Calling Indirect lending a “failed model” is like calling major league baseball a failed league when your favorite team is in last place. The truth is, lack of knowledge as well as poor planning and execution are to blame. Having been on both sides of the equation, I can tell you this; the will to win is not good enough. Wanting to build membership and put quality loans with reasonable returns on the books is a good thing; however, understanding the auto industry is paramount in order to do it successfully.
Let’s be clear, referring members to a local dealership where credit union financing is available is considered indirect lending. But using the same train of thought, placing 9 people on a baseball field is considered a baseball team. Indirect lending is not for all credit unions. However, asset size, field of membership, and competitive landscape are the prerequisites to getting involved. Once a credit union understands the true potential of their market based on many factors, then the questions of; are we capable, able, and willing must be answered. Unfortunately only the “willing” part is answered in many cases.
It is true that credit unions can and continue to be blinded by growth and short sited success. However, that is poor execution and not a failure of indirect lending as a business model. It is this lack of execution that turns what is a wonderful opportunity into what can be considered the “Devils Playground.” Most members are financing and leasing vehicles at dealerships. The greatest opportunity for new member growth is at a local auto dealership. As a matter of fact, there is no better way to build new members than indirect auto lending. Therefore, it is worth every bit of energy for credit unions to participate and take advantage of this extraordinary opportunity. The key is to do it right. Not alone.

We launched a de novo indirect auto lending program in December 2009. Our success is derived from two major elements: emphasis on used auto loans (vs. new) and “service” (please don’t laugh).

We originate more used auto loans through the design of the program itself. We acknowledged upfront that long term there is no way to compete with the captive finance companies. Underwriting, LTV’s, cutoff scores, terms, rate-tiers, etc., all play a part to give us an 80/20 mix of used/new auto loans.

Our service gets delivered through our dealer rep and our underwriter — they have combined experience of 20+ years. Our rep hand-selected 10 dealers within the local market and calls on them frequently — delivering loan files, providing supplies and running interference on loan “stips” and “problem” loans. The dealers also have easy access to our underwriter in the event of a rehash or a question. Our turnaround time for loan decisions is currently 31 minutes — good, but we are working to reduce this further to 15 minutes.

So far, our loan volume has exceeded expectations; average FICO has been consistent at 680-690; average yields are much higher than anticipated. In addition, we have not had to pay the highest reserve to the dealers.

Knock on wood — so far, so good.