Integrated Lending Technologies L.L.C.

If you’ve been involved in the indirect lending business for more than a few years, you know that historically dealers have hated credit unions. Credit unions have to take a lot, if not most, of the blame for that. They distrusted dealers and treated them as if they were enemies instead of partners. They implemented unwise policies that undermined a dealer’s ability to make money on financing or back end products. As a result, a dealer would only send a deal to a credit union if he had no place else to go with it or was forced by a credit union member to send his application to his credit union. 

 The tide started to turn about 10 years ago. A few credit unions caught the vision and started working with dealers instead of against them. They built successful indirect programs, growing their auto loan portfolios and adding new members. Other credit unions saw what was happening and joined in. But many dealers were still pretty skeptical, and it was an uphill battle to win them over. Then, the Great Recession hit us. What a windfall for credit unions! By early 2009 many banks and finance companies had dropped out of the auto lending market completely, but credit unions stayed in it. For many dealers it was like a religious conversion. They finally saw the light. Credit unions could be good lenders. They could be trusted. I don’t have any empirical data to back me up, but I’ve noticed a real change in dealers’ attitudes. Of course the banks and other lenders are back in it now, but many dealers would now rather work with credit unions than banks or even the captive finance companies.
 

So what’s the point? Credit unions should strike while the iron is hot! They should take advantage of the current situation by expanding their indirect operations and strengthening existing dealer relationships. They should be advertizing their indirect programs to their members and prospective members. They should be promoting their programs to every dealer in their market. Let them know that you want more of their business. Emphasize the following:

1. Our rates are competitive;
2. Our commissions are competitive or even generous;
3. Becoming a member is easy and can be done right at the dealership;
4. Our members are loyal, and they want their loans financed at their own credit union;
5. We want to approve loans for our members and look for ways to do it;
6. We respond and pay quickly; and
7. We’re consistent.
 

It’s true that overall car loan volume is far less than what we were seeing 7 to 10 years ago, but it will be back. And dealers tell us they remember who was with them during the hard times. Credit unions that cut back now on advertising and promoting their indirect programs are making a big mistake.

This post is a departure from our regular style, but we thought it appropriate to share the blog posted earlier today about Opal Jay, a member of our Advisory Board. She’s a terrific resource for us, but more importantly a great friend. Take a look.   

http://simplecentsblog.org/2011/01/whos-your-mama.html#comment-1929

I just read the article in the CU Times regarding the comments made by NCUA Chairman Debbie Matz before the Senate Banking Committee on December 9. I was particularly concerned about her requests for additional powers, particularly the authority or ability to examine credit union service providers, or “third-party vendors” as they’re sometimes called. Obviously, since we provide a web-based indirect lending management system for credit unions, we would be a vendor subject to such NCUA audits. From my perspective, expanding the authority or responsibility of the NCUA to include audits or examinations of independent technology providers is a terrible idea for at least three reasons.
First, the NCUA has already provided credit unions with a detailed and specific set of criteria for selecting and qualifying vendors. The NCUA audits include a review of the credit union’s compliance with these standards. Our own policies and procedures have been influenced significantly by the strict standards set by the NCUA since our credit union clients require us to comply with them. A direct examination of vendors by the NCUA would be redundant and unnecessary.
Secondly, it’s beyond the scope of the purpose of the NCUA. I can’t see anywhere in the history of the establishment of this agency where examination, and resulting control, of independent service providers was contemplated. How would they determine which vendors should be examined? What would be the standards for different types of vendors? The very idea of such an enormous intrusion into private enterprise is government run amok.
Thirdly, I have no idea how much such an expansion of powers would cost, but I have no doubt that we can’t afford it.
Chairman Matz may have noble intentions, but this idea just dosesn’t make sense.

I just read Michelle Samaad’s article in the CU Times about the decline in membership at certain credit unions. The most recent data show that membership decline is more common in smaller credit unions, but a fair number of the big boys are losing members too. According to CUNA Mutual Group’s September Credit Union Trends Report, 20% of CUs with more than $1 billion in assets saw a decline in membership over the last year.

Of course there are several reasons why credit unions lose members. Being exclusively SEG based can be a challenge. Declining population in your community is pretty difficult to overcome. But the most common explanation is that, regardless of the size of the credit union, members leave if they’re not getting what they want from the credit union. Credit unions need to offer a full range of services and make those services available to the members when and where they want them. They also need to offer some particularly convenient or desirable service that will attract non-members. This might sound painfully obvious, but it nevertheless seems beyond the grasp of some credit unions.

Since ILT provides indirect lending technology to credit unions I certainly have a vested interest in promoting it. But, since I spend a great deal of time analyzing this market, I feel like I can offer a perspective that will be useful to credit unions dealing with membership decline or inadequate growth rates. Our own research shows a dramatic correlation between certain statistical data and indirect lending. A well managed indirect lending program at a credit union will almost certainly result in a higher than peer average numbers for not only membership growth but many other categories measured by the NCUA, including return on average assets, loans/shares ratio, loans/assets ratios and loan growth. In fact, a negative membership growth rate or a loans/assets ratio below peer average is an almost certain indicator of a credit union without an indirect program.

The conclusion seems pretty unavoidable. Indirect lending may not be the only solution to membership loss, but it’s certainly the most obvious one. You have to keep up with the competition in nearly all services offered. If you’re pretty much on an equal footing in all other services but have no indirect program, you’ll continue losing out to the competition that does have a program. And that will ultimately result in loss of members. Stated a little differently, if you want to retain your members or attract new members you must make it easy for them to get an auto loan, and nearly everyone now expects the dealer to take care of the financing for them. If your credit union doesn’t have an indirect relationship with the dealer when your member shows up to buy a car, chances are your CU won’t get the loan, and you might lose your member. You certainly won’t get any new members.

As we advise all our clients, there are risks associated with indirect lending as there are with every other lending or investment program, but they can be managed. The risk of having no indirect program is much harder to manage.

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.

According to CUNA Mutual Group’s Credit Union Trends Report for May 2010, “Through the first three months of 2010, vehicle loans held by CUs declined by 2.6%. Since the expiration of ‘cash for clunkers’, month-only declines have averaged 0.8%. Over the past year, CU vehicle loans have declined 3.7%”.

Over the last very difficult year credit unions using the DILLS™ system have fared better than the national average, but hardly anyone’s numbers are where they were a year ago. As we move into the summer months when demand is usually the highest, everyone seems to be struggling to meet lending goals or falling short of expectations.

What’s the problem?  We all know that demand for new car loans dropped dramatically last September when the “Cash for Clunkers” program ended. The captive finance companies responded to that development by offering a variety of subsidized loan products to spur on sales. Sometimes those subsidized deals aren’t all that great for the consumer, but many credit union members are lured away by them in spite of our best efforts. Then, as car sales started to pick up again, the big banks and finance companies came back into the market with rates that seem ridiculously low, and they’re aggressive with their dealer compensation plans as well.

What can we do?  There’s no single, easy solution, but here are some suggestions:

1. Find out as much as you can about your major competitors for loans at the dealership. What are their rates, plans and commissions? Ask any friendly F&I person. They’ll be happy to tell you. Some of them may exaggerate a little, but they’re still a good resource.
2. Try to be in your competition’s ballpark for at least some loans. You need not be the “low cost leader” in any category, but you should be competitive. Some of those “too good to be true” rates are reserved for super-credits, and you can still compete for loans to people with average to good credit.
3. Visit the dealer. Let him know you’re still in the market and would like some of his business.
4. Stay in the game. Dealers appreciate consistency. They will come to distrust lenders who are here one day, gone the next.
5. Service and personal relationships will make the difference with dealers. Set yourself apart from the competition by being a leader in non-financial factors like decision turnaround, funding turnaround, better technology and relationship management.
6. Advertise and promote your indirect lending program. Let your members know they can get a loan from your credit union at the dealership. Tell them to insist that the dealer arrange for a loan from their own credit union.

I just read Brett Christensen’s comments in the article titled “Is Indirect Lending a Romp in the Devil’s Playground” in the April 7 edition of Credit Union Times. In the article he’s quoted as saying, “I tried my hardest … to keep an open mind about indirect lending, and my mind isn’t open anymore”. I couldn’t have said it better myself. Any credit union executive who took the time to read his railings against indirect lending should be grossly offended. His basic premise appears to be that credit union folks are too stupid to be successful at indirect. According to him, loan officers are so anxious to look good that they will buy almost anything. He must also think that managers who are supposed to be monitoring the programs are just incompetent or that they like the growth so much that they ignore bad underwriting practices.
He was right about one thing. Growth is what motivates credit unions to do indirect lending. People buy cars and get financing at dealerships. If a credit union expects to increase, or even maintain, its auto loan portfolio, it must have an indirect lending program. And, if that program is well managed, it will be successful, and the credit union members will get the service they expect from their lending institution.

Most lenders doing indirect lending do business with at least some independent dealers. If you develop a specific and detailed policy and follow it, doing business with independents makes good sense. The most common concerns are:

• Does the dealer have the financial strength to weather economic downturns?
• What recourse do I have if I don’t get the title?
• Are the dealership employees properly trained?
• Will I get complete and accurate loan documents?

If you do business only with franchise dealers, consider the following:

• Having a franchise from a manufacturer does not guaranty a dealer’s financial strength or that the dealer will stay in business.
• Independent dealers vary dramatically in size and financial strength just like franchise dealers.
• Some independents have excellent technological infrastructure and well trained management and finance professionals. Some definitely do not.
• New developments can practically eliminate the risks of not getting a perfected lien from an independent dealer.

If your indirect program isn’t available in independent dealerships, it isn’t available to buyers of almost half of all used vehicles. What do you think? Should you be doing business with independents? Are the problems or risks exaggerated? Have you done enough research on ways to reduce the risks?

The percentage of automobile and other equipment loans booked through the indirect lending process continues to increase, and the number of lenders doing indirect continues to grow.  More people than ever are looking for information about it. We here at Integrated Lending Technologies are providing this weblog as a forum for anyone interested to share his or her thoughts and ideas about indirect lending.  We’ll regularly post our observations about issues and developments related to indirect lending and open it up for discussion. We won’t use it to tout our own products, but we may mention some technological features that we develop if we think they’ll be of interest generally. Anyone can log in and post whatever they like. Our goal is to get people talking and sharing. Let others know what works for you or what has caused you problems. Ask questions. Someone else will have the answer. Share opinions. And we promise to not let this blog get stale. If we think things are moving too slowly, we’ll spice it up a little with some of our own opinions, and we’ve got some pretty strong ones. So, check back often.