By Ray Birch
AUSTIN, Texas–State regulators are turning a watchful eye on indirect lending at credit unions, where volume growth remains on the accelerator, with special attention on CUs moving into the channel for the first time.
Included in the issues being scrutinized: the length of repayment terms.
Among the agencies that has said the loan category has moved on to their radar—while also saying they are not concerned—is the Texas Credit Union Department. The National Association of State Credit Union Supervisors (NASCUS) also confirmed other state agencies say they are paying more attention to indirect loans.
The Texas CU Department told CUToday.info that a sizeable percentage of Lone Star State-chartered CU assets in this state are in indirect auto loans.
“One of the things we look at is close to 25% of credit union assets under management in Texas are in indirect auto loans,” said Micheal Riepen, director of examination support activities with the Texas CU Department. “We’ve had pretty consistent, steady growth in indirect lending and we remind our credit unions that as you undertake any type of lending program to do it in a safe and sound manner, and it is our responsibility to ensure you are doing it properly.
“We are looking more carefully at indirect programs, partly because there is greater concentration risk as this part of the portfolio grows,” he continued. “We want to make sure that based on the credit union’s risk tolerances and capital structure that they do the right level of indirect lending that is appropriate for their credit union.”
As CUToday.info reported, the Texas CU Department recently issued a bulletin to its state-chartered credit unions emphasizing that before starting an indirect auto loan program, a credit union's officials and management should determine whether its is consistent with the credit union’s overall business strategies and risk tolerances.
Big Driver of New Memberships
A big reason for the attention is the rapid growth of indirect lending, which has reached record levels at credit unions as a means to sustain auto lending and overall loan portfolio growth. The focus arrives as CUs are posting record membership growth—706,000 new members in August and 5.02 million on the year through that period, the fastest growth in credit union history, according to CUNA Mutual Group’s latest Trends Report.
Mike Schenk, chief economist at CUNA, estimates that one-third of all new members come through the indirect auto lending channel.
Riepen said that indirect growth in the state has been steady over the last four years, increasing at about 10% annually.
“We don’t have any significant concerns at this time, but what we do want is if an indirect program is complex, and as CUs just get into indirect lending, that it’s done properly. We look carefully at your decision-making,” he said.
The department is also watching how CUs respond to the rising rate environment, Riepen said.
“We have had a number of rate increases by the Federal Reserve, and we don’t want credit unions to get too caught up in competing with some of the ultra-low rates, like those from the captive finance companies,” he said.
Riepen said that the department wants to ensure margins on the loans at credit unions are not too thin and properly take into account all operational costs and potential charge-offs.
“We want to make sure your net yield is at least as good as what you could earn from just putting money in a Treasury,” he said. “We had an interest rate environment that did not move for eight years. So, you want to be careful in a rising rate environment that you are not underpricing your loans.”
Riepen added that while indirect loans have grown, it has yet to become a concentration risk.
“But as you have an increasing level of a loan type in your portfolio, we want you to look carefully at who your affiliations are with. Are your programs set up properly?,” he said. “Are delinquencies from paper provided by each auto dealer monitored? Are you looking at the quality of loans you are getting from specific dealerships? Are you assessing your risk?”
What if Rates Keep Increasing?
At the National Association of State Credit Union Supervisors (NASCUS), CEO Lucy Ito said the forecast by many economists that a recession is looming by 2020 is reason for concern.
“We are in this very positive economic environment, and the obvious question for regulators is what happens if this positive economic environment turns the other way?” said Ito, who noted state regulators are not yet concerned about CU indirect programs and their record growth. “But one area of indirect I am hearing concerns about is length of terms. Terms are going out much longer, as we know. So the question is how, in a rising rate environment, does a credit union respond if it is locked into a six-year loan and a recession arrives in less than six years?”
Ito emphasized that credit unions must be “nimble” with its indirect programs.
“Those credit unions that are not carefully forecasting and structuring their loans will see trouble coming,” Ito said. “I think there is concern for the less-nimble credit unions—possibly new entrants into the indirect market. I would not say examiners are worrying about credit union indirect lending, they are just on their toes about what might happen in a changing economy. Credit unions need to be prepared for what might happen in an economic downturn.”