LOCKPORT, N.Y. – Cornerstone Community FCU knows launching an indirect lending program by itself is risky and its chances of succeeding are iffy, but given the changing lending environment, particularly gradually rising mortgage rates, the $207 million credit union is willing to take its chances. "Real estate lending has been our bread and butter over the last 18 to 24 months," said Irene Bull, vp of lending for CCFCU, formerly known as Unit No. 1 FCU. "But now with mortgage rates starting to rise, we have to be prepared and have an auto lending program ready to go to compensate for any falloff we expect to see on the mortgage side." But it's hasn't just been low mortgage rates and a record number of mortgage originations that's eaten in to the credit union's auto loan portfolio. Bull said auto manufacturers' 0% financing and rebate offers also took a bite out of Cornerstone's auto loan business. Bull estimated the credit union's auto loan portfolio accounts for about 32% of its total loan portfolio of $110 million. She wants to get that figure up to 50%. As of June 2003, its mortgage portfolio was $32,972.5 million. Bull said the credit union sees indirect lending as a way to build up its auto loan portfolio because it will make it more convenient for members to fund their auto loans through the credit union. "Our members that purchased vehicles and funded their loans through other lenders have straight out told us the reason they didn't take out their auto loan with Cornerstone was because it was too inconvenience," said Bull, explaining that under the credit union's current auto loan product, a member has to leave the dealership to come to the credit union to complete paperwork and then return to the dealer site with the necessary documentation in hand. "Even though Cornerstone's rates were lower, these members were willing to pay more on interest rates for the convenience of being able to do the loan at the dealer site," she said. "We have to be able to show our members we can offer the same level of convenience as our competitors do." The solution, said Bull is simple: "We need to become part of the group of financials that are involved in indirect lending in our area." The Town of Lockport where Cornerstone is headquartered is located around 60 miles west of Rochester. The credit union has approximately 37,000 members. Cornerstone is hoping to launch its indirect lending program shortly after the start of 2004, and Bull is optimistic it will be successful because "we have a good working relationship with the car dealerships in the area. In our talks with them, we've realized we have the same goals – we both want to get the member in to a vehicle, and both sides realize that in bad economic times such as what we're going through now, that's sometimes difficult to accomplish. So the dealers are anxious to talk with us," she said. Initially, Cornerstone will test the program for about six months with three to five dealerships, and then it plans to open it up to other dealers. One thing Bull wants to make sure is in place before Cornerstone launches its indirect lending program is that the credit union has "tight underwriting parameters." She explained that the credit union has 13 loan officers among its headquarters and two branches, and while Cornerstone has underwriting parameters, there is some subjectivity involved in loan decisions. "A loan officer looking at a member's credit rating could reject their loan application, but the dealership could look at the same rating, consider other factors, and have approved it. We want to make sure members don't get different information from the loan officers and dealership," Bull said. Bull said she realizes that one of the keys to the success of Cornerstone's indirect lending program will be its ability to bring enough business to the dealerships, and she knows that if the program involved other area credit unions, that would bring something to the table. The problem with that, she explained, is there are a lot of small credit unions in the area. Bull said "they haven't voiced any desire to do indirect lending." But since Cornerstone has a community charter – it serves all of Niagra County – that might give its program a fighting chance, opines Roger Rassman, vp of marketing, ESL FCU, the largest credit union in New York State.The $2.6 billion credit union is one of two owners – the second is Xerox FCU – of a CUSO called Credit Union Auto Finance LLC that was formed in 1999 and five credit unions participate in. In addition to ESL and Xerox, the other three are Rochester credit unions – St. Pius X Church FCU, The Summit FCU, Rochester, and Family First FCU. Rassman said ESL never considered going in to indirect lending by itself despite its size. Prior to becoming a multi-SEG credit union – ESL's field-of-membership now includes the employees and families of Eastman-Kodak Company, members of the George Eastman House Association, employees and their families of Wegman's Food Market, and the City of Rochester as an investment area -dealers would have had to qualify potential car buyers as being ESL members. "There was a membership barrier, too many hurdles," he said. "Auto dealers want to sell cars, not qualify people." "Now with a our broader field-of-membership, dealers can be comfortably sure someone who wants to purchase a vehicle is either an ESL member or belongs to one of the other four participating credit unions in the CUSO," he explained, adding that the credit union now handles the member validation process, and it's not the dealer's responsibility. ESL's auto loan portfolio, said Rassman, is about $330 million, and most of that has come from indirect lending, he said. Prior to participating in the CUSO, ESL's auto loan portfolio "was neglible," Rassman said. But it's not just how many members and potential borrowers a credit union can bring to a dealer, it's also how a credit union treats the dealers and the strength of the credit union's brand – the CU's reputation, name recognition, trust – that play a role in getting the job done. "Consistency is important," said Rassman "The dealers know if they sell a vehicle to an ESL member, the loan will be processed quickly and the dealer will get the funds." Sounds easy? You'd be surprised how easy it is to mess up, said Rassman. "Auto dealers are a fickle group. They're there to sell cars and they'll do whatever's best for them to get that done. The challenge for credit unions is to create programs that are good for the dealers and for credit unions and their members," he said. Sometimes that means walking a tightrope between doing what's best for the members and keeping the dealers happy, "but the volume of loans you get are worth the effort," said Rassman. Even if a credit union by itself is able to manage all of that, Credit Union Direct Lending President/CEO Tony Boutelle said "the chances are the credit union won't get as great a share of the market and volume they would have gotten had they been part of a CUSO because that way all of the participating credit unions will be using a common technology approach. If you can give a dealer that, they'll want to go back and use that platform and do business with the credit unions. "It's important to keep it as simple as possible for the dealer. If a dealer is distracted by having to work with different programs, then that impacts a credit union's ability to get loans," he said. "For a small credit union to come in and reinvent the wheel, that's won't maximize their indirect lending business." "The biggest misconception credit unions have when it comes to auto lending is that their biggest competitors are other credit unions. In truth, credit unions stand to gain a larger market share of the auto lending market when they work together," he said. CUDL currently has relationships with credit unions in 12 states. By the end of the first quarter 2004, Boutelle said the CUSO will expand in to Illinois through a relationship with United Airlines Employees CU. -

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