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
; 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.
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.
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
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.
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