LAS VEGAS – Until it teamed up a year ago with a San Diego firm with experience in sub-prime indirect loans, Patelco Credit Union in San Francisco knew it was "getting pummeled" in the market and had to find a remedy. The problem, said Chris Oldag, senior vice president of lending, was the administrative overload of trying to grapple with a flood of loan requests accompanied by rising delinquencies. "We really wanted to meet the needs of these sub-prime borrowers" but the demands became overwhelming and losses exceeded tolerances, declared Oldag, a panelist at a session on sub-prime and mid-prime lending at the annual Auto Lending Symposium sponsored by CU Direct Corp. of Rancho Cucamonga, Calif. In seeking assistance, Patelco turned to ACC Consumer Finance LLC which underwrites and buys auto contracts from dealers and then sells them under forward commitments to CUs with ACC getting income from the contracts. While the $3.6 billion Patelco has been in the indirect field since 1992 and doing risk-based lending since 1996, the servicing task plus the delinquencies convinced management, said Oldag, to sign on with ACC Consumer Finance, a move that has proved "extremely successful but I don't mean this to be a commercial for them." He said ACC has already shown experience with origination/servicing of sub-prime paper as well as collection capacity. Its application verification process "is unequaled." Patelco had been having .39% charge-offs on sub prime and a 2.16% delinquency ratio. Its net charge-off rate was .62%, above the .46% average for the top 50 CUs in California and the .52% average for the top 50 CUs in the U.S. Patelco has a total auto loan portfolio of $846 million of which $408 million is indirect and $138 million is mid and subprime. Average balances have been at $16,400 and 17.95% is the APR yield. The typical borrower has a 560 FICO score and $1,600 of monthly income. Under the ACC plan, "absolutely everything is verified" and the results in 10 months "are excellent," he told the CUDL panel audience. Hearing the praises of the Patelco linkup was Rocco Fabiano, chairman and CEO of ACC, a firm in business 15 months and which relies on a "cash reserve model" tied to a trust subsidiary of Alaska USA CU which serves to help protect the client CU from losses. Fabiano said aside from Patelco, he has four other client CUs including Alaska USA "with two more" about to sign up. Fabiano said ACC shies away from the traditional approach of hiring an insurance firm to cover loan risks since there are marketing and management fees to be paid to the insurer. Patelco, said Fabiano, is managing to retain a 6% yield on the subprime portfolio after covering origination and service expenses paid to ACC. Its subprime loans are in the 600 FICO range. Also speaking at the CU Direct panel were Robert Hogan, president of CU Credit Connection of Salt Lake City-a firm also in business for a year-which does the origination and servicing for CUs working off the CU Direct Lending platform. CU Connection, which lists America First FCU of Ogden, Utah as its prime client, uses a four-tiered risk based pricing system for the loans. "We start where the credit union ends," said Hogan. "Funding of contracts will also be within the Decision App indirect lending system" run by CUDL, said Hogan. Discussing the market potential of sub-prime, Hogan noted that 35% of the U.S. population has "blemished credit" and that over $100 billion in sub-prime auto loans are generated annually. "As much as 65% of your current application flow is currently denied due to credit," said Hogan noting that CU members with blemished credit "are being underserved and forced to go with a competitor" to gain credit. A fourth panel member, Eric Fruitlander, vice president of Capital Lending Strategies of Irving, Texas described an insurance-based system "in which we are able to make more loans beyond a credit union's normal risk tolerance." Use of an insurance carrier indemnifies the CU against major loss with Capital Lending undertaking the decision-making process on servicing. -

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