Key Considerations for Subprime Indirect Lending

With expanded charters often resulting in more diverse memberships, credit unions may need to develop greater expertise in subprime lending.


Subprime lending is overlooked by many in the credit union community . Concerned about higher delinquency and charge offs, many credit unions have conservative lending guidelines that limit their ability to serve new members with impaired credit. However, with the subprime lending market growing 5% a year, the need for more flexible guidelines will only increase. Credit unions can use this as an opportunity to build a niche by serving subprime markets.

Credit unions are gifted at developing strong relationships with their members. By developing relationships with less credit-impaired members, credit unions can help members improve their ratings, be less likely to default and create a valuable long-term relationship.

Subprime indirect lending among credit unions can vary greatly. Each credit union has the ability to customize their approach to this type of lending, and each approach can bring benefits such as:

Additional Interest Income: Credit unions can expect higher income due to the higher rates of non-prime loans. For example, a 5-year $10,000 loan at a rate of 18% can bring an extra $3,600 as opposed to a prime-lending rate of 6%.

Underwriting Model Flexibility: Credit unions have the option of choosing a program that is in-house or that is outsourced to a CUSO or third-party vendor. Each option has its own perks for the credit union.

  • In-House: Some credit unions prefer to control their indirect lending programs so that they can review their loans on a case-by-case basis. Bad and no credit applicants are reviewed individually, and the effects of the loan can be managed carefully and internally. Some credit unions customize bands of credit scores to better define their specific borrowing market. In-house also helps promote member loyalty and trust, as well as aid those individuals who need a car in order to earn income. The credit union can monitor its success and quickly change an aspect not working correctly.
  • Outsourcing: Some credit unions are turning to a credit union service organization (CUSO) or a third-party vendor to service their programs. Such organizations have a staff that is experienced and knowledgeable in successful subprime lending. Dealers have often worked with such companies, which eliminates the time credit unions may spend forming and maintaining those relationships. Additionally, credit unions can extend their geographic reach ultimately expanding their potential client base with the extended dealer network.
  • A Blend: Seeing benefits with both, some credit unions are looking to blend the options to provide the best service. Credit unions with subprime lending are developing their own hybrid to best suit their needs and the needs of members.

Member Growth Opportunities: With the increased demands for subprime lending, credit unions can look to subprime lending as a change to attract new members within the limits of their operations. Individuals need cars to be able to work, and they need to work to be able to afford cars. This need fits neatly into the credit union philosophy of servicing their community and membership.

There is not a set equation for a successful program. Success is dependent upon your membership, the size and experience of your staff, consistent monitoring, and goals for the future. Credit unions looking to offer such a program must be open minded to a changing environment and new avenues.

To learn more on how subprime lending can work for your credit union, join us for a webinar on “Best Practices in Subprime Indirect Auto Lending”, brought to you by Callahan and Associates.




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.