Credit unions, regardless of their size, are constantly looking for ways to grow revenues and keep costs at a minimum. And indirect auto lending has become one of the most productive ways to achieve these goals. But maintaining indirect lending programs requires effective, efficient, and timely loan decisioning; that’s why one of the fastest growing methods to keep these programs running successfully is outsourced underwriting.
With outsourced underwriting, credit unions of all sizes can easily compete against the more aggressive loan providers (such as captives and banks) within their markets. Credit unions utilizing outsourced underwriting have seen significant increases in the number of loans submitted for decisioning and then booked by the credit union. When yield and interest are added to the equation, credit unions have realized as much as $10,000 - $20,000 in additional revenue per month.
Consider the following to determine if outsourced underwriting is right for you:
What exactly is outsourced underwriting?
In its basic form, outsourced underwriting involves contracting a company or individual to underwrite auto loans on behalf of a credit union. The credit union sets and controls the credit policies and loan criteria that are used to make the decisions on the loans, and owns the loan once it is booked. The outsourced underwriting provider supplies the experts that know how to apply those policies and criteria at the credit union.
Why should I consider using outsourced underwriting?
Whether you are just starting an indirect lending program or trying to revitalize or grow an existing one, personnel costs can be a key obstacle. While technology may allow you to automatically decision most of your loans, you will still need knowledgeable underwriters to review those that fall in the gray area. And, since most automotive purchases are made in the evenings, on weekends and holidays, your availability after normal business hours is necessary to demonstrate to your dealers that they can count on you.
Outsourced underwriting allows you to extend your capabilities without incurring additional staff salaries. It gives you a cost-effective way to get your program up and running or to try new ways to enhance what you are currently doing with as little upfront cost as possible; frees your existing staff to focus on other types of profitable loans, and allows you to always be open. Your dealers will know that they can count on you even if your lobby doors are locked. This creates a stronger relationship with your dealers and potentially increases loans being directed your way.
What should I look for in an outsourced underwriting provider?
There are several criteria to consider when selecting a company for this service. The key “ity” words to remember are capacity, credibility, capability, availability, and reliability.
The best outsourced underwriting providers can decision a minimum of 2,500 loans each month. Why? Because the best provide this service to a considerable number of credit union clients. Having the capability to handle this volume establishes credibility that the provider can maintain processing loan volumes at or below this tier. Whatever your institution’s current or anticipated future volumes, the provider should decision your loans as if you were its only client.
On average, an outsourced underwriting provider should secure an approval ratio around 45 percent. This number can fluctuate depending on how aggressive the credit union wants the provider to be, but generally speaking, this is a good standard. Since the provider bases its decisions on credit union guidelines, strategic changes to those guidelines should be able to help move that ratio in a more desired direction if 45 percent is not your goal.
Target turnaround times for outsourced underwriting providers should be 10 minutes or less. However, really strong providers can offer that extra boost you’re looking for from your indirect lending program, producing even faster times — perhaps as little as five minutes. Of course, this depends on the experience of the provider’s team members; in your due diligence process, it is always wise to ask for the average tenure of the underwriting team.The best providers offer a team of seasoned underwriters with tens of thousands of individual auto-underwrites under their belts.
A strong provider adheres to the lender’s policies and criteria and does not take on too many risky loans in the gray area. Should the credit union want the underwriter to buy deeper or back off on certain types of loans, the provider should be available with staff trained to consult, review, and implement those changes in a timely manner. Additionally, the provider should always provide feedback and reporting to help the credit union improve their policies.
Lastly, strong providers should be available to field calls from dealerships for rehashing or fixing deals. Dealers love to call-in after submitting deals and want to able to speak with a decision maker when they do. The outsourcing provider should be professional enough and have experience working with dealers so that the process is smooth and actually improves the relationship between the dealer and the credit union.
How much does it cost to use an outsourced underwriting provider?
All outsourced underwriting providers use different pricing models. But prices are almost always based on anticipated monthly or yearly loan volume. Look for a provider that will negotiate a flat fee per underwritten loan, instead of basing the price on a percentage of the loan amount. Should volumes increase, be sure the provider will be willing to negotiate discounts and new pricing in a given period.
Outsourced underwriting is just one of the key aspects to consider when looking to start or improve your indirect lending program. Other areas such as dealer management, technology, loan processing and funding, and consulting and reporting should also be reviewed on an ongoing basis. CRIF Select is the industry’s leading provider of outsourced indirect lending programs and technology for credit unions. In fact, our complete suite of indirect lending solutions has more than 30 years of experience when it comes to helping credit unions and other financial institutions outperform the competition.
For more information about the important factors to keep an eye on when it comes to underwriting for your indirect lending program, please click the button below to download a copy of our “Indirect Lending Top 10 Checklist: Building Better Relationships Through Underwriting.”
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