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.
Showing posts with label Indirect Lending. Show all posts
Showing posts with label Indirect Lending. Show all posts
Wednesday, October 10, 2018
Friday, June 9, 2017
Almost 20 Percent of CU Industry Loans Were Indirect Loans
The National Credit Union Administration (NCUA) this week reported that at the end of the first quarter 2017 19.5 percent of all federally insured credit union loans were indirect loans.
As of the end of the first quarter of 2017, 1,901 federally insured credit unions had outstanding indirect loans, according to a NCUA spokesperson.
Credit unions reported $172.6 billion in outstanding indirect loans as of March 31, 2017 -- up almost 21 percent or $29.9 million from a year earlier.
In comparison, total loans outstanding grew by 10.6 percent over the same time period.
Since the end of 2012, indirect lending at credit unions has more than doubled. Outstanding indirect loans were $78.2 billion at the end of 2012. Almost 13.1 percent of all loans were indirect loans.
I suspect that indirect lending has played an important role in the membership growth at credit unions over the last couple of years.
As of the end of the first quarter of 2017, 1,901 federally insured credit unions had outstanding indirect loans, according to a NCUA spokesperson.
Credit unions reported $172.6 billion in outstanding indirect loans as of March 31, 2017 -- up almost 21 percent or $29.9 million from a year earlier.
In comparison, total loans outstanding grew by 10.6 percent over the same time period.
Since the end of 2012, indirect lending at credit unions has more than doubled. Outstanding indirect loans were $78.2 billion at the end of 2012. Almost 13.1 percent of all loans were indirect loans.
I suspect that indirect lending has played an important role in the membership growth at credit unions over the last couple of years.
Wednesday, September 9, 2015
NCUA: FICUs May Buy Participation in Loan Generated through Indirect Lending Channels
The National Credit Union Administration (NCUA) in a legal opinion letter to the Georgia Credit Union Affiliates stated that a federally insured credit union (FICU) is permitted to purchase a participation in a loan generated by an indirect lending arrangement under limited circumstances.
According to NCUA, an expansive reading of its rule would treat a retailer as performing an administrative function, which is an extension of the FICU's or eligible organization's lending operations, and not as a separate lender generating the loan.
NCUA cautioned that in an indirect lending arrangement the final underwriting decision must reside with the FICU or eligible organization and the retailer must assign the loan or sales contract to a FICU or eligible organization very soon after it is signed by the borrower.
It is NCUA's view that the longer the time period between the formation of the contract and its assignment, the greater the likelihood that the arrangement will be treated as a purchase of a third party loan instead of making a loan through an indirect channel.
Read the legal opinion letter.
According to NCUA, an expansive reading of its rule would treat a retailer as performing an administrative function, which is an extension of the FICU's or eligible organization's lending operations, and not as a separate lender generating the loan.
NCUA cautioned that in an indirect lending arrangement the final underwriting decision must reside with the FICU or eligible organization and the retailer must assign the loan or sales contract to a FICU or eligible organization very soon after it is signed by the borrower.
It is NCUA's view that the longer the time period between the formation of the contract and its assignment, the greater the likelihood that the arrangement will be treated as a purchase of a third party loan instead of making a loan through an indirect channel.
Read the legal opinion letter.
Wednesday, June 10, 2015
Quorum FCU Restructures Timeshare Loan Program to Avoid Regulatory Limits
According to Quorum Federal Credit Union's 2014 Annual Report, the Purchase, NY-based credit union restructured its vacation ownership or timeshare loan program to circumvent regulatory limits.
As I previously reported, Quorum Federal Credit Union, beginning in 2009, entered into financing agreements with several vacation ownership companies to provide loans for the purchase of timeshares and rapidly grew its timeshare loan portfolio. (Read here and here)
According to Note 4, the National Credit Union Administration (NCUA) directed the credit union to reduce its exposure to vacation ownership loans.
So, outstanding vacation ownership loans fell from $135,413,000 at the end of 2013 to $43,526,000 at the end of 2014.
However, Note 4 further points out that the credit union made changes to its vacation ownership loan program so that it qualifies as indirect loans and thus not subject to any specific regulatory limits.
As I previously reported, Quorum Federal Credit Union, beginning in 2009, entered into financing agreements with several vacation ownership companies to provide loans for the purchase of timeshares and rapidly grew its timeshare loan portfolio. (Read here and here)
According to Note 4, the National Credit Union Administration (NCUA) directed the credit union to reduce its exposure to vacation ownership loans.
In 2014, the NCUA directed the Credit Union to reduce their vacation ownership loan portfolio by June 30, 2015. The limitation applied to the Credit Union’s holdings is a result of the NCUA determining that these loans meet the definition of an eligible obligation as opposed to indirect loans. The aggregate limit for eligible obligation is 5% of unimpaired capital and surplus. As of December 31, 2014, if the Credit Union were required to reduce its holdings, approximately $91,842 of vacation ownership loans would need to be sold. As a result, this amount of loans has been classified as loans held for sale in the consolidated statement of financial condition at December 31, 2014.
So, outstanding vacation ownership loans fell from $135,413,000 at the end of 2013 to $43,526,000 at the end of 2014.
However, Note 4 further points out that the credit union made changes to its vacation ownership loan program so that it qualifies as indirect loans and thus not subject to any specific regulatory limits.
During 2015, the Credit Union proposed certain changes to the vacation ownership loan program and the NCUA has acknowledged that the proposed changes to the program will qualify future loans as indirect loans. There is no regulatory limit specific to indirect loans, and therefore the Credit Union anticipates continuing the vacation ownership loan program with such loans qualifying as indirect loans. Similar to other loan types, these loans will follow the concentration guidelines adopted by the Board of Directors and will be subjected to examination by the NCUA.
Monday, January 20, 2014
Indirect Auto Lending Will Be Subject to Greater Scrutiny in 2014
Fitch on January 16 warned that "[h]eightened scrutiny of potentially discriminatory auto lending practices by the U.S. Consumer Financial Protection Bureau (CFPB) will likely raise lender regulatory costs in 2014."
Fitch noted that the CFPB began to investigate the auto finance industry last year over allegations that lenders my have discriminated against borrowers based on race and violated the Equal Credit Opportunity Act.
The CFPB is focusing on the practice of indirect lending through dealers, which allows dealers to mark up the interest rate submitted by the lender.
Fitch believes that increased regulatory costs and compliance requirements will weigh on the financial performance of auto lenders in 2014.
As of September 2013, NCUA reported that 1,839 credit unions reported operating indirect consumer loan programs.
Read the Fitch press release.
Fitch noted that the CFPB began to investigate the auto finance industry last year over allegations that lenders my have discriminated against borrowers based on race and violated the Equal Credit Opportunity Act.
The CFPB is focusing on the practice of indirect lending through dealers, which allows dealers to mark up the interest rate submitted by the lender.
Fitch believes that increased regulatory costs and compliance requirements will weigh on the financial performance of auto lenders in 2014.
As of September 2013, NCUA reported that 1,839 credit unions reported operating indirect consumer loan programs.
Read the Fitch press release.
Thursday, September 19, 2013
Quorum FCU Dives Into Indirect Timeshare Lending
TimeshareLeaks has started to investigate the ongoing relationship between Quorum Federal Credit Union (Purchase, NY) and The Berkley Group, a leading timeshare developer.
Quorum FCU entered the timeshare lending business in late 2009, when it founded a credit union service organization (CUSO) called Vacation Ownership Funding Company (VOFCO). Quorum owns 79 percent of VOFCO.
In its 2009 Annual Report, Quorum wrote about how VOFCO will help to facilitate the relationship between Quorum and the vacation ownership companies and would fuel future growth of the credit union.
In its 2012 Annual Report, Quorum wrote that it "entered into agreements with several vacation ownership companies to provide indirect loans for the purchase of vacation ownership intervals."
TimeshareLeaks noted that between 2010 and 2011 vacation ownership loans grew by 302 percent and between 2011 and 2012 vacation ownership loans almost doubled, growing by 90 percent.
At the end of 2012, the credit union held $103.5 million in vacation ownership loans, which equated to 18 percent of its loan portfolio.
In fact, almost 94 percent of the growth in the credit union's outstanding loan balances between 2009 and 2012 has come from vacation ownership loans.
No wonder Quorum in a 2011 letter opposed a proposed rule by NCUA that would have subjected its CUSO to additional regulatory oversight.
Quorum FCU entered the timeshare lending business in late 2009, when it founded a credit union service organization (CUSO) called Vacation Ownership Funding Company (VOFCO). Quorum owns 79 percent of VOFCO.
In its 2009 Annual Report, Quorum wrote about how VOFCO will help to facilitate the relationship between Quorum and the vacation ownership companies and would fuel future growth of the credit union.
In its 2012 Annual Report, Quorum wrote that it "entered into agreements with several vacation ownership companies to provide indirect loans for the purchase of vacation ownership intervals."
TimeshareLeaks noted that between 2010 and 2011 vacation ownership loans grew by 302 percent and between 2011 and 2012 vacation ownership loans almost doubled, growing by 90 percent.
At the end of 2012, the credit union held $103.5 million in vacation ownership loans, which equated to 18 percent of its loan portfolio.
In fact, almost 94 percent of the growth in the credit union's outstanding loan balances between 2009 and 2012 has come from vacation ownership loans.
No wonder Quorum in a 2011 letter opposed a proposed rule by NCUA that would have subjected its CUSO to additional regulatory oversight.
Sunday, August 22, 2010
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).
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).
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