If there’s one thing that remains true, it’s that our financial landscape is constantly evolving. Through this, indirect lending for credit unions and banks has emerged as a critical strategy. This form of lending can allow banks and credit unions to expand their lending portfolio and match with more borrowers over time. So, what are the key differences between indirect lending for credit unions and direct lending? What benefits can the method bring to lenders? And what are some of the best ways to meet due diligence requirements? In this blog, we’ll break it down, giving you our complete guide.
What is Indirect Lending for Credit Unions?
Before we dive too deep into the differences between indirect and direct lenders, let’s first establish what indirect lending for credit unions and banks is. Simply put, indirect lending is a financing process where credit unions and financial institutions offer loans to applicants through intermediaries, such as car dealerships or other third parties. Instead of the borrower directly approaching the financial institution, they obtain financing through the intermediary who then sells the loan to the credit union or bank. For example, if an applicant finds a car they’d like to purchase at a dealership, they can apply for an indirect loan and receive multiple offers if the dealership is part of an indirect lending network.
What Differentiates Indirect from Direct Lending?
The difference between direct and indirect lending for credit unions and banks is centered around the intermediary, such as Web Finance Direct. In direct lending, applicants go straight to their credit union or bank. They communicate and negotiate terms with the lender without any intermediaries. This method typically offers a bit more transparency, as borrowers directly interact with the institution that provides the financing. Those who have established relationships with their bankers may prefer this method to an indirect lender.
The Main Benefits of Indirect Lending for Credit Unions
So, how do the lenders and dealers benefit from being part of an indirect lending network? To start, indirect lending can give both parties access to a wider range of borrowers.
Serve a Broader Applicant Base
As of 2023, the average FICO score for Americans is 714, which falls in the “good” range. Those with below-average scores may face some challenges in qualifying for direct loans, but indirect lending may help them secure more options. This is big for both dealerships and lenders looking to expand their sales and lending portfolios. Dealerships, especially those in the auto, RV, marine, and power sport industries can often offer loans to applicants on the spot and complete sales in a relatively quick fashion.
Dealerships Become More Competitive
Because indirect lending for credit unions and banks allows both parties to serve a broader applicant base, it can also make the dealerships more competitive over time, which also is a major benefit for both. For the dealerships, it’s simple. The ability to offer consumers the choice between multiple loan offers when making a big purchase can give them the much-needed flexibility to complete sales. This in turn can help credit unions and banks that are a part of the dealership’s indirect lending network to connect with more potential members than direct lending.
Indirect Lending Can Grow Your Lending Portfolio
Let’s say for example your credit union wants to attract more members in the marine industry but doesn’t quite have the staff to start targeting borrowers. How can you pull it off? Well, indirect lending for credit unions and banks offers an avenue to expand loan operations without necessarily opening new branches or investing heavily in direct marketing and outreach. Through your indirect lending partner(s), you can target specific borrowers in specific industries and lower you overhead costs at the same time.
Improve Customer and Member Satisfaction
Providing great customer service is the name of the game for both the dealerships which seek to attract buyers and the lenders which seek to attract and retain quality members. Indirect lending for credit unions and banks can help both sides accomplish this. Put yourself in the shoes of a car buyer. If you show up at a dealership, find the perfect car you’re looking for, and manage to get a fair financing offer, you’d be happy right? With the right touch of customer service and communication, indirect lending can make this a reality for all involved in the buying process.
Consistent Access to Qualified Lenders or Dealers
Finally, indirect lending can help lenders establish meaningful relationships with qualified dealerships and vice versa. Successful collaborations in indirect lending can build trust and reliability between dealers and lenders, which can help them optimize their offerings to customers and members.
At Web Finance Direct, we carefully vet each vendor and dealer to ensure they are qualified and connect with highly qualified applicants. To learn more about our indirect lending for credit unions and banks, including backend offerings such as gap insurance and warranties, check out our solutions page. You can also contact the team to get started with becoming a member of Web Finance Direct’s indirect lender network.
Three Steps to Start Your Own Indirect Lending Program
If you’re a credit union or bank looking to get into indirect lending, there are three main steps you could take to get your indirect lending program up and running. From first building your foundation to establishing the right partnerships, here is how to set the right benchmark.
Define Your Lending Criteria
This first step is arguably the most important for indirect lending credit unions and other financial institutions. Before you start your program, first decide which applicants you want to target. Why is this important? It can help you better outline your lending requirements and ensure you match with applicants that meet your lending standards.
Establish Strategic Partnerships
Once you’ve decided that the time is right to start your indirect lending program, you’ll want to begin establishing strategic partnerships with third parties and dealerships. Continuous collaboration and feedback sharing can help both lenders and dealers optimize processes to enhance customer experiences, from loan application to approval to purchase completion.
Implement Risk Management Strategies
The best indirect lending credit unions and banks will dedicate a lot of time and resources to managing the risks associated with lending. Some of these strategies include:
Credit Risk Assessment
When a significant portion of borrowers fails to meet their obligations, financial institutions can suffer substantial losses, endangering their financial stability. Because of this, financial regulators place a high emphasis on credit risk assessment. Institutions that fail to effectively assess and manage credit risk in their indirect lending portfolios can face penalties, increased scrutiny, or more stringent operational restrictions. Additionally, poor credit risk assessment could strain relationships with dealerships as well.
Fraud Detection and Prevention
For indirect lending credit unions and banks, it is crucial to ensure the right steps are in place to prevent fraud. In the 2021 fiscal year, lenders suffered a staggering $7.7 in auto loan fraud alone. Although indirect lending with a partner like Web Finance Direct can help you limit the risk of loan fraud, make sure you’re always on the lookout for any applications that don’t seem right.
Loan Monitoring
Once an indirect loan is approved, make sure you keep track of it. Regular monitoring can identify borrowers who are falling behind on payments. Loan monitoring can also provide a clear picture of the overall health of the lending portfolio. Lenders can track patterns, such as increasing late payments in certain segments, and take preventive measures.
Vendor Due Diligence: Why It Matters
Following up on loan monitoring, vendor due diligence is another critical step in the indirect lending process. Vendor due diligence plays a critical role in risk management.
“Vendor due diligence is a comprehensive evaluation process conducted by a company or organization when considering entering into a business relationship with a third-party vendor or supplier,” says Andrea Silvers, Vice President of Lender Relations at Web Finance Direct. “The purpose of vendor management for credit unions and banks is to assess and verify the vendor’s capabilities, financial stability, reputation, and compliance with relevant laws and regulations.”
Many industries are subject to regulations that mandate strict oversight of third-party vendors, and the financial sector is no different. Ultimately, when done right, vendor due diligence provides indirect lending credit unions with the comprehensive information they need to make informed decisions, ensuring that they partner with dealerships that align with their strategic goals.
According to the National Credit Union Administration, the elements that make up a successful due diligence program for indirect lending credit unions include an initial planning process, comprehensive policies to address everything from underwriting to monitoring, and a thorough review process. So, how can credit unions and indirect lenders best conduct due diligence?
Utilize Technology
Vendor due diligence, customer relations, and loan tracking can all be made easier with the help of digital tools and apps. With Web Finance Direct’s new dealership platform and customer mobile app, you can upload documents faster and more efficiently, check application statuses, and even chat directly with dealerships.
Employ a Vendor Due Diligence Team
If your indirect lending credit union or bank has the available resources, it may be worth it to train and deploy a full-time due diligence team.
“If the borrower’s vendors are not compliant with relevant laws and regulations, it can expose the borrower to legal and regulatory risks. Lenders may want to verify that the borrower’s vendors are in good legal standing to minimize these risks and better meet compliance requirements,” says Silvers.
Through regular training, your vendor due diligence team can stay on top of evolving financial landscapes and regulatory requirements to streamline your indirect lending process in the long term.
CLEAR Reporting
As part of vendor due diligence for indirect lending credit unions, confirming the trustworthiness of dealerships plays a big role. At Web Finance Direct, we leverage CLEAR reporting to carefully vet every dealership we work with.
“Web Finance Direct utilizes Thomson Reuters CLEAR for all dealerships that we work with. It provides access to a wide range of public and proprietary data sources to help assess the risks associated with the business,” says Silvers. “We pull a CLEAR report for every dealership that we work with to ensure they pass the minimum CLEAR risk assessment standards. If the minimum risk assessment standards are not met, we will not work with that dealership.”
To learn more about indirect lending and the hottest topics in the financial industry, check out our blog.
FAQs
What is indirect lending?
Indirect lending for credit unions and banks is when a consumer receives a loan from a financial institution through an intermediary, like a car dealership, instead of directly from the lender.
What are the risks of indirect lending?
The risks of indirect lending for credit unions and banks include the potential for higher default rates, reliance on intermediaries for borrower vetting, and possible reputational risks if intermediaries engage in questionable practices.
How can due diligence support successful indirect lending programs?
Due diligence supports indirect lending programs by helping lenders vet dealers and meet compliance requirements.