AUBURN HILLS, Mich. – Robin Johnson is the first to admit that managing a credit union's indirect lending program in-house is not the right solution for all credit unions. But the executive vice president says it's turned out to be the best way for Cornerstone Community Financial FCU to minimize the risk that's inherent with the product. The $139.7 million credit union that was chartered in 1951 as Motor Parts FCU, has been involved in indirect lending since 2001 and used to offer the program to its members through third-party vendor Members Express which had relationships with several credit unions in Ohio. When the credit union first considered offering indirect lending to its members, Johnson said the manager at its Perrysville, Ohio branch was very experienced in indirect lending. So for the first three years, the credit union used that branch as a “test tube” to monitor how delinquencies, charge offs and member relations went. In 2003, CCF decided to expand indirect lending to its Michigan branches. By then the Ohio Credit Union System had formed an indirect lending partnership with Aimbridge, and Johnson says Members Express discontinued doing business with Ohio CUs. That prompted CCF to move the management of its program internally. But that wasn't the only reason, Johnson stresses. “There's so much risk in indirect lending, it's very important that we control all the dealer relations and there's no third party,” she says. “There are so many conditions that can arise at the dealership. We make our dealers jump through our hoop and have our staff out there visiting with them, asking questions and managing our program. You lose some of that control when you use a third party.” Cornerstone Community has indirect lending relationships with 19 dealers including 13 in Ohio and six in Michigan. Johnson says the credit union has been adding dealers in Michigan “very slowly” as a way to control its indirect lending volume – since January 2005 its indirect portfolio has increased from $5 million to $16 million representing a 220% increase. CCF's total loan portfolio is $126 million of which 33% is from auto loans. Forty percent of CCF's auto loans are indirect loans. The CU's auto loan penetration rate among its members is about 25%. CCF's average car loan is about $17,000. The credit union doesn't have relations with any recreational vehicle dealers, but it does count one Harley Davidson motorcycle dealer in its network. Johnson is very cognizant of the risks that come with indirect lending, and she says CCF has taken several steps to mitigate exposure to those risks. Besides managing its own program, CCF doesn't do automated scoring. Neither does it do after-hours approval. That means, of course, when a member wants to finance a car purchase through CCF when the credit union is closed, they have to wait until it reopens for business. “We're okay that we miss some deals because we think it's more important to analyze the deal before the member is approved rather than after they drive off with the vehicle only for us to find out after the fact that the member shouldn't have gotten the loan,” says Johnson. CCF also doesn't allow dealers to bump up interest rates “just to put something extra in their pockets like they typically do. That's why it's such a good business for dealers.” She adds that, “The dealers will be the first ones to tell you they're a shady bunch of people. They admit to us they tell the members they can persuade them to get financing somewhere else. We've told the dealers that we'll promote them as long as they promote us to members. You learn a lot of things when you member your own program. I tell the dealers I'm managing a business too.” The credit union also doesn't do any subprime lending – 80% of its portfolio from every dealer has to be A to C paper quality. The remaining 20% can be D paper, and for those loans CCF does risk-based pricing. Johnson says CCF is doing “pretty well” on its yield from its indirect loans – it's averaging about 8%. The credit union has averaged a 0.5% delinquency rate on indirect loans over the last four years. “We feel very good about our program because we do so much monitoring and have a lot of diversity in it,” she says. Johnson stresses that any credit union that manages its indirect lending program itself needs to have a very good tracking system in place to be able to keep records on the yield by dealer and the quality of paper in their portfolio that comes from each dealer in their network. She says a lot of credit unions know this information “as a whole,” but not by individual dealer. “When it comes to dealer relations, you have to be in their face in good times and bad. You have to ask questions and talk with everyone,” says Johnson, adding that CCF sometimes even sends in `blind shoppers' to the dealerships to assess the shopping and financing experience who are actually credit union staffers posing as members shopping for a vehicle . Johnson and her staff visit with dealers weekly, and she said the credit union has gone as far as terminating business with dealers until problems are resolved. CCU also works hard at building quality relationships with the members who join the credit union at the dealer site. She explains that within a week after the new member joins the CU, CCF personally calls the new member to thank them for choosing to finance their auto purchase through the credit union and to invite them to the branch to discuss other products and services CCF offers. In another initiative to boost the quality of members that join CCF through an indirect loan, the credit union is offering these new members the opportunity to reduce their auto loan interest rate by 50 basis points if they open a checking account or direct deposit with CCF within 30 days of obtaining their auto loan from the credit union. Johnson says it's one way to encourage these members' loyalty to the credit union. “It's great when we get these new members' car loans, but two years down the road when they sell the car you lose them as a member. So we're trying to relay the message that we're more than just an auto financer. What we're hearing when we talk with these members is they have no idea of all the products and services we offer. It's up to us to educate them,” says Johnson. “We make the dealers jump through a lot of hoops, but we feel if we're going to have a successful program managed in-house that we have to have a lot of controls in place,” she says. -

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