Overcoming Common Indirect Lending Challenges

There are many obstacles standing in the way of building a successful Indirect lending program. Here are three that have come to the forefront for many credit unions.


By aaBeck Technology Group, Inc.


While there are many obstacles standing in the way of building a successful indirect lending program, here are three that have come to the forefront for many credit unions in recent years:

  1. Providing quick approvals to dealers on loans that cannot be approved through automated lending software
  2. Keeping losses from delinquent loans in check
  3. Turning indirect loans into “full-service” members

Let’s take a closer look at these challenges and how to deal with them:

1. Fast & Accurate Approvals

In today’s technology-driven lending marketplace, timing and convenience win consumers’ business in financing the loan. Consumers want quick, convenient access to auto loans at the point-of-sale. Dealers want fast, reliable turn-around time on applications. If credit unions are not available after-hours and on weekends to decision loans, they are unable to compete effectively in the market, and indirect loans will be closed with another lending source. In most cases, any financial institution that takes longer than an hour to approve an auto loan application will not likely capture the business.

When considering the effectiveness of any indirect lending program, a credit union must ask itself one question – If automated lending software is used, can dealers receive underwriting decisions for those applications that are not automatically approved? This is where most credit unions run into problems. They either don’t have the resources or the time to manually underwrite these “non-auto approved” loans on a 24/7 basis.

Lending Solutions, Inc. (LSI) works with many of the leading indirect lending companies in the country and helps credit unions speed the loan approval process for the applications that do not receive automatic credit union approval. Dealers need quick, efficient alternative options that also allow them to keep the loan with the credit union. By helping credit in unions make this possible, we enable more members to finance a new or used car through their credit unions, strengthening the credit unions’ lending portfolios.

“Since adding LSI to our indirect loan coverage, dealers have been excited about the improved turn-around times on the applications. The process has been transparent to our members and dealers without the credit union adding additional staff, states Lynn Walker, AVP of Lending, LA Financial Federal Credit Union.

“Prior to bringing LSI onboard, we would have decisions back to our dealers in the morning on loans received at night and on weekends. Now, our Arizona and California operations are working around the clock with 24/7 answers. Dealers are able to wrap up the paperwork and submit the loan quicker than ever! LSI’s underwriting service on our workflow manager has resulted in approximately a 69 percent approval ratio and a booked-loan ratio well over 40 percent. LSI loan officers are able to understand the dealer submissions, and stipulations are set according to our policy – internal staff verifies and is able to more efficiently process loans,” adds Walker.

Lee Kolquist, CEO of Lending Solutions, Inc., LSI, and in reinforces Walkers points by adding, “While automated software helps our clients meet dealer demands of time and convenience, today’s sophisticated, automated technology is still unable to address every loan application. When credit unions consider that approximately 75 percent of their members will finance their auto loan through the dealership, operating a successful, user-friendly indirect program is essential to maintaining member loyalty and business”.

2. Keeping Losses from Delinquent Loans in Check

Many credit unions are experiencing record losses from indirect lending. They get into indirect lending with the best of intentions and they are committed to making it work. The early returns are usually positive. But, when the results start to turn it’s like the NCUA says, “It can become a tidal wave .”

The following is an excerpt from industry expert Rex Johnson’s latest webinar on indirect lending:

Credit unions that get into trouble all have the following characteristics:

      • They grew too fast
      • They were not staffed for the growth
      • Lending and collections both had issues
      • There was an initial state of denial which just compounded the problem

Once credit unions recognize and understand they have a problem, they are looking at 24 to 30 months of working out the issues with a lot of pain and explaining to the Board of Directors on how this happened.

With that, keep in mind these two keys regarding indirect lending:

      • You cannot play this game without a strong, well-staffed, well-trained collection department
      • You can decrease your losses by making collections your #1 priority.

In order to minimize losses, credit unions should analyze the entire lending process – starting at the beginning of the credit granting process and ending with collections. The collection department is really the quality control department. For the collectors to be effective in what they are doing they must have training in:

      • Recognizing good versus bad risk applicants
      • Understanding scoring models
      • Knowing what direction the score is headed
      • Understanding a mistake and not adding to the loss

3. Turning Indirect Loans into “Full-Service” Members

If you're like many credit unions, your indirect program may be generating a high volume of loans, but it is a difficult challenge to get these members to make your credit union their primary financial institution. The key to turning these indirect members into full-service members is timely, professional follow-up. Simply sending them a coupon book and a welcome letter is not going to win their business. Credit unions need to take a more proactive, personal approach to deepening these member relationships. If you have the internal resources to manage an outbound calling program, it’s a great idea to have a dedicated person or team of people (depending on your volume) contacting these new members welcoming them to the credit union. Their goal should be to:

  • Introduce the credit union and welcome the member
  • Educate the member about the credit union and its services
  • Cross-sell appropriate products – checking accounts, credit cards, home equity loans, etc.
  • Thank them for their business

If you can accomplish these tasks in a friendly, professional and efficient manner, you’ll see amazing cross-selling results and create long-lasting, deep relationships with these new members.

Depending on the size of your credit union, you may or may not be able to set-up a dedicated staff to facilitate this outbound calling process. If you can handle the calls internally, the main objective is to ensure your staff is well-trained in member service skills and versed in cross-selling. If you do not have the resources or expertise to conduct a continuous outbound campaign internally, Lending Solutions, Inc. offers customized outbound campaigns for credit unions.

In conclusion, indirect lending can be a great tool to help you grow your loan volume and strengthen you credit union, but it must be managed efficiently and continuously if you want to see long-term success. Lending Solutions, Inc. will be conducting a free webinar on indirect lending. Feel free to register or get more information by clicking on this link.


June 6, 2005


  • Excellent points. We are aware of these, but need to keep reminding ourselves.
  • This article has some unrealized potential. One effect of indirect lending is a surge in new account fraud, and the subject was untouched in this article. I would be very interested to read about what indirect lending programs recommend and what other credit unions are doing to combat fraud.
  • A bit general but good none-the-less
  • Good points, but these are the obvious points. I would like to see if other credit unions have experienced decreases in liquidity and margin due to accelerated CUDL growth.
  • Addressing the isue of fraud. 1) Fraud accounts are covered in YOUR dealer agreement. If the deal is a fraud the dealership pays off your loan and picks up the vehicle. It should be no lost to the credit union. Another verification is when you mail the Member a letter about their purchase of the vehicle and the vehicle your have financed. You also request a current copy of the purchaser's drivers license. Information on the current credit report pulled by the credit union (not a dealers copy) will alert you on the social security you have used. 2) It is most important that the credit union knows their dealers. Dealerships do a much better job when there is a working relationship between them and the credit union.
  • Indirect Lending Technologies, LLC has has concentrated on helping design policies that draw good paper through the system. And it appears that the real key to cross-selling is getting that new member into a Checking Account - until that happens - they will never really be an active member.
  • Another solid control to consider: when speaking with the borrower, identify characteristics of the vehicle for confirmation (i.e, particular options such as sun roof, six CD changer, etc.)
  • Good information and observations, but as a whole, the credit union industry continues to resist indirect lending and thus loose out on valuable opportunities to increase membership growth. Until credit unions understand that car dealers are partners for financing rather than pariahs, indirect lending will continue to be a mystery. Big banks and finance companies have caught the vision that dealers are the major source for consumer automobile loans. Credit unions in the US need to heed the call and serve their members by offering this product.
  • More on Indirect Lending at www.barrykirby.com
    barry kirby
  • This is a nice recap of the basics. Until recently, there have not been a lot of options for Credit Unions to get into Indirect Lending without a sizeable expense in technology and staff. Some Indirect Lending platforms still encourage an environment where "cheaper is better", and even with increased loan volume, Credit Unions still are not achieving the spread or return to justify the risk associated with dealer originated indirect loans.
    Jared Kasper - OAG Indirect