Written By: David Park, Regulatory Compliance Counsel, NAFCU
My car's check engine light started blinking while I was driving into work. The car sputtered along, and I made it to the repair shop. But things sounded bad. And when the service representative uttered the phrase "decarbonize intake valves," a phrase I have heard far too many times over the past few years, I was confronted with a decision that I had been dreading. And thus, Ygritte - yes, my wife and I have the unfortunate habit of naming our vehicles - was sent to an untimely demise much like her namesake from Game of Thrones.
Just like that, I was in the market for a new car and an auto loan - which reminded me of a post by a group within the Federal Reserve Bank of New York's Research and Statistics Group from last week regarding auto loans. The post discussed the worsening state of the performance of auto loans and noted that "there were over 7 million Americans with auto loans that were 90 days or more delinquent at the end of 2018." The Research and Statistics Group also found that auto loans originated by credit unions performed quite well in comparison to those originated by auto finance companies: "6.5 percent of auto finance loans are 90+ days past due, compared with only 0.7 percent of loans originated by credit unions." Dan Berger, NAFCU's President and CEO, discussed the report on the Fox Business Network earlier this week.
As NCUA has observed, auto lending at credit unions has increased over the past few years due in part to indirect auto lending.
Because of the credit risk that arises whenever a credit union makes loans, the rise of indirect auto lending, and the performance of auto loans trending downward, it seemed like a good idea to revisit some of the NCUA's guidance relating to indirect auto lending and delinquency rates. The most relevant sources are the NCUA's 2010 Letter to Credit Unions regarding Indirect Lending and Appropriate Due Diligence as well as its guidance from The NCUA Report from the Second Quarter of 2017.
In the 2010 Letter to Credit Unions, NCUA notes that some of the red flags that examiners will review in determining whether a credit union is effectively managing its indirect lending program are increased amounts of repossessions, delinquencies, and loan losses. In the letter, the NCUA also suggests that credit unions should "[e]stablish an exit strategy in the event of an unexpected or unplanned increase in the program risk profile." With respect to underwriting standards, NCUA recommends that indirect lending standards "be reviewed at least annually or more often if risk levels increase or if negative trends begin to surface."
This dovetails with NCUA's recommendations for effective risk management:
"The most effective method of evaluating the performance of a vendor is through an analysis of the vendor’s static loan pool data. The credit union’s indirect lending policy should establish the information which is contained on the static loan pool data report. The static loan pool data report should provide sufficient information to determine, at a minimum: delinquency rates, default rates, current and cumulative losses, prepayments, and rates of return for each vendor." See, Letter to Credit Unions 10-CU-15.
Similarly, The NCUA Report from 2017 recommends "[t]aking early action to revise the program when adverse performance trends occur." One of the key takeaways from these sources appears to be that effective management of indirect lending programs requires analyzing delinquency rates and taking certain actions to mitigate or minimize risk that might arise from indirect lending programs. If your credit union's indirect auto lending program is seeing some of the same downward performance trends that the Federal Reserve Bank of New York's Research and Statistics Group noticed, then both of the NCUA sources may provide guidance about best practices in managing those programs moving forward.
To end on a personal note, my wife and I purchased a new car and settled on a name. We named the car Pod after young Podrick Payne hoping that the car would last as long as Podrick has lasted on Game of Thrones. I hope we did not curse young Podrick.