Indirect Lending: Taking the Plunge

Susi Bennett, Desert Schools Federal Credit Union
April 4, 2008 | COMMENTS

Credit unions typically have been associated more with direct automobile lending than with indirect lending. However, as nearly three-quarters of all automotive loans are indirect, credit unions risk not fully supporting their members if they don't participate in the indirect market.

Additionally, indirect lending can significantly increase your auto loan market share. It was the quest for this market share that led Desert Schools Federal Credit Union in Phoenix to make the strategic decision to become a predominantly auto and real estate lender.

In 2000 we made a commitment to focus on indirect auto lending, going up against the big guys such as Bank of America, Wachovia, and Chase. During the first few years, we definitely experienced a learning curve. But with the help of new technology and a focused marketing effort, we captured a large share of the market.

If you're considering throwing your hat in the ring, there are several steps I recommend that helped us to become a major player in our area.

1. Attain buy-in from the top.

When we decided to move toward indirect lending we obtained complete buy-in from everyone at the top. We knew this venture would require new technology, new employee training, marketing collateral, and an investment of time and money.

Also, to be successful we'd have to develop partnerships with dealers, and we needed complete support for this initiative. We laid out our strategic plan and didn't move forward until everyone was on board.

2. Do your research.

Our next step was researching the automotive dealers in our area. We needed to know how they preferred to process loans, who they preferred to work with and why, and what they expected from a financial institution. We had to make it easy and comfortable for dealers to work with us. Our research led us to our next step.

3. Form strong relationships.

What did we hear from dealers? They wanted the process of submitting an application to be simple, and the decision from the lender to be fast.

When we first started indirect lending, we were receiving loan applications by fax machine. Our employees then had to manually key in the data, meaning there was a lot of lag time between when we received the application and when we issued a decision. Our process definitely wasn't simple or fast.

We looked for ways to improve our process and found DealerTrack , whose solutions allow dealers to electronically send loan applications to their chosen lenders, and the lenders return their answers in seconds if automated or in minutes with manual decisions.

We formed a relationship and went live in 2004. Now, when a dealer submits a loan application, it goes directly into our system and the dealer receives a decision within minutes. It's that fast, and it means we can look at more applications and buy more loans.

Another great vendor relationship that launched us into indirect lending is with Equifax's APPRO LoanCenter Consumer , our loan origination and decisioning platform. Sound, consistent, and closely monitored underwriting must be in place before entering the indirect lending arena, and the APPRO solution gave us the tools to do just that.

Integrating the DealerTrack system with APPRO was the next critical step. This was a key strategic decision and has helped us attain a nearly $1 billion auto loan portfolio. Seek out "best-of-breed" companies that can help you grow and diversify, and your credit union will reap the rewards.

4. Hire smart.

Our new focus necessitated that we hire dedicated employees who were determined to promote our product. We needed employees who would generate awareness among both dealers and members. So where did we look? To the dealer world.

We recruited dealership finance directors because they understood the dealer world, but we also insisted on "credit union-minded" attitudes. An added bonus was they were familiar with the DealerTrack tools because most had used them in the dealership. Many dealership employees gravitated toward working for us because we offered them a change from the typical 80-hour workweek found in dealerships.

5. Mobilize your marketing.

Don't jump into indirect lending without backup. Arm yourself with every resource available, especially marketing campaigns and materials.

We didn't mobilize our marketing efforts at first, and it showed in low market share. In 2005 we had huge support from our marketing department with interactive media, billboards, radio, and TV, and our numbers skyrocketed.

We've put a lot of marketing behind directing our members to our dealers, and it has paid off. Our member message is all about convenience and the time saved by visiting one of our dealers for an auto loan. When they visit our dealers, they can get a loan right there, in minutes, from the credit union they trust.

Indirect auto lending is an exciting arena that can significantly increase your auto loan portfolio, but it's not an area to simply jump in to. If you'd like to take your credit union to the next level of auto loans, do your homework, ensure you have complete buy-in from the top, cultivate vendor partnerships, hire people who know the market, and back up your new offering with comprehensive marketing. Planning, forethought, and persistence can make your credit union a player in this mostly untapped market.

Susi Bennett is assistant vice president of consumer lending at $3-billion-asset Desert Schools Federal Credit Union in Phoenix . This story first appeared at www.creditunionmagazine.com and is reprinted with permission.