ONTARIO, Calif.—The rapid growth in credit union indirect lending programs has triggered more examiner scrutiny and additional emphasis on the performance of CU indirect lending programs by regulators, as CUToday.info reported earlier here and here.
In one case, the Texas Credit Union Department cautioned state-chartered credit unions that while the increase in indirect loans is good for the portfolio, a credit union is putting itself at risk if it lacks the specialized knowledge needed to ensure those loans pay off.
But one auto lending expert says credit unions can be more effective in mitigating risk and optimizing performance within their indirect portfolios through use of dealer performance scorecards, multi-dimensional portfolio analysis, static pool analysis, and profitability analysis.
“These practices allow credit unions to identify risk and low-performing segments within their portfolio, take corrective action in a timely manner, and maintain a sound and viable indirect lending program,” explained Jane Hammil, VP advisory services at CU Direct, who shared some key reports and metrics the company recommends credit unions use to effectively monitor risk within their indirect portfolio.
Begin With a Scorecard
Credit unions should develop and monitor a “scorecard” for dealers with the highest concentrations of loans in the portfolio, said Hammil.
“The scorecard report should include metrics such as delinquency, cumulative losses, average LTV, average credit score, profitability by credit tier, exceptions, funding delays, and audit discrepancies,” she said. “A report with drill-down capabilities allows lenders to quickly identify problem loan segments and other unidentified risks within the portfolio.
Hammil said credit unions should conduct an analysis of static pools—by origination tier and year—on a monthly to quarterly basis to “visualize” how portfolios originated during specific periods are performing, relative to other pools of loans.
“This will help credit unions determine how policies and procedures are affecting portfolio performance, if new dealers are performing as expected, and provide predictability to portfolio performance,” she said.
Another recommendation: lenders should obtain new credit scores for loans within a portfolio on a quarterly or semi-annual basis to determine if creditworthiness is improving or degrading over time, noted Hammil.
“The report can be further segmented by dealer, credit tier, time of origination, LTV, collateral value, etc., to understand how the portfolio is changing over time,” she said. “The information can also be used to mitigate future losses through collections strategies or to identify new areas for growth.”
In addition, credit unions should measure profitability of the overall indirect portfolio, as well as profitability at the dealer level, by monitoring the average net yield, annualized losses, cost of funds, and origination costs, said Hammil.
“The credit union should determine if each loan pool is profitable, and if so, when in the lifecycle the pool became profitable,” she said.
Rethinking Loan Terms
And with a lot of eyes, both from credit unions and regulators focused on the growing length of terms, Hammil provided some perspective.
“Extended length of loan terms seems to be a hot button issue with NCUA according to the Supervisory Priorities published in NCUA’s letter to credit unions (17-CU-09) in December 2017,” said Hammil. “At CU Direct, we’ve found the average length of term for all indirect loans funded through our network has not changed in the past three years (2016-2018). Looking at the 1,100 CU lenders, 14,700 dealers, and 1,045,840 loans funded through CU Direct’s indirect lending platforms through September 2018, the average loan term has remained consistent at 70 months.”