By John Flynn, Open Lending President & CEO
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.
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.
Validate that lending policies have specific underwriting guidelines to include credit scores, debt-to-income ratios, interest rates, amortization schedules, loan-to-value ratios, diversifications standards, and concentration limits (from individual dealers).
Ensure control structure provides appropriate oversight of loans
Validate loans are adequately covered, not only in policies but with regular internal/external reviews
Collection procedures and repossession procedures need to happen independent of individuals that make loan origination decisions.
Loss evaluation methods have relation to the behavior of the portfolio with current trends.
Ensure lending practices are consistent to approved policies via sampling of credit files if the loan portfolio is significant in regards to capital investment.
Ensure repossessions are valid.
Determine whether management has waived any dealer recourse agreements.
Verify IT systems are effectively used to create systems capable of capturing multiple variables (credit scores, dealers originating loans, debt-coverage ratios, vehicle identifiers [i.e. VINs], etc)
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: Check out my previous blog on