AUSTIN, Texas—The Texas Credit Union Department is cautioning state-chartered credit unions over indirect auto lending programs.
According to the regulator, there has seen a steady increase in indirect auto lending by state charters in the state over the past several years, and while it said such loans can benefit the credit union by growing its auto loan portfolio, it is also expressing concern that indirect programs require specialized knowledge and skills to be successful.
The regulator’s warning was first reported by Keith Leggett, the former senior vice president and senior economist at the ABA, on his blog.
The Texas CU Department said that before starting an indirect auto loan program, a credit union's officials and management should determine whether an indirect lending program is consistent with the credit union’s overall business strategies and risk tolerances.
The Texas regulator further stated a credit union needs to perform adequate due diligence of the dealers involved in the program, and needs to develop and implement proper internal controls to monitor the overall performance of auto loans made indirectly.
"Absent adequate internal controls, credit unions may be assuming significant credit risk and exposure to losses that could create safety and soundness implications," the regulator stated, according to the Leggett report.
Examiners Plan Reviews
Texas Credit Union Department said its "examiners will ... carefully review the quality of loan underwriting, the overall credit risk of the portfolio, collateral values, title work, internal controls, and the credit union’s due diligence of its dealer participants."
Furthermore, with the recent increase in interest rates, a credit union should weigh the risk/reward of indirect loan yields versus risk-free investment yields. The state regulator commented that a rapid expansion "in a competitively priced indirect auto loan program could be detrimental to earnings," Leggett noted.