4 Indirect Lending Red Flags that Catch Examiner Attention
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.
High Concentration of Indirect Loans
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.