credit union within a short period of time, such as 7 days. Otherwise, the loan may be treated as a purchase of an eligible obligation, subject to the provision of the Federal Credit Union Act §107(13) and Part 701.23 of NCUA’s rules.

Although the credit union must make the final approval, it is important that management oversee the dealership’s credit evaluation. This process may include independently obtaining credit reports, recalculating debt ratios, and/or verifying income and employment. Failure to perform these functions indicates the credit union is not maintaining control over the program. A dealer that is constantly submitting applications from borrowers who do not meet the credit union’s standards may be trying to pass off poor credit quality without notice. If documentation is incomplete, problems can arise when securing title to collateral or collecting the loan.

Experience combined with periodic training ensures that staff remains current with the automobile industry and enables them to identify questionable practices such as inflated purchase prices and trade-in values. While the dealership will process much of the paperwork, this should not preclude the credit union from hiring staff with indirect lending experience. Staff must work with the dealership’s financing personnel to:

; obtain the required documentation,

;familiarize the dealership with the credit union’s underwriting standards and loan programs, and

; verify final paperwork to ensure it complies with the credit union’s policies and underwriting standards.

As a final step in the loan approval process, the credit union should review the paperwork submitted by the dealership. The final paperwork is the binding documents between the borrower, member, and the dealer. If the credit union fails to catch mistakes or changes to the initial paperwork, the right of recourse may become obsolete. It is a common practice for the credit union to call the borrower and verify the terms of the sales contract. Credit unions may perform this check on a sample basis.

Monitoring

When management fails to oversee the indirect lending program, it will become a safety and soundness concern. The board must stay abreast of the program’s performance to determine how the indirect lending affects the credit union’s financial condition. The materiality of the program in relation to the credit union’s operations and financial statements should dictate the frequency of reporting. For credit unions with limited exposure—such as less than 100 percent of net worth—a semiannual review may be sufficient. For credit unions with new programs, rapidly growing portfolios, or exposure exceeding 100 percent of net worth, monthly reports would be prudent.

REGION V

Collections

Indirect lending can generate a significant amount of loans and new members who lack loyalty to the credit union. More loans means loan growth and the growth is often significant and rapid. This dynamic may prompt higher delinquency rates, charge offs, and repossessions. Keeping an eye and producing analysis on these trends is beneficial for the credit union and are tied to the level of resources allocated to the collections department, should that come into play.

The credit union should compare the performance of indirect loans to loans originated otherwise. Disparities in loan performance can lead to different reserving requirements, and IRPS 02-3 “Allowance for Loan and Lease Losses Methodologies and Documentation for Federally Insured Credit Unions” can provide more guidance on this point. The credit union, for example, may need a separate pool for indirect loan portfolios to accurately estimate probable losses for purposes of funding the Allowance for Loan and Lease Losses.

Conclusions

Many credit unions operate successful indirect lending programs. However, success is contingent on establishing proper controls prior to implementation. Maintaining success moves in tandem with ongoing and effective management. Credit unions are encouraged to use NCUA’s AIRES Indirect Lending Control Questionnaire as a reference guide for key components of an indirect lending program. Other resources: NCUA Letters to Credit Unions No. 10-CU-15, Indirect Lending and Appropriate Due Diligence, and No. 07-CU-13, Evaluating Third Party Relationships.