Getting New Jersey car dealerships to partner with credit unionsfor vehicle financing has been a hard nut to crack for some.

The $171 million First Financial FCU in Wall, N.J., can attestto this as it tried to scale barriers since the cooperative startedoffering indirect auto lending eight years ago, said Alice Stevens,chief operating officer. One of the obstacles was the proliferationof banks that had already secured alliances with dealerships acrossthe state.

“This area of the country is very highly banked,” Stevens said.“Up until late 2007 into 2008, we had a tremendous amount ofcompetition from Chase, Wells Fargo, Sovereign Bank and Bank ofAmerica.”

First Financial is hoping to stand out among those major playerswith the launch of Jersey First Auto Connection, an indirect autolending credit union service organization. The new entity aims topair New Jersey credit unions with vetted dealerships in theirareas using the expertise of First Financial's staff.

The CUSO will provide participants with a CU Direct Corp. platform, software and funding, a decisionengine customized for a credit union's underwriting criteria,custom dealer reserve or a flat dealer incentive, underwriters andongoing resources to enlarge and cultivate dealer networkrelationships. Credit unions can use their own pricing model.

Since Jersey First officially opened for business in February,the CUSO has been advertising its services and held meetings with ahalf dozen credit unions, Stevens said. The initial plan is to formalliances in the southern and central parts of New Jersey and thenmake its way throughout the rest of the state.

Credit unions that sign on to the CUSO pay an annual maintenancefee which includes any CUDL fees to ensure that the appropriateunderwriting guidelines are in place. Stevens said there is aper-funded loan fee. All fees are based on a credit union'smembership size. First Financial is the 100% owner of Jersey Firstbut bringing in other owners has not been ruled out, she noted.

First Financial is touting its reputation as one way to courtcredit unions. Stevens said it has built a $35 million indirectauto lending portfolio since 2003. The program morphed over theyears as the economic downturn slowed lending volume. It was shutdown in 2005, but when Stevens, a 15-year veteran in the nichelending space, was hired in 2006, the program was resurrected. Eventhough the credit union was getting fewer loans per dealer, it washoping to maintain the same volume, she pointed out.

One key move was hiring a fulltime staffer dedicated solely toexpanding the First Financial indirect network that would recruitand do the necessary follow-ups to seal the deals. Before, thecredit union had business development staff that “would jump in andout” and did not have the designated time in their busy schedulesto nurture relationships, Stevens said. When the new hire arrivedin October 2009, First Financial worked with 20 active dealerships.Today, the network has more than doubled to over 40.

When indirect lending's spigot slowed to a trickle a few yearsago, many of First Financial's bank competitors pulled out, leavinga potential void to fill. Stevens said Jersey First's timing couldnot be better. Still, she noticed that some of the big, nationalbanks are slowly coming back into the market.

“Really, this is a good time now because there are fewer lendersaround. We feel when things start to turn around, we will alreadyhave some strong ties and dealers will know our reputation,”Stevens said.

Besides the bank competition, Stevens acknowledged that indirectlending has left a bad taste in the mouths of some credit unions.The NCUA was concerned enough to issue a letter in early 2010warning that an “improperly planned or loosely managed indirectlending program can lead to unintended changes in the risk profileand financial performance.” The regulator strongly urged creditunions to mitigate these risks by establishing proper goals andportfolio limitations for indirect lending programs, creating andfollowing specific underwriting standards and vendor policies, andmaintaining a “comprehensive, effective, and ongoing due diligenceprogram.”

“There was a time when some credit unions didn't handle indirectwell. It got a bad reputation, it frightened some people,” Stevenssaid. “I have a saying with my staff–'you can do anything poorly.'Indirect lending is something that has been done poorly.”

Part of the problem is not aligning with the right dealerships,she offered. First Financial vets each one to ensure that theirbusiness model is a right fit for members. The credit union has hadto sever a few relationships that didn't pass the service test withits members.

Another critical issue is always keeping a keen eye on portfolioperformance. Stevens said First Financial's chief financial officerdoes a unique static pool analysis of the indirect loan portfolioso that at any given time, ups and downs can be spotted andaddressed. The credit union has a 1% delinquency rate and anaverage yield just over 8.5%. Stevens uses the data as anadvertising tool for potential CUSO signees.

“This is a type of business that can be managed and can beprofitable,” Stevens said. “In times like these with so littleborrowing going on, it's an opportunity to create some deeprelationships that can serve well into the future.”

One other component that might help is keeping in constantcontact with the dealerships once the alliances have been formed.Steven said turnaround is key. If a customer is sitting at adealership ready to sign, the time it takes to reach and connectwith someone at a credit union can easily break a deal.

“If you get a bad reputation with the dealership, it's very hardto recover,” Stevens said.