Maturing Auto Loan Participation Market Marked by Lack of Pricing Standardization

LAS VEGAS – Loan participation can be a critical part of a growth solution for credit unions and provide CUs with an attractive investment alternative, but a lack of pricing standardization in the maturing auto loan participation market makes pricing “the wild card” for both sellers and buyers. “Loan participation is a great way for credit unions to manage their liquidity needs and keep their indirect lending cycle going,” WesCorp’s Dan Frilot, loan participation manager told attendees of Credit Union Direct Lending’s 2004 Symposium here who sat in on his loan participation workshop. “But the lack of pricing standardization creates best practices and due diligence requirements for both the buyer and seller,” he stressed. Frilot described the auto loan participation market as being a “one-way market” driven by credit union liquidity and having lots of buyers but a limited number of sellers. It’s also characterized, he said, by a large number of brokers who find buyers and sellers and connect them, but few principals. Among some of the emerging new loan participation facilitators in the market are entities like CUSOs, corporate credit unions, and some third party vendors. “Without pricing standardization, buyers and sellers face a variety of pricing strategies,” said Frilot. This means the buyer needs to require more information upfront from the seller, he said. Frilot listed several items on his “Buying: Best Practices” list: * Due diligence: * review seller’s financials and management team * understand lending program and lending history * examine servicing and collections ability * on-site visit (kick the tires!) * Analyze product offering: * get static pool history, performance assumptions, etc. * pricing and yield, fees, payment methods * reporting and payment expectations He also had a list of best practices for selling loans: * master loan participation agreement * identify selling objective * establish pricing objectives * readily available credit and collateral data * track and report performance history * target loan characteristics “Remember, the more and better information the seller can provide on the loans they’re trying to sell, the better price they can ask for the loans,” said Frilot. “When looking for partners to participate loans with, identify and define them upfront and keep in touch with them,” he advised. “Understand what information they’re going to accept about the loans such as borrowers’ FICO scores or a description of the vehicles. Having a policy and procedures in place helps make for successful transactions and weed out bad ones.” -