Texas CU Regulator Warns CUs about Indirect Auto Loans

The Texas Credit Union Department in September cautioned state-chartered credit unions about indirect auto lending programs.

According to the the Texas Credit Union Department, there has seen a steady increase in indirect auto lending by credit unions over the past few years.

While the regulator notes that indirect lending programs can benefit the credit union by growing its auto loan portfolio, these programs require specialized knowledge and skills to be successful.

The state regulator wrote that before starting an indirect auto loan program, a credit union's officials and management should determine whether indirect lending program is consistent with the credit union’s overall business strategies and risk tolerances.

The Texas credit union regulator stated that a credit union needs to perform adequate due diligence of the dealers involved in the program.

A credit union needs to develop and implement proper internal controls to monitor the overall performance of these programs. "Absent adequate internal controls, credit unions may be assuming significant credit risk and exposure to losses that could create safety and soundness implications."

According to the Texas Credit Union Department, its "examiners will ... carefully review the quality of loan underwriting, the overall credit risk of the portfolio, collateral values, title work, internal controls, and the credit union’s due diligence of its dealer participants."

Furthermore, with the recent increase in interest rates, a credit union should weigh the risk/reward of indirect loan yields versus risk-free investments yields. The state regulator commented that a rapid expansion "in a competitively priced indirect auto loan program could be detrimental to earnings."

Read the September Bulletin.