Would you fly in a jumbo jet piloted by a NASCAR or Formula Oneracecar driver?

“Not if your life depended on it” is most likely your responseand practically no one would argue with that. While professionalracecar drivers possess awesome talent, it does not necessarilyqualify them to fly a 50-ton jumbo jet.

Fast-forward to the credit union space, having a successfuldirect auto lending program does not guarantee that a credit unionhas the skill or infrastructure necessary to run a successfulindirect lending program. Many elements exist with indirect lendingthat simply don't with direct lending. Credit unions that enterthis arena without being prepared may be placing the credit unionand its members at substantial risk.

There is something almost nostalgic about a credit union membervisiting a credit union, and sitting down with a loan officer todiscuss their need to borrow money on a vehicle they have eitherpurchased or are considering. The dealer is almost insignificant inthis scenario. In addition to being in total control over thetransaction's tempo and process, the credit union, in manyinstances, may also have an ongoing intimate relationship with themember, which allows them to render a proper credit decision.

How does this compare to indirect lending?

You receive an application that has been sent to four otherlenders. The last 20 applications your credit union received fromthis particular dealer had an average FICO score of 540. Moreover,since the loan wasn't automatically approved, you have less thanfive minutes to respond in order to have a 20% chance of actuallybooking the loan.

Why? Because four other lenders are simultaneously looking atthe same application. You now have 20 referred deals in your queueawaiting a decision. The dealer calls the credit union for ananswer, but has to leave a message along with the other dealersawaiting a decision. Finally, you retrieve your voice mail messagesand spend 10 minutes listening to dealers with funding issues aswell as those waiting for credit decisions.

For many credit unions, this is not an exaggeration. In thisscenario, the credit analyst is pulled way out of their element andcomfort zone. As a result, the service provided to the dealersuffers and the dealer may choose another lender to do businesswith. This creates a negative identity for the credit union, to saythe least.

That, however, is not the worst-case scenario. The worst-casescenario can result in one poor credit decision after another, withlosses mounting at a surprisingly fast pace. Unfortunately andsurprisingly, these scenarios are not uncommon.

The phrase “knowledge is power” has never been more prevalentthan in automotive indirect lending.

Automotive indirect lending provides a golden opportunity for acredit union to build a substantial, quality auto loan portfolio aswell as increase membership. Like any other nascent business,credit unions develop their own personality by the way they conductbusiness. While some use their internal resources and reach out forprofessional assistance, others try to do it all on their own.Consequently, it's no surprise that open community charter creditunions have the highest risk. This is because they have thegreatest opportunity for gain. The risk versus reward mantraapplies here. Simply participating in an indirect lending programis not enough.

Today's technology makes it almost too simple for a credit unionto connect to auto dealers and begin accepting applications. It iscritical that credit unions, regardless of charter or asset size,work with an outside partner with knowledge and experience in allcore areas–building and managing dealer relationships, riskmanagement, etc. Moreover, to protect the credit union, it isimportant they seek outside expertise in other aspects of indirectlending, such as rate marketing and member education, to cite afew.

These and other core components will not only protect the creditunion, but ensure it is building a healthy indirect lendingproduct.