Today’s competitive lending environment—created in part by reduced borrowing behaviors among inflation-weary borrowers—rewards lenders with a differentiated edge. Fintechs promising that edge are entering the credit union space at a rapid pace, bringing both opportunity and potential threat to the doorsteps of the nation’s cooperatives.
This expanding ecosystem of indirect lending has vastly increased the regulatory compliance surface for credit unions. That’s because the buck always stops with the lender. If, for instance, a credit union examiner finds that an online auto marketplace failed to provide a borrower with a mandated financing disclosure, the credit union—not the marketplace—is held responsible.
As even more third parties enter the indirect lending funnel, it’s critical to keep an eye on the appropriate execution of regulatory policies and procedures.
What follows are some of the more common missteps in indirect lending compliance. Heading into a new year, credit unions would do well to check in on each to be sure both the cooperative and its partners are abiding by the rules.
Both federal and state examiners like to see a good mix of direct and indirect loans on a credit union’s books. Too many indirect loans cause regulator heartburn simply because the loans can be more difficult to manage—and to collect on past due payments—as compared to their direct counterparts. Often accompanied by things like direct deposit and long-term relationships with credit union members, direct loans are more stable in the eyes of regulatory bodies.
High instances of first payment default, skip-a-payment participation or frequent refinancing within the indirect portfolio may also send up warning flares. The credit union should monitor this activity alongside their loan department counterparts to get ahead of any issues that may one day raise the eyebrows of an examiner.
Integrating a new indirect partner may cause volume or certain loan qualities to spike. In these circumstances, it will be important to capture that explanation and document it so that it’s ready come exam time.
One of the most frequent complaints credit union lending officers share with the ViClarity team is how much time their staff spends chasing down missing stipulations. From proof of residency and driver’s licenses to income statements and credit union membership applications, it can feel almost inevitable for at least one piece of required documentation to be missing from an indirect borrower’s loan file.
Especially when pressured to move quickly, dealer staff may be tempted to keep a loan moving through the process and forget to close the loop on stipulations. To mitigate this risk, credit unions should work with the dealer sales/finance departments to continually emphasize the mandate to meet comprehensive stipulations with each loan submitted.
Although there is no magic bullet for ensuring partners, such as car dealerships and auto lending networks, collect a comprehensive set of documentation for every transaction, it’s a best practice to have procedures and a checklist of required stipulations for a complete loan application and file. This serves as a good reminder for active salespeople, and good training for those new to the partner organization. It’s also a good way to ensure updates to state regulations get addressed in a timely manner—a practice increasing in relevance as more credit unions partner with online networks that work with borrowers across state lines.
It’s not unusual for a credit union to offer preferred dealership pricing or other incentives to area auto sales businesses or even to their own loan officers. However, examiners could take issue if those incentives accompany an unusual volume of loan leads from a single partner/employee or loans that don’t seem to fit into the context of others, either from a pricing/terms or stipulations standpoint.
Compliance teams should be consulted during the design, promotion and management phases of incentive program development—especially with brand new third-party relationships—and should also be informed of any changes to the programs as they progress.
Examiners are big fans of well-documented portfolios that show signs of frequent reporting and analysis. An anomaly or misstep is less of a red flag if it’s clear that the credit union detected it, investigated it, captured it for historical purposes and made a plan to correct it, if necessary.
Vendor due diligence and internal audits are two effective ways to operationalize analysis of an indirect lending program. Compliance teams can “own” these events, which will allow them to unobtrusively check in on the execution of reporting procedures throughout the year.
It’s an exciting time for indirect lending. Many progressive brands, from Carvana to Tesla, have developed programs specifically designed to connect car buyers with credit union lenders. Of course, alongside the excitement comes risk and responsibility. As the regulated institutions in the partner mix, credit unions shoulder the compliance impact. Maintaining consistent communication, ensuring contract terms and practices match up, performing regular analysis and documenting everything will help both new and existing indirect partnerships reach their potential—and protect members and the cooperative along the way.
If you need help reviewing your current processes or establishing new ones, ViClarity’s compliance consulting team can assist. Contact ViClarity to learn more! ViClarity is a company of the California and Nevada Credit Union Leagues and a benefit of Leagues membership.
Article originally published in Credit Union Business News, authored by Jovilyn Herrick, ViClarity’s Senior Director of Client Solutions, and Crystal Streeper, ViClarity’s Senior Compliance Officer & Training Coordinator on January 10, 2024.
