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Aug. 21, 2006
I agee with the commenters #1 and #2. Having been in the industry for over a decade, I have seen many credit unions enter subprime lending with the expectation that the higher interest rate on the loan is a "cure-all" and that they are "serving the underserved" at the same time. Without proper lending polices and a staff that is appropriately trained, losses will exceed revenue, and that hurts all of the credit union's members (do the needs of the few outweigh the needs of the many?). As the article indicates, an 18% rate on a 5 year, $10,000 loan will bring in an extra $3,600 over a 6% loan. Very true, but only if the member repays the loan!! Remember these are high default risk individuals that you are dealing with and they need to be handled as such. There is a good reason why large companies like Ford have gotten out of the business - to many borrowers do not repay the loan.
The problem with subprime indirect lending is that many times, CUs don't get into it for the right reasons. They get in to it to boost their ROA. (which might be tied to executive compensation?) They might also learn that they can pull some FOM shenanigans related to indirect lending - see associational fields of membership. Whatever the reason, many of these CUs aren't looking out for the good of the member. If they were, they wouldn't be putting them into an auto loan at 18%. Now, I agree that indirect lending CAN be a valuable tool for some CUs to increase loan volume. But there's a lot of greedy CEOs who need to stop being disingenuous about their reasons for wanting to make subprime indirect loans. They're looking to profit on the backs of the people who can least afford it... and that's 180 degrees out of faze with the credit union philosophy. In fact, it sounds like a banker's strategy.
If the shoe fits…check it for athlete’s foot! Sub-prime indirect lending can be an extremely profitable resource for CU’s… if they are willing to actually hire and PAY a knowledgeable person to oversea the program. It’s amazing to see such a large segment market whom CU’s claim to serve since their humble beginnings now turn their backs on the underserved just as the banks once did. Many CU’s get involved in indirect lending because upper management heard about success another CU was having with a program. They immediately contact the players, CUDL, Dealer Track, etc and then place this program directly under the same people who are not trained to transact with dealers. They almost immediately have success, which is short lived, because delinquency and charge-offs soon follow. Being involved in indirect lending is tough enough for CU’s let alone open Pandora’s Box to sub-prime lending. Ford actually sold their sub-prime lending portfolio because it was not profitable. Are there any CU’s the size of Ford? There is a way to conduct sub-prime lending but you must: Hire an experienced professional - Track performance by dealers - Off-set your portfolio with A+ and A paper - Perform Audit calls to members and place of work - Keep the LTV below 75% - Charge a rate of 18% or higher – and Only work with a select number of dealers who’s portfolio’s have performed well with your CU in the past. CU’s should first establish a solid indirect lending program before even thinking about entering the sub-prime lending arena. Yes every dealership in the country will want you to buy this paper; if you have the proper team and policy in place it can be successful. Let’s think for a moment, one member can bring you possibly 2 new auto loans in 3 years. One dealership can bring you 10+ auto loans in a month. Where would you place your efforts?
Agreed, NCUA's knee-jerk reaction did not help the situation. It's a shame credit unions brought this on themselves by chasing banks and instituting predatory lending practices.
Charging three times the rate doesn't equate to anywhere near three times the yield when dealing with subprime loans. This is especially true when the loans age and charge-offs rise. Recent NCUA action is reason alone to avoid this area of lending. They have required such expertise and due diligence that few credit unions can comply, even with third-party vendors who specialize in this area of lending. These vendors have been crippled by NCUA's restrictions and will likely cease functioning, which will result in the significant losses NCUA was trying to prevent.
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