Over the past month or so we’ve heard lots of talk about the official letter to all federally insured credit unions from NCUA Chairman, Debbie Matz, regarding indirect lending (Letter No. 10-CU-15 dated August 2010). Lots of credit union executives seem pretty concerned that the NCUA is “cracking down” on indirect. Many are assuming that the next audit is likely to be pretty rough and focused disproportionately on their indirect programs. Well, no one can predict how you’ll get along with your next auditor, but I’ve read the letter several times, and it’s not as bad as some people think.
The bad news is that, yes, the NCUA seems unusually focused on indirect. The recession has put some real pressure on car dealers. Dealers struggling to pay the bills may resort to a variety of shenanigans to move cars, and if lenders aren’t careful they can be victimized. I don’t have access to all the data from the NCUA regarding the number of credit unions that have gotten themselves into serious trouble lately because of poorly managed indirect programs, but I’ll accept their conclusion that the recession has increased the risks, to some degree, of operating an indirect lending program. In fact, the recession has increased the risks associated with all kinds of lending. But there’s no crisis here. The worst of the dealer fallout appears to be behind us, and most experts agree that car sales have bottomed out. There’s certainly no justification for believing that indirect lending itself is in trouble or unacceptably risky, and I don’t think Debbie Matz believes so.
Now for the good news. There’s nothing new or particularly controversial in the letter. The NCUA used 6½ pages to say that indirect lending can be risky and that appropriate policies, procedures and controls are necessary to avoid problems. We’ve been saying the same thing to our credit union clients since we started this business 10 years ago. I’m not going to recite all those rules here. We publish a free guide to indirect lending if anyone is interested. The point is, if risk can be recognized and understood, it can also be managed and minimized. And, a well run indirect lending program provides a number of benefits to compensate for those risks, including:
1. Offers convenience of “on the spot” financing to car buying members;
2. Not only retains, but increases membership;
3. Increases the credit union’s return on average assets;
4. Improves the average yield on loans;
5. Increases the loans/shares and loans/assets ratios;
6. Increases the percentage of members who are borrowers; and
7. Accelerates loan and asset growth rates.
So, to sum up, we agree with the substance of the NCUA letter. We just don’t think indirect lending should be singled out as requiring an unusually elevated level of scrutiny.
