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Indirect Lending Considering Indirect Lending? Start At the End and Work Back. (As seen in Credit Union Journal, June 14, 2008) |
Indirect lending can be an excellent way to enhance your lending program. Certainly, this is a risk-based program with a great risk/reward situation involved. While many credit unions have entered the market with great reward, some have suffered at the hand of the risk involved.
If your CU is considering entering this market or, if you’re already in it and have experienced increased delinquency and charge-offs that have not been rewarded with great returns, then consider this: look at the end of the process and work your way back.
The success of almost any indirect lending program can be linked back to the strength and preparedness of the credit union’s collection operation. Indirect lending is not like the normal lending program with the regular membership. Loyalties are not always maintained with the credit union and relationships may not have been established. In addition, the information received upon approving the loan may not be as high quality as the loan that came through regular channels.
These factors and others can lead to an increase in delinquency; charge offs, and will, eventually, affect your bottom line. By being prepared and performing some due diligence a credit union can be successful in this market.
The following are five areas that should be even after the fact:
- Operation and Staffing Do you have adequate staff or are you in a position to add staff to cover the increase of collection activity that will possibly be forthcoming? Certainly, there is the possibility of an increase in delinquency from this type of lending, however, this can be mitigated with the correct staffing levels. In addition, is your staff trained in up-to-date collection techniques? Is your management staff knowledgeable and able to train current and new staff?
- Collector Performance, Productivity and Quality
Measurements of collector performance, productivity, and quality are essential to monitor the collection efforts. Do you have these measurements in place? Do you have the capability to monitor ongoing collection efforts for quality? Collections are a daily effort that require a persistent investment to the task at hand and must be monitored continuously. - Repossession and Remarketing
With indirect lending comes the possibility of increased repossessions and remarketing. Do you have vendors that can handle an increase in volume? Have you established relationships with a remarketing company or auction house to sell the repossessions? Does your management staff understand what to look for in determining wholesale and retail values and what is. - Technology
An increase in delinquent loans calls for a more sophisticated collection system. This system should be capable of distributing accounts correctly in collector queues, be user friendly for efficiency purposes, and be able to handle advanced collection distribution matrices among other things. Does your collection system have the capability of performing these functions and more? - Management Reporting and Trend Tracking
Running an effective collection department requires information be gathered in real time, daily, and monthly to detect potential problems trends within the portfolio. Can your core system or your collection program provide these reports? Does your management team know what reports would be helpful in this area?
Solutions in Finance, Inc. is a San Jose, CA-based consulting firm that provides services for financial institutions in consumer lending, indirect lending, mortgage lending, and collection operations. The firm assists clients to create, improve, and maintain sound lending practices with overall superior credit quality. Collections operations best practices applications are introduced with new and improved strategies and processes, and a focus on decreasing delinquency, charge offs, and increasing charge off recoveries.
