Strong Underwriting Puts Muscle Behind Indirect Loans
Despite the frustrations that some credit unions face with building long-term, multiple product and service relationships with members who come through the door via indirect lending, the loans have continued to be a meaty portion in many portfolios.
From 2008 to 2010, the years commonly referred to as the Great Recession, auto lending and specifically indirect lending, provided credit unions with a barrier against loan losses during this time, according to the Filene Research Institute. The firm recently tracked successful lending programs to find out what strategies were in place that enabled continued loan growth in the midst of a massive economic downturn.
The research firm asked nearly a dozen credit unions if more than 50% of their auto loan growth came through indirect channels in 2008, 2009 and 2010, what they had done differently than their peers. Among the strategies were maintaining a large available network of dealers, consistent underwriting, taking on the closing themselves, and ensuring that business development managers were building new relationships with area dealers.
While banks and other lenders pulled back from auto lending, credit unions that relied on indirect lending during the recession said they kept their underwriting criteria constant and in some cases, tightened up standards, according to Filene.
“Auto lending will become increasingly competitive during the hoped-for recovery,” said Ben Rogers, Filene research director. “Credit unions should focus on recapturing as many competitors’ loans as possible and strategically deepen relationships with dealers, which drive much of the auto loan volume.”
The $1.4 billion EECU in Fort Worth, Texas, was one of the credit unions profiled by Filene. During the recession it was among the largest cooperative to capture 5% of consumer loan growth through the recession thanks to a “well-oiled indirect lending machine,” according to Joe Rossa, senior vice president of lending.
An in-house move after leaving a third-party origination system in 2007 coupled with population and steady job growth in the Dallas/Fort Worth area also helped. Rossa said marketing, underwriting and dealer relationships helped to boost its monthly indirect originations from $3 million to $6 million after going independent nearly five years ago.
The $851 million Scott Credit Union also made Filene’s list of successful lending leaders during the recession. Frank Padak, president/CEO of the Collinsville, Ill.-based financial institution, acknowledged that like some in the industry, indirect lending is not his favorite channel. However, making it convenient for members to obtain an auto loan at dealerships is more important.
That attitude has paid off for Scott CU. Between 70% and 80% of monthly originations come through indirect channels. It helps that the credit union has alliances with nearly 300 area dealers and its paper is in the 700 to 740-plus range. Carefully underwritten deals get quick returns and every request gets a response within 15 minutes, Padak said.
Members have also gravitated in a big way to Scott CU’s website to complete auto loan applications. In 2010, the credit union originated between $200,000 and $400,000 in monthly auto loans online and in 2011, the figures had gone up to $1 million.
Rogers said a commitment to building indirect lending programs sets credit unions apart from those that are not in it for the long haul.
“The majority of the credit unions highlighted here captured their lending growth primarily from indirect lending,” Rogers said of those profiled by Filene. “None of these was an indirect dabbler. Each cultivated strong dealer relationships, invested in technology, and set its own underwriting standards.”
Nearly 90% of loan growth at the $224 million Columbus Metro Federal Credit Union in Columbus, Ohio, relies on indirect lending, according to Tim Richey, president/CEO. A 2007 change from a fax system to a partnership with software management providers Dealer Track and RouteOne, helped boost indirect volume to 50% in the first month of implementation to 100% in the second month.
Richey said the key has been consistency with a three-person team underwriting the entire indirect portfolio over the past 10 years, Filene noted. While dealers have come to know Columbus Metro very well, the competition is turning up the heat. Richey said if a dealer gets 100 loans per month, the credit union will probably get 10 of those.
The $589 million SAC Federal Credit Union in Bellevue, Neb., was the largest lender in the state at the time of its Filene profile. Still, keeping that ranking comes with a lot of hard work, according to Bruce Schroeder, senior vice president of lending. To maintain the consumer portfolio, SAC FCU has to do $12 million a month, Schroeder said. Without indirect loans, the portfolio would go from 100% loan to share to 65%.
As is the case with other successful indirect lenders, consistent underwriting has helped SAC FCU stay ahead of the competition since it entered the indirect market in 1995, Schroeder noted. Rogers said credit unions cannot sit around and wait for national lending growth to trickle onto their balance sheets.
“Auto lending growth will increasingly have to come through market share growth,” Rogers said. “For individual credit unions, that means stronger direct originations, a better indirect pipeline, or aggressive measures to refinance loans from other institutions. [Successful] consumer lenders are concentrating on all three.”