A jump in auto sales could naturally lead to a potential boost in a credit union’s point-of-sale financing opportunities, but credit unions who want a larger share of the lending activity must build real, long-term bonds with local gatekeepers – the auto dealers. And the strongest bonds are based on a mutual understanding of both institutions’ business models.
At year’s end, indirect loans comprised nearly 43% of all credit union vehicle loans. But effectively developing and managing a strategy for this distinct book of business can be a tough task for institutions of any size.
In 2011, Ledge Light Federal Credit Union ($212M, Groton, CT) grew its new auto loan balances by 108% and its used auto loan balances by 90%, primarily because of its successful indirect lending strategy.
Third-party or CUSO models are a popular way for many credit unions to explore indirect lending, but Ledge Light worked with a group of advisors and on-staff talent to build its own network of 31 preferred dealers from the ground up.
“A lot of consumers are looking to replace their aging car or truck, and with interest rates as low as they are, this is a great time to do so,” says David Birulin, chief lending officer for Ledge Light. “We considered several options for structuring our indirect program, but the one that met the goals of the institution best was to do it in-house.”
Creating A Network
Building on the insight and historical experience of their CEO, who was a member of the Leadership team at Connex Credit Union when they started their indirect lending program, and the recommendations of a consulting company as to who would be the best match in terms of culture, values, and reputation in the area, the credit union initially kicked off its indirect program in September 2009.
Ledge Light didn’t achieve success overnight, it came with give and take. But the in-house structure gives the credit union the opportunity to be in direct control of the process and better manage relationships, member and dealer alike.
“We are looking for those dealers with good service quality, who stand behind their product and have accountability even after the deal is made,” Birulin says. “Our dealers understand what we’re looking for in terms of credit quality and our goals for increasing engaged membership, so it’s really a partnership.”
In the beginning, the credit union relied on the reputation it had already built in the community, which helped convince trustworthy dealers to give the program a shot.
The program debuted with five relationships, but the credit union now buys or books loans from 31 individuals that work at more than 45 dealer locations. Ledge Light believes those ranks will continue to swell in the future.
“We get calls from dealerships all the time wanting to join our program,” says Tina Waterman, Ledge Light’s indirect lending manager.
So what draws a dealer’s attention to Ledge Light over other financers? In many cases, it’s the same qualities and traits that attract new members, including transparency, availability, and an understanding of personal situations.
“Some of the bigger institutions never actually look at the application, they just auto decline or approve it,” Birulin says. “We look at every single one and find a way to make it work for the dealer, the borrower, and the credit union.”
The credit union assigns each of the underwriters in the three-person department their own dealerships, and Ledge Light is committed to being available whenever those dealers need assistance. Employees stagger their hours, work extended Saturday and holiday shifts, and take calls when they are at home to better suit the dealers’ workflows.
Despite the additional time it takes to review individual applications, the credit union beats many institutions with automated approvals to the punch. Over the past six months, for example, it has purchased contracts for roughly 69% of the applications it approved.
“This ratio is a testament to our speed and efficiency,” Birulin says.
Working With Dealers
Building an indirect army requires more than taking a hands-on approach with applications. In many cases, it requires an on-foot approach too.
“When someone has issues with their credit, we will meet with the customer in partnership with the dealer to find a car that fits their budget,” says Waterman.
The credit union also provides dealer incentives such as custom promotion pricing or the chance to hold events and presentations using credit union space and resources. Because the indirect department is in-house, Ledge Light can be more maneuverable in meeting the needs of its business partners.
“Last year we did a promotion with Valenti’s auto group where the giveaway included the winner driving a Chevy Volt for one year, free of charge, with the option to purchase after the one-year expired. They advertised for us, and we advertised for them,” says Waterman. “We even had the car at our annual meeting.”
For a local Harley-Davidson shop, the credit union displays motorcycles in its lobby and holds on-site test runs. Representatives frequently attend Harley-Davidson public events to help finance individuals on the spot.
These loans bring additional funds into the credit union, but at the end of the day Ledge Light is looking for new, engaged membership, not just one-off transactions. This is where dealers get the chance to return the favor and go the extra mile for the credit union.
“Many dealerships hand out our membership packets and tell customers about our other products and services,” Waterman says.
This gets members thinking about their whole financial situation. According to Birulin, more than 11% of indirect auto loan members are converted into full membership with others products and services. And as the credit union prepares to roll out other engagement campaigns in the months ahead, including a new member welcoming program, its goal of 20% indirect conversion looks increasingly attainable.
Backing Up Borrowers
Balancing flexibility with piece of mind in regard to compliance and asset performance, originators work closely with the credit union’s collections department to develop policies and solutions, such as payment restructuring, that honor the credit union-member relationship.
“We do know there is risk in seeing increased delinquencies and loss from an indirect business, so we are very careful all through the process,” Birulin says. “We’re member centric, so how we perform when a loan becomes past due is just as important as it is when we’re acquiring the business.”
Although the credit union frequently buys high-quality paper, even those with lower credit scores can get assistance and a substantial helping of financial guidance through the institution’s credit builder scenario.
“A lot of big shops don’t even do a debt-to-income calculation, it’s all about the credit score,” Waterman says. “Our dealerships appreciate that we’re trying to make the deal work, even if we have to have the buyer come in and sit down with us before we approve them.”