NCUA's Definitions of Indirect Lending Risks

In its NPR, NCUA discussed what it considers to be the five types of risks associated with indirect, outsourced loan programs: * Credit risk – both underwriting and post-underwriting factors generate potential credit risk, NCUA states. Credit loss experience may be worse if the indirect, outsourced loan program uses more permissive underwriting criteria than the credit union uses for its direct lending, it continues. NCUA advises that “credit unions should adopt appropriate metrics (e.g. performance standards) in their servicing agreements to ensure timely servicing and collection performance by the third-party servicer.” * Liquidity risk – according to NCUA, a credit union’s liquidity may suffer if the CU experiences a sudden increase in indirect, outsourced loans. “Liquidity may also be impaired if an indirect, outsourced arrangement restricts the ability to transfer servicing by imposing a material cost for the transfer, including the loss of a material economic benefit, such as cancellation of an insurance policy.” * Transaction risk – Also referred to as operating or fraud risk, NCUA says this risk can arising indirect, outsourced programs because the CU is relying “to a significant extent” on the third-party servicer’s internal controls, information systems, employee integrity, and operating processes.” The agency advises that “a credit union’s due diligence should include continuing review of each of these areas, as well as the financial condition of the servicer.” * Compliance risk – this may happen, says NCUA, from violations of, or nonconformance with, consumer protection laws. “To the extent a credit union has reduced control and supervision of a third-party servicer’s collection activities, a credit union’s compliance risk in an indirect, outsourced program may be greater than that of an in-house servicing program,” the NPR reads. * Reputation risk – this may result, the NPR states, from a third-party servicer’s compliance failures or transaction losses. “Poor quality servicing, improper collection processes, and questionable or excessive fees assessed against the borrower by the servicer may also alienate members from the credit union and affect the ability of the credit union to maintain existing relationships or establish new ones.”