Callahan indirect lending study addresses trends, misconceptions of product

WASHINGTON – Auto lending continues to account for one of the major components of credit unions’ loan portfolios, and CUs hold a strong market share-nearly a quarter, as of year-end 2000-of the total U.S. auto loan market. Still, as far as channels used by CUs to secure auto loans, indirect lending is a relatively new method – but, according to the latest study from Callahan & Associates on indirect lending, an increasingly popular one despite some CUs’ and leagues’ misgivings about the programs. Callahan’s “Indirect Lending: Opportunities and Challenges for Credit Unions, July 2001″ is the company’s second annual study on the indirect lending channel. Despite its newness, Callahan President/CEO Chip Filson said he is already able to discern trends in the indirect lending channel among credit unions. Granted that the relatively small sample size-292 useable responses from credit unions with over $30 million in assets, of which 50% reported they’re involved in an indirect lending program-means the findings should be projected with caution to all credit unions, Filson offered that the survey results still provide valuable information on the state of indirect lending in the credit union industry. “The history of credit unions’ attitude toward indirect lending has in general been ambiguous at best, especially concerning credit unions’ relationships with the dealerships,” said Filson. “While dealer relationships are key to a successful indirect lending program, there’s been the prevailing attitude that the dealers cannot be trusted.” Callahan’s Katherine Hessinger added that, “The credit union and dealer each have their own business strategy they’re trying to meet. While these strategies are usually different, that doesn’t mean they necessarily compete with each other. Credit unions have to be aware that dealers have their own agenda. They should read their contracts with the dealerships very carefully to make sure they don’t have any illusions about the relationship.” That makes some of the survey findings all that more important, Filson offered. One survey finding that jumped out for him was the high satisfaction rating for the indirect lending channel among credit unions with over $50 million in assets and for those that manage their program through a CUSO, instead of in-house or through a non-CUSO such as a league. Callahan asked how credit unions measured the success of their program and for the top three ways that CUs track the success. Loan volume and growth were the most frequently mentioned factors. Also mentioned were dealer comments/satisfaction; member satisfaction; number of new members; and market share. Additionally, when asked to rate their general satisfaction with their program on a scale of 1 (“very dissatisfied”) to 5 (“very satisfied”), more than three-quarters of survey respondents reported being either satisfied or very satisfied. Only 7% indicated they were dissatisfied with the program. “Running an indirect lending program correctly requires a lot of expertise. It’s an issue that can, and has, forced many credit unions to get out of their program because of what’s entailed,” said Filson. All the credit for CUs’ successful running of indirect lending programs can’t be given to credit unions’ improved skills to working with dealerships. Most credit unions with indirect lending programs are realizing that running an indirect lending program requires them to branch out of merely servicing a small niche group and reaching out instead to a broader market in their community. It’s one of the reasons, said Filson, that more CUs with community charters have indirect lending programs (62%), than do those with limited FOMs (45%) or a single-sponsor (15%). “It’s a way for credit unions with community charters to increase their membership, as well as grow their indirect auto lending portfolio,” he said. CUs are also increasingly realizing that their program is more likely to be successful and have more satisfied dealers and members with the program if they offer the program through a CUSO, rather than going it alone. More than half of the survey respondents-52%- indicated they manage their indirect lending program in-house, compared to 29% and 19% who manage it through a CUSO or non-CUSO. However, 80% of the respondents who indicated they manage their indirect lending program through a CUSO said they’d recommend indirect lending to other credit unions. That compares to 65% for those with in-house programs, and 64% for non-CUSO programs. “It’s rare that a credit union can be so dominant in a market that it can go to a dealer on its own and say `here are my terms and options, let’s do business.’ Credit unions that consider running an indirect lending program in-house are finding there’s more value to be gained in managing their program through a CUSO or belonging to a network such as CU Direct Corp. than in going it alone.” Another survey finding that Filson said may help dispel the bad rap indirect lending takes concerns the perception that the quality of indirect loans is lower and delinquencies are consequently higher. To address this issue, Callahan first asked CUs what percent of all applications from the dealerships the CUs approved in 2000 – the average response was 62.5%. Next, to assess the quality of the approved loans, two-thirds of the survey respondents reported they track delinquency specifically for their indirect, dealer-based programs. Delinquency rates for these loans ranged from zero to 7%, but the median reported rate was the same as the rest of the CU’s loan portfolio – 0.5%. While it appeared that a few credit unions experience a higher incidence of loan problems, most indirect lending programs to not result in elevated delinquency or loss, according to the report. What about credit unions that don’t participate in indirect lending? Among the reasons cited by respondents were: lack of resources; not in our members’ best interest; other initiatives have taken priority; too many stories about failures; emphasis has been on mortgage lending. “There are many misconceptions about indirect lending among credit unions,” said Filson. “Clearly this study shows that indirect lending programs can work successfully and effectively to help credit unions expand their auto loan portfolios as well as increase and effectively serve their memberships.” -