How does this compare to indirect lending?

You receive an application that has been sent to four other lenders. The last 20 applications your credit union received from this particular dealer had an average FICO score of 540. Moreover, since the loan wasn't automatically approved, you have less than five minutes to respond in order to have a 20% chance of actually booking the loan.

Why? Because four other lenders are simultaneously looking at the same application. You now have 20 referred deals in your queue awaiting a decision. The dealer calls the credit union for an answer, but has to leave a message along with the other dealers awaiting a decision. Finally, you retrieve your voice mail messages and spend 10 minutes listening to dealers with funding issues as well as those waiting for credit decisions.

For many credit unions, this is not an exaggeration. In this scenario, the credit analyst is pulled way out of their element and comfort zone. As a result, the service provided to the dealer suffers and the dealer may choose another lender to do business with. This creates a negative identity for the credit union, to say the least.

That, however, is not the worst-case scenario. The worst-case scenario can result in one poor credit decision after another, with losses mounting at a surprisingly fast pace. Unfortunately and surprisingly, these scenarios are not uncommon.

The phrase “knowledge is power” has never been more prevalent than in automotive indirect lending.

Automotive indirect lending provides a golden opportunity for a credit union to build a substantial, quality auto loan portfolio as well as increase membership. Like any other nascent business, credit unions develop their own personality by the way they conduct business. While some use their internal resources and reach out for professional assistance, others try to do it all on their own. Consequently, it's no surprise that open community charter credit unions have the highest risk. This is because they have the greatest opportunity for gain. The risk versus reward mantra applies here. Simply participating in an indirect lending program is not enough.

Today's technology makes it almost too simple for a credit union to connect to auto dealers and begin accepting applications. It is critical that credit unions, regardless of charter or asset size, work with an outside partner with knowledge and experience in all core areas–building and managing dealer relationships, risk management, etc. Moreover, to protect the credit union, it is important they seek outside expertise in other aspects of indirect lending, such as rate marketing and member education, to cite a few.

These and other core components will not only protect the credit union, but ensure it is building a healthy indirect lending product.