Identify & Monitor Indirect Auto Lending Risks

Follow this checklist to build a stable framework for your CU's program.

May 20, 2013

A successful indirect auto lending program forecasts risk and puts controls in place to monitor and address deviations from your credit union’s plan.

Here is a checklist of items you’ll want to monitor, courtesy Tim Harrington of TEAM Resources:

  • Too many loans too fast
  • Dealer commission too high
  • Falling prey to unethical/overly aggressive dealers who exaggerate borrowers' income, exaggerate borrowers' time on job, or power book – charge for options not delivered
  • Collections department staffing/resources overwhelmed
  • Ability to store/maintain/sell repossessed vehicles
  • Overreliance on a single dealer
  • Inadequate capital for risk
  • Inadequate training/planning

Some warning signs, according to NCUA:

  • CU approves more than 75% of applications
  • CU over-reliance on dealer for credit checks and credit reports
  • Dealer (not CU) accepts the borrowers' loan payments
  • Dealer makes payments on behalf of borrower (could hide past-due accounts)
  • Dealer finances down payment, resulting in member having no equity in collateral
  • Program operating outside CU's normal trade area
  • CU relies on a single dealership or single finance & insurance (F&I) person

Some controls to reduce risk:

  • Portfolio limits (by dealer, total portfolio, etc.)
  • Sensible dealer commissions (dealer reserve)
  • Track FICO averages by dealer by month
  • Inspection of repossessed collateral & comparison to original sales invoice