There's been increased media coverage about concerns over indirect lending. Specifically, repossessions that result in charge-offs, increased delinquency, and lost profits. Certainly, these can be a concern of indirect lending and any lending for that matter in this challenging economic time. Regardless, all lending requires careful monitoring and some specialized knowledge.
Since some of the larger financial institutions around the country that were doing indirect lending have all but abandoned it, there is now a great opportunity for credit unions to step into the void and serve those members and potential members. Smart credit unions have done so successfully while managing risk effectively.
How will credit unions capitalize on the opportunity while balancing the portfolio risk? One way is through increased automation, better reporting, and refined processes. Credit unions know consumer lending better than any other financial institution. While automating processes may seem counterintuitive to an institution trying to manage risk, it is just that automation that frees up personnel to review applications that require additional scrutiny and focused underwriting. In other words, when you automate decisioning for clear cut approvals and denials, the team can spend adequate time to carefully analyze and fund loans that need more assessment and management.
Automation can also help pinpoint strengths and weaknesses of applications better for those that are subjected to human review. Calculations, ratios, reserves, etc. are all part of the automation steps that help drive consistency and accuracy. In addition, by automating more of the processes, management has access to more reporting that is critical to decision making and careful monitoring of productivity, efficiency, underwriting process, rates, and credit tiers. In fact, reporting can also help credit unions to manage their dealer relationships more effectively.
Special reports dedicated to indirect lending can help monitor activity by dealer, including credit quality, LTV ratios, loan terms, funding rates, dealer reserves, documentation requirements, loan officer patterns, mix of new/used collateral, and look-to-book ratios. This reporting is extremely valuable for both internal monitoring and planning, and also assists in meeting standards commonly expected in today's auditing and examination processes.
Read a case study about Veridian Credit Union for an example of an indirect lending success story. Between 2008 and 2009, Veridian increased the credit union's loan monthly volume from $12M to $24M without adding staff and is now the #1 indirect lender in the state of Iowa. Veridian automated previously manual processes and when General Motors decided not to provide loans to anyone below a 700 credit score, they started receiving a large number of applications. By automating, reviewing all of their loan procedures, and retraining the team, they were able to reduce redundant loan approval criteria by 50 percent and more effectively manage auto-denials. With "Look to Book" reporting, Veridian was able to manage dealer relationships more effectively and profitably. Read the full case study.
With the increased pressure on credit unions' bottom lines, including a potential loss of fee incomes and increased member deposits, it would be a crime for CUs to abandon a legitimate lending channel such as indirect lending where credit unions, with the right tools and know-how, can prosper, grow and play an important role in their business communities. Lending always involves risk and often requires some specialized knowledge and tools, depending on the types of loans being granted, efficient business practices can mitigate those risks.
For more information, visit Teres Solutions to download a case study and learn more about our automation solutions.