Seven Direct Questions About Indirect Lending

June 1, 2010

Historically, indirect lending has been the pariah of credit unions. Stories of ruined balance sheets litter the industry’s collective memory. (Recently, however, these stories have been supplanted by stories of ruined balance sheets caused by corporates.)

In fact, many organizations’ indirect lending programs have matured. Credit unions understand the pitfalls that undermined previous attempts. What once were sheep going to the wolves’ den are now more like well-armed sheep going to the wolves’ den.

Still, some organizations have legitimate concerns and hesitate to enter the fray. Seven common questions:

1. Why should we treat indirect loans different than any others? As long as you randomly select people off the street, have them sign a piece of paper, and expect them to profess loyalty to your cause, indirect loans should perform exactly the same as your current portfolio. Actually, these members (and the dealers) have as much commitment to your organization as a washed-up sitcom star does to “Celebrity Rehab.”

2. Aren’t dealers’ motivations the same as ours? This reminds me of grocery store visits to buy cereal for my kids. When presented with a box of brand-name granola for $3.99 or a box of what looks like sawdust and fly poo for $1.99, I get the cheaper one. Why? I’m not the one eating the cereal. Dealers use the same rational. It’s not going to be their loan.

3. Are most dealers trustworthy? Sure, only a few lack something called a “conscience.” They have no problem inventing some income, taking a trade-in at an inflated price, or selling useless add-ons. For them, the goal is to move metal, not foster relationships. Of course, I don’t want to portray all car dealers as cloven-footed demons from another dimension. Some wear shoes.

4. Should we go it alone or join a group? It depends. Are you large and want to dedicate significant time and energy to developing a dealership network? Or do you simply want to sign a contract and then hear the beep of the truck as it backs into your lobby to deliver a load of cash? (Just kidding on that—typically they’re bringing in a few new repossessions for you). Even if you join a group, don’t think you can outsource common sense. Congress has been trying that for years to no avail.

5. What is the “auto-enhanced FICO” the dealer is trying to sell us? Technically, it’s the same as a regular FICO but with more weight on how the person has handled auto debt in the past. From a practical standpoint, it’s a number that adds about 20 points to the regular FICO score and can put your credit union in a world of hurt.

6. What do dealers want most? It’s like what a 16-year-old male wants from his prom date: fast decisions and predictability. Dealers want to know, given a set of facts, if they should invest the time to get the sale.

7. What’s the No. 1 area to watch? The loans. Make sure they’re the best paper you can get. Sure, the margins are thin, but indirect loans are investments—and pay a similar rate. As long as they’re managed, you should do well.

But if you don’t watch it, they’ll manage you.

JAMES COLLINS is chief financial officer at O Bee CU, Tumwater, Wash. Contact him at 360-943-0740 or at