ALEXANDRIA, Va. – Comments regarding credit unions' involvement in indirect lending made by NCUA Board member Debbie Matz at the agency's recently held budget briefing raised a few eyebrows, but it seems it wasn't due to consternation over what she said as much as surprise that it took an NCUA Board member so long to say what Matz did. Speaking at the Oct. 12th budget briefing, Matz expressed her concern about credit unions' concentration in indirect lending. Citing figures such as 125% which represents the average net worth CUs have in indirect lending, and the 19% of their loan portfolio in that product, Matz stated that, "We need to get our arms around that before we have a problem." Matz clarified to Credit Union Times that she isn't adverse to credit unions being involved in indirect lending, "I'm just concerned with how they do it." Specifically, she elaborated, she has few concerns with those credit unions that are managing their own indirect lending program "because we know the loans that are approved are consistent with the credit union's risk profile." What does concern Matz are those credit unions that use third-party, non-credit union owned vendors for indirect lending. "I don't have confidence they're using the credit unions' underwriting standards to make the auto loans or that credit unions are doing sufficient due diligence on these vendors and checking their financials to make sure they're financially secure," Matz explained. With an increasing number of credit unions involved with indirect lending, Matz said CUs shouldn't take the attitude that just because other credit unions are doing it, that means it's alright for them. "There's too much reliance on the perception that everything's okay," she said. "With 125% of credit unions' net worth tied up in indirect lending, if there are problems with how these third party vendors are approving the loans and something goes wrong, there wouldn't just be a ripple, there could be a tidal wave," said Matz. "Credit unions should never delegate loan authority to a third party vendor. They need to stay on top of things and make sure these vendors are adhering to underwriting standards the credit union is comfortable with," Matz said. Credit Union Direct Lending President/CEO Tony Boutelle says he understands Matz' concern. In fact, said Boutelle, several CUDL board members have spoken with Matz about the issue. "We share a lot of the same concerns about credit unions' safety and soundness with Matz," said Boutelle. "It is in our best interest that our credit unions are taking the soundest approaches to indirect lending. I don't think NCUA is on a different level than us." He added that: "I think Matz' concern is legitimate. Indirect lending in general has more areas of risk that have to be identified and managed. If a credit union is using a third-party vendor then there's another layer the credit union has to manage, the dealerships being another one. With more credit unions getting into indirect lending and with more of them increasingly relying on these vendors, I don't blame Matz for having the concerns she does. You have to remember that a third-party vendor doesn't have any credit union ownership, so that means the NCUA can't go in to check on them." Boutelle explained that when a credit union joins the CUDL system, the CUSO loads their lending policies and underwriting standards on the CUDL system. So CUDL processes the loans based on the criteria they give us, he said, and it's the CU's choice on how to make the loans. "All the dealer ever sees beside the loan application is whether the loan has been approved for the amount asked and the rate that's assigned to it. It's all done automatically through the CUDL system," said Boutelle. A loan application can also be returned to a dealer with a counter offer, in which case the dealer has the responsibility of contacting the credit union and negotiating the loan to get it approved. In some ways, said Boutelle, "Matz' concerns should have been put up as a red flag by NCUA 10 years ago. An increasing percentage of the credit union world is involved with indirect lending and these credit unions should be examined by NCUA. The vast majority of credit unions are doing indirect lending the right way, but more credit unions are using third-party vendors to outsource and do subprime auto loans." CUNA's VP of Economics Mike Schenk is also not surprised at Matz' remarks given that credit unions' involvement in indirect lending has increased "substantially" over the last 10 years. He conceded though that the reason indirect lending is on Matz' radar screen now is because NCUA only recently began asking for information on indirect lending on CUs' 5300 call report. CUNA conducts an annual Yearbook Survey on the credit union industry and publishes the results in the Credit Union Services Profile. Survey results show that 10 years ago only 4% of credit unions were doing indirect lending. At mid-year 2004 that figure was 16%. In addition, said Schenk referring to the number of consumers who join a credit union because of an indirect loan, 10 years ago 15% of members belonged to credit unions that did indirect lending. Latest numbers show that figure is 45%. Matz brought this topic up when she spoke at CUNA's Future Forum in Hawaii. Indirect lending, she said, "is not a service to get new members." "What Matz says about indirect lending is consistent with her role as a member of the NCUA board," said Schenk. "But no matter what line of business you're in, you need to do due diligence to make sure the vendor is doing what they say they're going." While agreeing that the NCUA board should be concerned about CUs' involvement with indirect lending, Schenk pointed out that when he looks at credit unions' asset quality statistics, there is little difference in delinquencies and charge-offs between credit unions doing indirect lending and those that aren't." Of course, he says, it can not be determined by looking at the numbers which credit unions involved with indirect lending use third-party vendors. Still, Schenk said, "there's nothing we see in call report data regarding asset quality that makes us think there's an accident waiting to happen. "There has been an increase in indirect lending activity, and as overseer of the insurance fund, NCUA needs to look at these numbers and determine if there's a departure from historical trends and if people are doing their due diligence to avoid possible pitfalls." NAFCU's Economist Jeff Taylor thirds the motion that Matz' concerns are valid. Third-party vendors have to make sure they're processing indirect loans that are in line with credit unions' underwriting standards and not passing on risk to credit unions by sending them C or D paper, he said. "In an indirect lending scenario, there are a lot of financing choices a dealer can steer a member to. The dealership has the incentive to send the loan application to whoever will make the loan or pays the highest commission. So they may steer paper to the credit union that's not necessarily in line with the credit unions' risk policies," he said. "The credit union has to put up the parameters and make that clear to the vendor," said Taylor. The NAFCU economist credited credit unions' involvement in indirect lending with helping them compete with the Big Three auto manufacturers' 0% financing offers. He cited recent figures that show credit unions used car loan growth – typically CUs' bread and butter – was outpaced by new car loan growth, 6% versus 13%, respectively, at the end of August. In addition, credit unions' share of non-revolving loans increased from 14.5% at the end of 2003 to 15.1% at the end of August. Auto loans accounted for a large portion of that, said Taylor. "We've been saying for a long time that the Big Three manufacturers can't keep their 0% financing offers. Eventually I expect these offers will change in nature. Now there are all sorts of configurations as they try to figure out what kind of incentives to put out on the market to increase sales volume that won't also cut into their profits," said Taylor, adding that he expects auto manufacturers to try to change the mix of incentives as a way to keep up sales "without giving away the house." Credit unions are increasingly turning to indirect lending as a way to ramp up new auto lending, "but a credit union needs to know what to do to minimize their risks. It's a good thing that Matz is bringing this up," said Taylor. -

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