Jan 14, 2020 Insights, Indirect Lending
Regulators realize that the competitive market for indirect auto lending has changed over recent years. With captive lenders offering significant incentives, indirect lenders have taken a more aggressive approach to maintain or grow their lending businesses. While regulators do not intend to impede banks’ and credit unions’ practices in growing these lines of business, they do want to remind financial institutions to be responsible in operating in the indirect auto lending market, ensuring they don’t expose themselves to significant risk and compliance issues, while offering guidance to strengthen indirect lending programs.
Open Lending can help you say ‘yes’ to more indirect loans safely and soundly.
To evaluate the consistency of these loans, the FDIC, the Comptroller of the Currency, the Federal Reserve Board, and the Office of Thrift Supervision adopted the Uniform Retail Credit Classification and Account Management Policy. Auto loans, considered closed-end credit, that are delinquent for 90 cumulative days are classified substandard; those at least 120 days delinquent are classified as a loss. Examiners are charged with ensuring that financial institution lenders adhere to this policy, unless repayment will occur regardless of repayment status. Many internal loan reviews have adopted a similar approach.
The FDIC offers the following advice to lenders in their auto lending business plans:
Evaluate strategic plans versus lending trends for consistency to include growth, risk levels, and projected rates of return.
While pursuing these markets, credit unions need to keep in mind compliance requirements as well. Ensure that your practices are creating the necessary information to comply with federal, state and local regulations as applicable. The NCUA echoes the FDIC bullets above, and offers additional guidance to credit unions to protect themselves in these markets.
Processes must be in place as they apply to indirect auto loan underwriting process, vendor policies, planning process and financial and operational reviews, which should be included within vendor agreements and contracts. Indirect loan programs must be actively managed and monitored, with fraud detection and strong risk management practices in order to protect banks and credit unions. But they can be rewarding as well.
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