Getting members gained through indirect lending to become fullmembers or multiproduct members has always been an issue of debate,but according to Brett Christensen, owner of CU Lending Advice LLC,the indirect lending business model as a whole is a failedmodel.

“I tried my hardest for 18 years to keep an open mind aboutindirect lending, and my mind isn't open anymore. In my opinion,it's a failed business model, but some of the biggest credit unionswill deny it until the end,” Christensen said. He went on todescribe indirect lending as a “partnership with the devil.”

The strategy at a credit union that offers indirect lending,Christensen said, consists of telling members to “just go down to adealership, get ripped off and get the loan with us.” Creditunions, he added, need to take a step back and make sure they havedone everything to grow loans without dealerships.

Over his consulting career visiting and speaking to credit unionexecutives about lending practices, Christensen cited some of the“carnage” he has seen from indirect lending programs.

“I saw a $600 million Southern credit union charge off $11million in indirect auto loans in a two-year time period. I saw a$175 million credit union in the Southwest charge off $5 millionone year and $6 million the next in indirect loans. I saw a $100million credit union in the West charge off $ 1 million a month inindirect auto loans.”

Growth is what propels credit unions to join indirect autolending programs, Christensen said, but the growth can becomeaddicting. Problems start to arise and large losses begin to buildup because, he added, underwriters feel pressured to approve loansbecause senior management is so proud of the exceptional loangrowth. Volume comes in so fast, employment, income and collateralverifications are not done, and the credit union's collectors arein a constant state of catch up once losses start to hit becausecollection efforts were not ramped up aggressively.

Wayne Tew, CEO of $626 million Clark County Credit Union in LasVegas, discontinued his credit union's indirect lending program inearly 2005, because he saw that there was very little margin afterpaying fees to dealers and keeping rates down and because there wasa bias at the dealerships to give loans to credit unions withcommunity charters.

“Despite the claims, there was very little member penetration.The members were mainly one account members,” he added.

Now, Tew said, the credit union uses the same approached it hadbefore it used indirect lending. It uses direct mail marketing andan aggressive sales group that cross sells products. The groupreceives large incentives based on what loans it brings in.

James Nastars, senior vice president, lending at $ 1 billionUniversity Federal Credit Union in Austin, Texas, said that thecredit union ended its indirect lending program in January 2000.University had been participating in an indirect program since 1993that had been running successfully until 1997 when Nastars said thewheels started to come off.

“We charged off a significant number in 1997. And what wenoticed was that a lot of the applications coming in had fraudulentor incorrect information. Some of that was our fault for not takinga better look at the application,” he said.

The credit union decided to revamp and redirect the program, butpressure from dealers to buy bad loans pushed the CU to discontinuethe program in 2000.

“Dealers would say to us, 'You need to relax your requirements'or 'If you don't buy these loans, we're not going to send you anyloans.' The culture of the dealers was not consistent with theculture of our credit union,” Nastars added.

In 2000, the credit union rolled out its Wheels 101 guide tomembers on on buying a vehicle.

“We saw disturbing figures for what members were being chargedfor cars and for guaranteed auto protection insurance. We decidedwe needed to be an advocate for our members,” Nastars said.

The credit union also started car-buying seminars, the first onehad 500 attendees, Nastars said, and overall the new approach toauto lending was well-received by members. He admitted that it isdifficult when competing with other lenders and when you are noton-site at the dealer, but the credit union tries to earn themembers' trust and get them into the credit union for preapprovalbefore they buy the car.

“It keeps us on our feet to make sure the member gets to usfirst. We just started a vehicle buyers program where the membercan take a check to a dealership to purchase a vehicle,” Nastarssaid.

Though the new program was well-received by members, Nastarssaid dealers in the area gave the credit union flak when it decidedto stop its indirect lending program and even threatened to sue thecredit union for its Wheels 101 program. Some dealers refused totake UFCU financing, but now, after 10 years, Nastars said thatthey rarely get push back from dealers.

In Winston Salem, N.C., Truliant Federal Credit Union has beenrunning an indirect auto lending program since May 2005. TroyMartens, vice president, consumer and real estate lending atTruliant said that the CU has procedures and policies in place tomonitor the program to prevent losses from piling up. Theunderwriting staff is constantly communicating with the financeoffice at the dealership, the credit union audits the loans beforethey get funded, it has a sales staff actively at the dealershipsand another audit is completed on the loans by an auditor outsideof the credit union's indirect lending department.

The collections department at the credit union uses a differentapproach for indirect loans. Martens said that indirect loanstypically see more first-time payment defaults because sometimesthe member doesn't know where the loan went after leaving thedealer.

“With added risks, we've stepped up our training and have atighter leash when it comes to indirect. Delinquency rates for ourindirect loans are typically a little higher than our direct loans,so we treat them differently,” he added.

Tony Boutelle, president/CEO of CUDL, said indirect loanstypically perform according to their FICO scores because they aregranted to new member. But loans to a credit union's current memberbase and SEGs typically perform above FICO scores.

“Credit unions can't go into an indirect program thinking theseloans are going to perform as existing membership and SEG loans,”Boutelle said.

Indirect lending, Boutelle said, is nothing more than a deliverychannel.

“There is no doubt about it that it creates more risk for creditunions to manage. If you understand how to manage risk you willhave success. All the things we give them are just tools creditunions need to take responsibility for managing the risk,” headded. “We know working with dealers is not exactly what creditunions want to do but it's where members go to get financing.”

Boutelle cited a 2008 J.D. Powers & Associates consumerfinancing satisfaction study that showed that 46% of consumers withluxury vehicle purchases and 50% of consumers with nonluxurypurchases intend to have the dealership work out the best deal forthem. Thirty-seven percent of consumers with luxury purchases and33% of consumers with nonluxury purchases said they intend to workwith the dealer to choose the financing options. Eight percent ofconsumers with luxury purchases and 6% of consumers with nonluxurypurchases came in with a preapproval and used that lender. Theresults, Boutelle said, show why CUDL exists.

Christensen said credit unions that are not indirect lendersneed to learn how to become professionals at stealing members backafter they've already received financing through another lender atthe dealership.

As a side project, Christensen said he is working on developinga credit union anti-indirect auto lending association where creditunions can share indirect lending war stories, ideas and learn howto grow without dealerships.

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