consider outsourcing your indirect lending program to a company that can provide you with program outlines, dealer management, and expertise. In any outsourced situation, be sure that it’s only a facilitation of your program, however, and that you control how loans are underwritten.
“We have found that having the right partner is an invaluable part of our indirect lending program, especially when it comes to compliance," says Ed Smith, indirect lending and business development manager at Vystar Credit Union ($4.4B, Jacksonville, FL). “Outsourcing has allowed us to have a successful and compliant program that ensures that compliance issues don’t just vanish today only to resurface tomorrow.”
Myth #4: Running An Indirect Program In-House Is Cheaper Than Outsourcing.
Some credit unions try to run their indirect program by dedicating half of a staff member’s time to managing the internal logistics and sending a marketing person out to manage dealers, which is a recipe for indirect lending program failure. In order to effectively manage dealer relationships, process loan packages, resolve compliance issues, and get money to dealers in a timely fashion, you need people dedicated to your indirect lending program. In these lean times, it’s unlikely that you have such individuals already on staff and difficult to justify the expense of adding new staff, so outsourcing is often the most cost-effective option.
While these and other indirect lending myths may persist, credit unions can learn a lot about succeeding in indirect lending by looking to their peers. Taleris Credit Union ($71M, Cleveland, OH) is one example of a credit union that has benefited greatly from indirect lending. Download the case study now to learn the secret of their success.
As the Director of Sales for the CRIF Select division of CRIF Lending Solutions, Trina Larson is an expert on indirect lending and how lenders and auto dealers can best work together to maximize their indirect lending success. To learn more about CRIF Lending Solutions’ automated lending solutions, visit www.criflendingsolutions.com.
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