CUNA Mutual Risk Management Specialist calls NCUA Indirect Lending Risk Alert Letter "Timely"
MADISON, Wis. - Not only does Brad Mundine think NCUA's Risk Alert Letter issued in June requiring federally insured credit unions to implement risk controls concerning third-party subprime indirect lending activities to be timely, he asserts the Risk Alert Letter "raised appropriate concerns given more credit unions are vying for a piece of this rapidly growing consumer business." In response to the Risk Alert (CU Times, June 15), CUNA Mutual contacted its credit union Bond policyholders to provide information addressing NCUA's concerns. "Unlike the dealer who doesn't have to live with the consequences of a subprime loan, credit unions have to live with the loan however long it's financed for. So there's nothing unrealistic about NCUA's recommendations," says Mundine who handles Colorado, Wyoming and Kansas for CUNA Mutual and reviews the exposures for the various products the company insures a CU for and offers recommendations on ways to mitigate those exposures to reduce the CU's risk. Indirect lending has been around for many years, but data shows the product has grown in popularity among credit unions and is an area they're very competitive in, even more than banks says Mundine. In 2003, for example, $23 billion in indirect loan dollars went to credit unions; in 2004 that figure was up to $51 billion. Specifically, the Risk Alert cautioned credit unions involved in third-party, subprime indirect lending that they may not have effective controls and monitoring in place, and failure to implement policies and controls could pose a risk to a credit union's safety and soundness. "Letting an outsourced vendor call too many of the shots will most likely lead to serious problems that can affect a credit union's bottom line," says Mundine. "CUNA Mutual is first and foremost concerned with helping credit unions exercise due care in the management of their operation, particularly when their lending activities involve a third party. A credit union board sets the policy for indirect lending regarding third-party affiliations, credit terms and credit scores, and in so doing must avoid potential pitfalls," he adds. Credit unions, he advises, have to balance their `lending appetite" to serve the underserved and credit-challenged consumers with their ability to manage those loans. Mundine recommends the following "best practices" credit unions should adopt if they're currently involved in indirect/subprime lending or are considering entering that market: *have written policies and procedures on items such as types of vendors, employee training, credit scores, loan terms and dealer fees. Management has to be 100% clear to its loan officers what its policies and procedures are and convey that message to everyone involved. Be very specific, don't be vague. *develop an employee check list. Be knowledgeable of loan application procedures, dealership contracts, obtaining documentation and auditing dealer reports. *maintain adequate resources. Have technologies in place that can handle capacity and maintain adequate staffing to deal with increased loan volume and delinquencies. *review vendor/dealership as closely as you would a loan applicant. Dealers should have liability coverage that would protect the CU in case the dealer does something wrong. *execute signed agreement. Never enter into a third-party agreement without signed, formal documents detailing terms and conditions. The agreement should also include an "Exit Clause" - a Plan B - if the third-party fails to live up to the terms. *understand the risks. A credit union must have appropriate checks and balances built into the loan underwriting and approval process. Monitor dealer fees, blue book values, vehicle accessories, buyer income and employment information, and additional coverages. *conduct pre- and post-quality reviews. A pre-funding review is critical to ensure compliance with a CU's indirect lending policies. CUs need to be careful of automatic approvals because it is possible exceptions will slip through. Don't be too trusting of a dealership, watch every loan that comes through, even though the dealer is a partner in the subprime, indirect lending relationship. Post-disbursement reviews should be done by a staff member not closely involved with the indirect lending program such as the internal auditor, after the loan has been reviewed, approved, funded and booked. The review should look at the dealer reports and the credit union's process. *use a fraud detection system. Require a copy of the purchaser's driver's license with photo and verify the match. *monitor management reports to check on production and delinquency statistics. *develop collection procedures to implement in the event of default of a loan. It is important to determine the cause of the delinquency and to confirm the legitimacy of the loan. *maintain internal controls and ensure there is no unauthorized activity in the indirect portfolio. "The whole indirect lending concept for credit unions was in response to members wanting to get a loan right away at the dealership if all the information on them was available at the dealer level. But some credit unions assume that indirect lending is plug and play and haven't done their thorough homework. Some dealerships unfortunately sometimes take the path of least resistance to get a loan through, so credit unions have to keep working on their dealer relationships," says Mundine, noting that risk management and due diligence are critical for this type of product. -