Responsible, Indirect Lending Programs for Credit Unions
Most credit unions are apprehensive to dive into the indirect lending world and for good reason; starting an indirect lending program can be overwhelming. When done correctly, an indirect lending program can become one of the most significant sources of loan volume and interest income for any credit union. Once you’ve determined that you want to have indirect lending as a strategy for your credit union, then you’ll need a plan to bring clarity to a very complicated process. Following is a list of variables that demand much attention, whether implementing an in-house program or a third party program:
Know your Market and Competitors
Before you start setting indirect lending volume goals, it is prudent to examine your local market and competitors to see what they are doing with their indirect lending program; this will help you set reasonable and attainable goals as well as measure success.
Funding and Processing: The Need for Speed
Take a look at your internal operations. Your credit union must be able to electronically fund indirect loans within 24 hours of receiving and processing the loan documents. Because so many finance competitors want the loans a dealer can send to them, a significant factor in capturing this business from dealers is dependent on how rapidly you can process and fund loans. If your credit union is unable to fund quickly, perhaps a third-party with a proven reputation may be worth considering.
Delinquencies and Losses
Lending involves risk. Just as with your direct loans, indirect lending is also susceptible to delinquencies and losses. Methodically building an indirect loan portfolio will help your credit union manage the same low loss ratio and profitability as your direct loan portfolio, if not more. Your Dealer Agreement can be the most important weapon you will have to defend against dealer or customer fraud or other misrepresentations to mitigate yours loses in an Indirect Program.
Dealer Fees; Paying to Play
If you are going to be an indirect lender, your credit union must be comfortable with paying dealer fees for funded loans, as this is standard practice. The fee your credit union pays will be determined based on your market, competitors, the incentive amount needed to drive the dealer to send you loans and most importantly, loan net profit. All indirect lending programs need to have a fee recourse period, usually referred to as a chargeback period. With a chargeback period of 90 days, if a loan pays off within this recourse period, your credit union will be entitled to collecting dealer fees paid for the loan back from the dealer.
Pricing Loans for Profitability
Indirect loans can be profitable for a credit union if you create a pricing that considers all costs associated with capturing an indirect loan; some of these costs include: dealer fees, origination fees, cost of funds, collections efforts for charge-offs and servicing fees. All successful indirect lending programs have a historically-validated pricing model.
The Buy Rate Sheet
Your Buy Rate Sheet should leave no questions for the dealer about your lending parameters. It should include rates and terms by tier and year model, Loan to Value rules, business hours, details describing any restrictions, title address, loan buyer phone numbers and email addresses and any detail that is important to your indirect lending program.
Understanding these essential items will help your credit union adopt a robust and responsible indirect lending program.