Love went on to discuss what she considers the "three P's" of indirect lending due diligence: * paper – there should be dealer contracts that are written in the best interests of members and have financial projections built in. * people – know who your staff are and their skill sets. Do you have to bring in new expertise? If you hire contractors, be sure to get references. Be able to make informed choices. * process – policies and procedures, infrastructure and systems; training and monitoring.

"Each credit union has to determine its own level of pain with indirect lending, and that's determined by how easy it is for the credit union to get into indirect lending, the volume of activity, and how difficult it is to get out of a program," said Love.

"The higher the pain level, the more important due diligence is," she said and reminded credit unions that, "the dealer is in business to sell cars, not to protect a credit union's loan portfolio."

Before a credit union can control the risk of indirect lending, it first has to be able to identify and grade the risk, the RD said.

"If you're just buying loans, then the credit union needs a different way to monitor the loan because that member will have a different relationship with the credit union. Indirect lending credit unions think they have members' auto loans when instead the credit union has a portfolio of loans they've bought," said Love.

In order for a credit union to grade the risk of indirect lending, Love offered, it needs to first understand how the paper is graded "so you can monitor the loans you're getting from the dealerships and make sure you have the right proportions of paper grades in your portfolio."

Credit unions involved in indirect lending also need to assess their internal operational risks. According to Love, "About 70% of the time when NCUA sees a credit union lose money in indirect lending it's because the credit union put too much authority in one person's hands at the credit union."

To avoid finding itself in that position, Love offered several suggestions. For example, with override capabilities, a credit union wants to have that capability to remain flexible and be able to process loans for members with less than perfect credit history. But the credit union also needs to be sure it's not putting too much authority for that in one employee's hands.

Similarly, while a credit union should encourage its loan officers to develop relationships with dealers, the CU needs to monitor those relationships to assure the loan officer isn't processing loans the CU otherwise wouldn't accept to make the dealer or themselves look good.

Most important, says Love, the credit union has to make sure it has an indirect lending policy that its employees are following.

When evaluating and measuring a CU's indirect loan portfolio, Love said NCUA considers six factors: volume, revenue, cost, delinquency, losses and yield.

"When measuring the progress of your indirect loan program, you have to be consistent and do it in real time. You can't wait three or four weeks for data to evaluate your portfolio," she said.

"The NCUA wants to make sure credit unions are proactively managing their indirect loan portfolios, not vice versa, and that their volume of indirect lending match their goals," she continued. "If a credit union's results are different than their expectations, the NCUA wants to know what the credit union is doing about that. If it determines it's not doing anything then the NCUA want to look at the credit union's portfolio.

"Risk management is key. You can't rely on someone else. Due diligence has to be upfront and continuing," she added.

Unitus Community CU's Paul Kirkbride, vice president of lending, agreed that CU's involved with indirect lending need to be continuously due diligent. Joining Love and Goldenwest FCU VP of Lending Tamara Wass at the session, Kirkbride emphasized, "Preparation for an audit doesn't start two weeks before the event. An audit isn't an event, it's an ongoing process. Credit unions involved with indirect lending need to understand the risk and invest in technology to monitor that."

Echoing Love's comments, Kirkbride stressed that CUs need to document their policies and procedures and follow them. CUs also need to understand their program's profitability and be able to report on it.

In addition, CUs should be able to segregate their indirect auto loan portfolio from their regular auto loan portfolio for loss estimation purposes. Look for trends, he said, and address them immediately. [email protected]