This analysis should provide the credit union with the basic framework to develop its indirect program limits
Credit unions must recognize the additional risk inherent in today’s indirect lending and determine if these risks are acceptable and controllable given the credit union’s staff, financial condition, size, and level of net worth. Credit unions that engage in indirect lending in any significant way should have board-approved policies and procedures, as well as internal controls that identify, measure, monitor, and control these additional risks. The initial development of a sound indirect program includes a documented analysis of existing programs within the local marketplace. The analysis should include dealer reserve structures (i.e. flat fees, rate mark-up limitations, etc.); maximum loan maturities based on amounts financed; minimum credit scores allowed; maximum limits for “add-on” products; loan to value limits; and the basis for collateral valuation (NADA trade, retail, etc.). As part of the ongoing due diligence process for any indirect program, this type of analysis should continue on a regular basis throughout the life of the program. Another pertinent consideration during the implementation phase of the program is whether the credit union’s program will be geared toward franchise or non-franchise dealers, or a mixture of both. Generally speaking, non-franchise dealers e level of financial stability as franchise dealers, and e quality of internal control processes in place. In some instances, this could elevate the potential for fraudulent transactions. Credit unions that engage in a small volume of indirect lending should have systems in place commensurate with their level of risk. Credit unions with existing indirect lending programs should carefully consider whether their program meets the following guidelines and should implement corrective measures for any area that falls short of these minimum standards.
The Department recognizes each credit union has its own individual risk profile and tolerance levels. However, as part of its ongoing supervisory monitoring processes, the Department will use certain criteria to identify credit unions that are potentially exposed to significant indirect lending risk. A credit union that has experienced rapid growth in indirect lending, has notable exposure to a particular credit risk category, or is approaching or exceeds the following supervisory criteria may be identified for further supervisory analysis to assess the nature and risk posed by the indirect lending program: • Total reported indirect loans represent 250 percent or more of the credit union’s net worth; or • Total reported indirect loans represent 25 percent or more of the credit union’s aggregate loan portfolio.
Field of Membership
As indicated by Section of the Finance Code, credit unions may only make loans to its members, and, as such, borrowers in an indirect loan program must meet the field of membership requirements included in the credit union’s bylaws and must become members of the credit union. Before underwriting and making a decision on a potential extension of credit, a credit union should ensure the dealership provides adequate documentation to confirm whether the prospective borrower qualifies for membership. Evidence of the prospective borrower opening a credit union membership account must be retained, along with all other pertinent documentation. Further, a credit union must obtain all necessary information and follow all procedures for opening accounts as required under applicable law, including the Bank Secrecy Act, as amended by the USA PATRIOT Act, its implementing regulations, and any directives that may be issued. These requirements are in addition to the documents and disclosures required to be given or completed in conjunction with the extension of credit.
Risk Management
Prior to engaging in an indirect automobile lending program, the board and senior management of the credit union should ensure that proposed activities are consistent with the credit union’s overall business strategy and risk tolerances, and that the credit union has properly acknowledged and addressed critical business risk issues. These issues include the costs associated with attracting and retaining qualified personnel, investments in the technology necessary to manage a more complex portfolio, a clear origination strategy that allows for after-the-fact assessment of underwriting performance, and the establishment of appropriate feedback and control systems. The risk assessment process should extend beyond credit risk and appropriately incorporate operating, compliance, and legal risks. Finally, the planning process should set clear objectives for performance, including the identification and segmentation of target borrowers, and performance expectations and benchmarks for each segment and the portfolio as a whole. Credit unions establishing an indirect lending program should proceed slowly and cautiously into this activity to minimize the impact of unforeseen personnel, technology, or internal control problems and to determine if initial profitability estimates are realistic and sustainable.