ORLANDO—Declining auto sales combined with credit unions posting record indirect lending numbers has some state credit union regulators taking a hard look at the indirect auto loan portfolios at credit unions.
That was one theme expressed by state regulators interviewed by CUToday.info during the State System Summit hosted by the National Association of State Credit Union Supervisors (NASCUS).
One examiner is cautioning that while credit unions should remain optimistic about indirect lending, they need to be very “diligent” with this book of business.
Shawn Burcham, senior examiner at the Oklahoma State Banking Department, told CUToday.info that the booming indirect growth is good for credit unions as long as they are proceeding carefully.
“It’s appropriate growth,” said Burcham. “I know everyone wants to be a billion-dollar credit union, but that won’t happen overnight. With indirect, credit unions need to be cautiously optimistic with their growth.”
First & Foremost
What examiners in his state are looking for foremost, said Burcham, is concentration risk. He said that examiners will typically take a hard look at a credit union whose indirect portfolio is growing more than 10% to 15%.’
“That is a red flag in our risk monitoring,” he said. “From there we go through the portfolio and see which credit tier is growing the most—is that D and E paper or A and A-plus? We go from there and broaden our exam scope based on what we find.”
Shawn Burcham
Indirect lending is growing at a very high percentage among credit unions in Oklahoma, noted Burcham.
“That’s great,” he said. “But we want to make sure that proper procedures, controls and monitoring are in place. We want to make sure that risk is not getting out of hand here, and past-dues and charge-offs are increasing, really impacting the bottom line and earnings.”
Adjusting Lending Policies
Burcham concurred that the increased attention to indirect is coming at a time when auto sales are just beginning to decline, which may encourage some CUs to reach into lower credit tiers to keep their growth at current levels.
Burcham said that in recent years many credit unions in Oklahoma have changed their indirect lending policies to provide for such leniency. He said terms were regularly being extended to 84 months and sometimes longer, debt-to-income ratios have been raised, and loan-to-value ratios extended out to 120% and 130%.
But Burcham also noted that he has seen some credit unions recently begin to tighten lending standards.
“We have seen some pullback, so maybe not 84 months, but 72,” he said. “And debt-to-income ratios being lowered for D and E paper, and A and A-plus paper as well.”
Lessons Learned
In Colorado, state CU examiners are also watching credit union indirect loan portfolios. But Mark Valentine, deputy commissioner of the Colorado Banking Division, says CUs have learned the indirect lending lessons handed down from the Great Recession. He told CUToday.info that he does not think credit unions will make the same mistakes now and in the near future that some made approaching 2008.
“Indirect lending was certainly an issue with credit unions prior to the recession,” Valentine said. “It was an issue especially at some of the larger credit unions in our state. They were hot and heavy into indirect auto to the point where they did not do proper background checking and due diligence, so delinquencies went up a lot then. Indirect auto lending is again climbing in our state, but this time the industry is smarter about how they handle it.”
Valentine said credit unions are now performing better background checks on their new members and are following the loans more closely.
“They are first making sure these new borrowers are financially strong, making better decisions, and then following the loans as they mature—just doing a much better reporting job,” he said.
Watching for Red Flags
Mark Valentine
As a former auto lender himself, Valentine said he is confident in the ability of Colorado CUs to manage indirect lending, but added that examiners continue to watch for red flags.
“One of those is high LTVs,” he said. “As well as high debt-to-income and low credit scores, your typical risk profile.”
Valentine believes credit unions are performing good job with the auto dealers with which they are working.
“Especially with the larger lenders, they are pulling reports monthly on dealer charge-offs and credit histories,” he said.
The View from the Nutmeg State
In Connecticut, state regulators are paying attention to any area of significant growth at credit unions and indirect lending is among those, said Mary Ellen O'Neill, Director of the Financial Institution Division
of the Connecticut Department of Banking.
O’Neill, who is also NASCUS board chair, said that as her team reviews CU indirect programs, they continue to see sound underwriting policies and standards.
“We are not seeing credit unions loosening lending standards to keep growth going,” said O’Neill. “We always stress to the institutions that they keep their lending standards at par.”
Asked whether the department has seen credit unions reaching into lower credit tiers to keep lending levels growing as car sales decline, O’Neill said that if credit unions in the Nutmeg State are making such moves it’s not motivated by growth objectives.
“I think it’s more about going to work with borrowers, helping those who need an auto loan and getting the person into an appropriate lending structure,” she said.