Indirect Lending

NCUA issued a letter to credit unions about indirect lending programs. The "letter details the risk management practices that are appropriate and necessary to soundly manage an indirect lending program."

NCUA notes that rapid growth in indirect lending programs may cause a "material shift in a credit union’s balance sheet composition."

NCUA warns that a poorly managed program or a program with weak controls can quickly lead to increase credit risk, liquidity risk, transaction risk, compliance risk, and reputation risk. NCUA writes that it "has seen seemingly healthy credit unions fail in a matter of months due to indirect lending programs that spun out of control."

The letter states that NCUA examiners are looking for red flags or warning signs associated with a credit union's indirect lending program. This includes increasing amounts of repossessed autos or increasing indirect lending delinquency and loan losses. Additionally, NCUA is looking for other warning signs such as incentive programs tying loan officer bonuses to indirect loan volume (see failure of Cal State 9 CU) or high concentration of indirect loans to assets or net worth.

According to NCUA data, federally-insured credit unions reported holding $73.8 billion in indirect loans on their books as of March 2010. This translates into 13.05 percent of all credit union loans.

Among credit unions with at least $50 million in outstanding indirect loans, 94 credit unions report having indirect loans that were at least 3 times the credit union's net worth as of the end of the first quarter of 2010. The following table lists the twenty-five credit unions that have the greatest exposure to indirect lending as a percent of their net worth. (click on image to enlarge).