WEST PALM BEACH, Colo. – Credit unions' increased involvement in indirect lending is irrefutable. Not only are more credit unions involved, but indirect lending is accounting for a larger share of their loan portfolios. So it's no surprise there are also more indirect lending CUSOs and vendors for credit unions to choose to do business with According to Callahan & Associates' 2006 Auto Lending Report, 58.3% of credit unions with more than $50 million in assets were involved with indirect lending as of June 2005, compared to 39.4% three years prior. Between June 2004 and June 2005, 98% of all net auto loan growth for credit unions came through indirect lending. What's more, in four states – New Mexico (New Mexico Educators FCU), Oregon (OnPoint Community CU), Utah (America First FCU) and Washington (BECU) – a credit union is the top auto lender. All four of them are involved with indirect lending How are indirect lending CUSOs and vendors differentiating and positioning themselves for credit unions? Credit Union Times spoke with five of the leading credit union indirect lending vendors and CUSOs – Aimbridge, CU Direct, CU Direct Connect, GrooveCar and Credit Union Acceptance Corp. (CUAC) – to find out what they consider to be their key differentiators, and based on their responses two factors stand out – technology and business model. In fact, the theme of technology is pervasive regardless who you talk with. Not surprising, they say, considering that the technology drives the loan and can be the determining factor on whether a CU or another lender gets the loan. "The platform an indirect lending CUSO or vendor uses has a major impact on where the loan application goes and how many lenders get to look at it when the dealership shotguns the loan," says GrooveCar President David Jacobson. Jacobson, who used to own his own dealership before founding GrooveCar, says any dealership has about nine financial institutions and lenders that it works with, "so the chances are small you're going to get the loan if you're just on DealerTrack because so many lenders are on that platform." GrooveCar uses a proprietary interface, AppTrack which Jacobson says allows credit unions to do loan considerations instead of flat out declining applications. Aimbridge President/CEO Ann Schmidt says her company's goals all center around technology and information management systems. "Our goal is to offer the most nimble and efficient technology to credit unions for them to originate indirect loans and make sure they have everything they need to compete," she says, adding that, "With the heightened sensitivity in the regulatory environment, our goal is to provide credit unions what they need to make sound business decision when it comes to their indirect lending practices." Schmidt says RouteOne is the origination tool of the captive lenders, and she's become wary of DealerTrack since the company went public last year. She explains "in its rush to grow, DealerTrack has a lot of lenders on the tool. So you have a lot of them who go through the process and expense of underwriting a loan, but then it's up to the dealer to decide who gets it. The capture rate is very low." In comparison, says Schmidt, "We think our technology AppLine is well-positioned with dealers to be the primary tool for credit unions involved with indirect lending. We get an 80% capture rate compared to DealerTrack's 40%. I think it will be increasingly hard for the smaller lender to be heard on DealerTrack." CU Direct's Boutelle says the CUSO is close to becoming a national aggregator which is important because, he says, the company can create a network built around a credit union brand and technology platform. "CU Direct is trying to provide a solution to credit unions that has a lot of flexibility in it. We're trying to add value to indirect lending to help improve credit unions' processing efficiencies. We recognize that credit unions are different, they want the flexibility to pick and choose what they need, and we've adapted our model to meet those needs. The key for us is keeping the national brand because it's important for credit unions to have visibility on the national level." He explains that, "Indirect lending is still a local event, but when you can commit with a national brand and technology, then you get national dealerships working with credit unions. "Dealerships like working with an aggregator, rather than with 3,000 different credit unions because then they have to have a different relationship with each one and that's very difficult," Boutelle adds. All the key players agree having a flexible model is important because it allows credit unions to decide the extent of the relationship they have with the CUSO or vendor. Stephanie Kroepfl, vice president of strategic development, CU Direct Connect says flexibility is key to the CUSO's business model. "We don't want to own different markets and set up CU Direct Connect shops. We want to help credit unions and CUSOs set up their own program, almost in a franchise model where we provide the tools and software." The CUSO makes its proprietary indirect lending software available to credit unions that even want to manage their own program, although Kroepfl acknowledges, "it takes a pretty large credit union and CUSO to buy and maintain the software. A more practical model is for them either to use an ASP model or for the short term let us process the loans for them but they maintain the relationships with the dealers and members.: Adrian Dominguez said CUAC takes a slightly different strategy from the other CUSOs and vendors. He explained that CUAC operates off a single point of sale, which means, he said, "we offer a dealership one program, one single point of contact – deal with us and we'll take the heat and deal with any issues or problems from the dealer." Dominguez realizes some credit unions want to manage the dealer relations, but he offers that dealer management is a big job for a credit union that doesn't have the staff trained to handle dealer issues, "and there are a lot of issues out there," he says. CUAC had solely been on DealerTrack since October 2003, but it recently signed with RouteOne and Dominguez expects the CUSO will be on both platforms by the end of the first quarter 2006. That, of course, will increase the CUSO's credit union clients' visibility with dealers and increase their chances of getting members' loans. When it comes to who gets the loan from the dealer, Boutelle says, "Dealers take the path of least resistance. If you're a member of a credit union that's offering a competitive rate, then the loan will go to that credit union. Credit unions shouldn't take a myopic view about whom they're competing with for their member's loans. There are so many other lenders out there they're going up again." Boutelle advised that when it comes to indirect lending, "credit unions need to look at the bigger picture. There's more competition for members' loans coming from banks and captives, and credit unions have to figure out a way to strategically attack that." That's where dealer relations come in. "Indirect lending is dead if you only have a platform without the relationship with the dealer," says GrooveCar's Jacobson. "That ultimately determine who the dealer sends the loan to," he adds. "When dealers smell blood – an opportunity to get a loan and make a sale – they'll do anything to get the deal. The indirect lending business depends on relationships and how well they're managed." -

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