Account originations and collection strategies and techniques often differ from those employed for existing members; thus it e lending staff responsible for both indirect loans and other loans. Additionally, servicing and collecting indirect loans can be more labor intensive. If necessary, the credit union should implement programs to train staff. The board should ensure that staff possesses sufficient expertise to appropriately manage the risk in indirect lending and that staffing levels are adequate for the planned volume of indirect activity. Seasoning of staff and loans should be taken into account as performance is assessed over time.
Dealer Due Diligence Review Process
Credit unions should perform a thorough due diligence review of any participating dealer prior to purchasing an indirect loan. Credit unions should not accept indirect loans from dealers that do not meet their underwriting criteria, and should regularly review whether the prospective borrowers being offered by a dealership meet the established criteria. Deterioration in the quality of indirect loans or in the portfolio’s actual performance versus expectations requires a thorough reevaluation of the dealers who originated the loans, as well as reevaluation and adjustments of the credit union’s criteria for underwriting indirect loans and selecting dealers. Any such deterioration may also highlight the need to modify or terminate the correspondent relationship.
Loan Underwriting and Administration Procedures
After the indirect loan is purchased, loan administration procedures should provide for the diligent monitoring of loan performance and establish sound collection efforts. To minimize loan losses, successful indirect lenders have historically employed stronger collection efforts such as calling delinquent borrowers frequently, assigning more experienced collection personnel to seriously delinquent accounts, moving quickly to repossess collateral, and allowing few loan extensions. This aspect of indirect lending is labor intensive but critical to the program’s success. To a large extent, the cost of such efforts can represent a tradeoff relative to future loss expectations when a credit union analyzes the profitability of indirect lending and assesses its appetite to expand or continue this line of business.
Credit unions should keep in mind that a large percentage of the borrowers in an indirect lending program may be new members to the credit union. These new members e level of loyalty to the credit union as other segments of the existing membership. As a result, the collection efforts may need to be modified to begin contact earlier with the indirect loans than with other segments of the loan portfolio.
The credit union should be cautious about using different types of credit scores to qualify indirect borrowers than is used for existing borrowing members. The use of alternative credit scores, such as “auto enhanced,” can place more emphasis on the repayment of certain loans in comparison to other outstanding debt obligations and the scoring model may provide a higher credit score than a standard credit bureau score. In addition to potentially increasing credit risk, the lack of consistency between the use of different types of credit scores can create discrepancies in the analysis of the credit quality of the entire loan portfolio.
Loan Review and Monitoring
Once indirect loans are booked, credit unions must perform an ongoing analysis of these loans, not only on an aggregate basis but also for sub-categories. Monitoring performance for the entire indirect loan portfolio as well as by dealer is a critical factor to ensure the success of an indirect program. This monitoring may include the tracking of both early stage (i.e. 15 to 29 days; 30 to 59 days) and reportable delinquencies (60+ days), by dealer and credit score categories for each dealer. Additionally, the tracking of loan losses by dealer (broken down by credit risk categories) is a strong monitoring process. Credit unions should have information systems in place to segment and stratify their indirect portfolio (e title loans in Arizona.g., by dealer, loan-to-value, credit scores) and produce reports for the credit union to evaluate the performance of the indirect loan portfolio. In addition, comparison of the indirect segment relative to the credit union’s total loan portfolio and other loan segments (i.e. direct auto loans) can provide the credit union valuable insight as to the performance trends of the indirect program. The review process should focus on whether performance meets expectations. Credit unions then need to consider the source and characteristics of indirect loans that do not meet expectations and make changes in their underwriting policies and loan administration procedures to restore performance to acceptable levels.