Success and Failures of Indirect Lending May 12, 2011 10:00 a.m. Facilitated by: Steve Kutrubis Sponsored by

Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Agenda • Why Indirect? • Keys to Success • Policies • Reporting • Due Diligence • Dedicated Staff • The Do’s and Don’ts • Getting Started • Questions

Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Why Indirect? • New Members

• Loan Growth • Point of Sale/Purchase • Convenience

Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Why Indirect? Auto Consumer Facts (JD Powers & Wall Street Journal)

87% finance at dealership

75% research online

Spend average 4.9 hours online

Auto Consumer

Seek auto loans every 26 months

60% research financing online before entering dealership

Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Why Indirect?

And, consider this... 70% of members don’t vehicle finance with their credit union. Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Why Indirect? Members buy vehicles/get auto loans regardless of economic conditions

Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Credit Union Auto Lending Market Share Credit Union Retail Market Share Nationwide 35.0% 30.0% 25.0% 20.0%

18.0%

17.0% 17.1% 16.2%

18.4% 18.0%18.9% 18.2%17.7% 17.7%17.4%

16.8% 16.0%

15.0%

10.0% Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan10 10 10 10 10 10 10 10 10 10 10 10 11 \Source: AutoCount, an Experian Company. Does not include private party transactions.

Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Keys to Success A comprehensive and thorough understanding of indirect dealer lending and the dealer industry • Policies • Reporting • Relationships/Dedicated Staff • Due Diligence

Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Policies • Quality Control

• Same rates-direct/indirect • Market competitive pricing (not necessarily as the market leader) to achieve credit and profitability objectives while avoiding risks of adverse selection • Flat fee only or risk based pricing? • Consistency

Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Policies - Underwriters • • • • • •

Comprehensive and on-going underwriter training is critical Underwriters must have quality decision expectations and performance monitoring, with clear consequences up to and including termination A quality loan decision cannot be sacrificed to secure a loan; you can’t outrun bad deals Underwriters are not assigned to specific dealerships Underwriters are not compensated for securing loans; but it is part of their job expectations that they will use every opportunity to do so Average turnaround time on “review” applications well below 15 minutes

Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Policies - Funding • • • • • • • •

24 hour turnaround time from complete package to funding is critical Your thorough review process will not be sacrificed to meet turnaround time goals – 65% new members – 35% existing members Because of this split it is crucial that you verify who you are lending to o Detailed review of all applications and book sheet to identify discrepancies in the application information and/or power booking Run all new members through a qualify process which includes Chexsystems, early warnings, and fraud finder Address mismatches between application and credit report require “proof of residence” on all tiers

Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Reporting – Analysis & Review • • • • • • •

Perform weekly general rate analysis and monthly regional competitive rate analysis Track “look to book” ratios weekly, monthly, and quarterly Summarize auto loan funding's on a monthly basis by tier, term, new/used, rate, and LTV Monthly review process that randomly selects loans for accuracy of initial quality control process, 2-5% of all funded loans Track market share by county, region, and state monthly Monitor market share by loan quality by region monthly Static Pool Analysis

Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Reporting – Dealer Committee • • •

•

•

•

Dealer review committee meets monthly Committee reviews dealer delinquency and charge-off with next steps of action decided Other common issues include power-booking, application fraud, member eligibility concerns, and title perfection Committee makes decisions to terminate, suspend, place on a watch list, or do nothing Internal due diligence: (D&B and/or BBB reports, financial data, word on the street matters most) Dealer Scorecard

Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Due Diligence – Contract Management • Contractual Agreement between Credit Union and Dealer

• Dealer required to submit proper contract documentation with every loan • Protects Credit Union from Dealer and Member Fraud • Protects Credit Union with Right of First Refusal • Allows Credit Union control over membership issues • Indemnifies Credit Union from claims, actions and lawsuits • Requires Dealer to comply with all federal and state laws and regulations • Dealer financials – Tax returns, P&L statements, etc.

Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Dedicated Staff- Dealer Rep • • • •

• • • •

No loan approval authority Develop profitable dealer relationships Help communicate to dealer: volume, approval and pull thru ratios, title perfection, member service Lets you know what the dealers are saying and hearing How often should you visit dealers? (who?, when?, days off?) Track your dealer visits! Dealer entertainment: (lunches, gifts, rewards, marketing materials) New dealer development: (dealer reputation, referral sources, other dealers)

Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Do’s • • • • • • • • • •

Do have expanded hours, 7 days? Do have separate underwriters (from direct Consumer loans) Do have separate funding group Do have sufficient authority lending limits Do have extended terms Do have multiple credit tiers Do have indirect policy and procedures Do have multiple loan types Do have sufficient business reps to cover dealer base Do have Dealer Delinquency numbers

Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Don’ts • Don’t have decision overturned by another loan officer- needs to be supervisor/manager • Don’t make a lending decision while in the dealership • Don’t have a loan officer handle one dealership • Don’t hesitate to short fund a deal for dealer issues • Don‘t get caught in the need for “favors” • Don’t get caught in “I send you all my business” • Don’t settle for dealer LTV, randomly call borrowers for validation of options • Don’t stop making changes to your program

Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Getting Started-Ways to do Indirect Lending 9 On your own (100% yours – start to finish) You have total control You are accountable for results (good or bad) 9 Through a CUSO provider (eases staff requirements) You give up some control (varies depending on CUSO) You are still accountable (good or bad) 9 Through a non-CUSO provider (eases staff requirements) You give up some control (varies depending on provider) You are still accountable (good or bad) Find which business model works best for your business strategy, Credit Union culture, and ROI requirements

Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Getting Started • Who is your competition?

• Where is your marketplace? • What are the competitive rates? Can you compete? • Tolerance level for delinquency (Board buy-in!)

• What credit levels are appropriate for your market? • Deal only with Franchises? Include Independents? • Hold the dealers accountable: If they say “we see your

members,” then set minimum volume and credit quality levels. • Be flexible and consistent. When programs start and stop, dealers will lose confidence. Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Getting Started • Requires full commitment from top down • Early program errors; Too much volume too fast, Underwriting criteria too open • Slow steady growth • Increase member and dealer convenience • Let members know – Web, print, other media • Conservative and consistent with loan approvals • Gradually add dealerships • Same policies, rates and terms for both direct and indirect loans • Developed a Preferred Dealer List Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Getting Started • Review contracts thoroughly for accuracy • Each member is contacted to verify loan and overall dealer experience • Cross-sell additional services • Communicate with dealers daily • Maintain good relationships with dealers and the community • Loan officers available to dealers after hours • Reports • Top 30 dealer survey • Dealer of the month/quarter • Same day funding

Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Conclusion Why do it? • Members are financing autos somewhere • Dealer controls financing (don’t kid yourself)

• Good source of short term loans/offset long term mortgage • Portfolio balance

Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Conclusion • A successful indirect lending program requires all moving

parts to work as one • The thirst to increase market share cannot be quenched by sacrificing loan quality • Quality underwriting, consistency with the overall program, and a positive sales and service culture, with accountability, are the keys to a successful indirect lending program

Great Lakes. Great People. Great Credit Unions. Positively Michigan!

Thank You!

Steve Kutrubis [email protected] 630-803-2291

Great Lakes. Great People. Great Credit Unions. Positively Michigan!