Indirect Lending:Managing Risk

Ryan Sturgis, PartnerAran Loftus, Senior Manager Financial Services Group

• Industry Trends

• Fundamentals of Indirect Lending & Risks

• Common Frauds

• Regulatory Perspective

• Risk Mitigation

Objectives

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Larger Credit Unions More Successful

Portfolio Up ~$100B in 3 Years

Auto Delinquencies Increasing

Contract with a dealer to originate loans at the point of sale

Indirect Lending

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The Indirect Heat Wave

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• The need for speed and convenience

• On average, indirect lending approximates about 60+% of all auto lending, and continues to grow

Indirect vs Direct Lending Risk

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• You are not directly dealing with your member, no interview process.

• Your faith is in the dealer

• Dealer is profit motivated and wants the deal done!

• Significant pressure to make quick decisions (competition driven)

• Overall income and job time

• Editing FICOs

• Fake work number

• Power booking, or car value inflation

• Odometer roll back

• Fake trade in’s or down payments

• Many other things

Common Schemes

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• Rapid growth can lead to increased risk:

o Credito Reputationo Liquidityo Compliance

HIGH LEVEL RISK

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• High concentration of indirect loans

• Incentive programs for loan officers to volume, especially when not considering portfolio performance

• Lack of performance monitoring efforts

• High first payment default rates

• Loan documentation & collateral perfection issues

• Inflated prices, dealer created down payments, instances of power‐booking

EXAMINER RED FLAGS

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• Poorly documented risk assessment, program controls and monitoring efforts• Credit, interest rate, liquidity, compliance, reputation, staff

experience, etc.

• Lack of dealer due diligence• Common problem due to magnitude

EXAMINER RED FLAGS

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BASICS OF A SUCCESSFUL PROGRAM

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• Effective risk management proceduresoEffective policies & general program parametersoOngoing analysis of program effectivenessoOngoing review of risk exposure to financial condition

• Vendor due diligence• Ongoing training• Controlled growth• Dealer monitoring• Monitoring concentrations• Dedicated staff, including collections!

MONITORING

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• Recent trends in dealer activity:o LTVo FICOo Tierso Overrides?

• Amounts and trendso First payment defaultso Delinquencies, charge‐offs, cumulative COso Concentrationso Profitability by dealer

• Don’t forget about monitoring your dealer reps!

MONITORING (CONT’D)

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• Change collection frequency• Post charge off reviews• Legal review of contracts• Call backs ‐ several benefits

o Sell additional serviceso Verify basic informationo Catch power‐bookingo Understand their experience with the dealer Catch warning signs early (excessive

pressure, culture)

MONITORING (CONT’D)

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• Scrutinize loan documents:oApplicationsoPay informationoTitle perfection

• Timely reviews of files• Periodically review dealers to ensure they

meet criteria such as:oReputationoExperienceoFinancial condition (can be difficult)

• Maintain a large dealer base

• Diversify between dealers and regions/areas

• Diversify in tiers

DON’T GET CONCENTRATED!

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KNOW YOUR DEALER

• Understand culture & people

• Reputation due diligence

• Changes in key people

• Have dedicated dealer reps

• Visit them

• Train dealers on fraud prevention and awareness

• Encourage a partnership24

• Understand the general risk of the program

• Test controls to ensure compliance with policies & procedures

• Test monitoring efforts & understand results

• All dealers should be included• But increased samples for large volume or higher

risk/watch list dealers25

AUDIT IMPLICATIONS

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Crater Lake—A monument to perseverance, North America’s deepest lake filled to 1,949 feet over720 years.

Grand Canyon—At 277 miles long and up to 18 miles wide, this icon serves as a testament to determination and time.

ReachExpertise

106years in business

3,200+professionals

30+industries served

25+locations

west of the Mississippi

100+countries served

through Praxity, AISBL

$690Min revenue

earned

Data as of January 2019

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ARIZONAPhoenix

CALIFORNIAFresnoLos Angeles NapaOrange County Silicon Valley SacramentoSan DiegoSan Francisco Santa Rosa StocktonWalnut Creek

COLORADODenver

KANSASKansas City

NEW MEXICOAlbuquerque

OREGONEugeneMedfordPortland

TEXASDallas Houston

WASHINGTONBellingham EverettSeattle Spokane Tacoma Yakima

Our Locations

25+locations west of the Mississippi

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Grand Canyon—At 277 miles long and up to 18 mileswide, this icon serves as a testamentto determination andtime.

Reach

4thin the nation in

number of credit unions served

2ndin the nation in assets audited

85clients with assets

greater than$500 million

Staying current on financial reporting standards, ensuringsenior executives and supervisory committee members understand their roles, maintaining regulatory compliance and IT security, and finding ways to reduce risk throughout the organization are some of the most effective ways to help your credit union succeed.

Our professionals are well-versed in the complexities of your industry—we serve over 400 credit unions and other financial institutions, that range in size from less than $1 billion to over $20 billion in assets with multibranch operations.

By engaging a team that’s intimately familiar with the challenges you face, your institution can be well positionedto seek out best lending practices, manage interest-rate-risk, and grow its membership.

CreditUnion Experience

1Callahan and Associates, 2019 Guide to Credit Union CPA Auditors

3We serve three

of six largest credit unions

nationally

1stin the Western

Region innumber of

credit unions served

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We offer a full range ofservices and specializations that span accounting,consulting, and wealth management to suit your specific needs.

ServicesInvestments

Insurance

Tax

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Investments

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Due Diligence

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IN ST IT U T ION A L

IN DIVID UAL

T R A N SA C T ION S

ST R A T EGY & OPER A T ION S

IT

TAX

A SSU R AN C E

Wealth ManagementConsultingAccounting

The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and

receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal,

accounting, investment, or other professional advice is required, the services of a professional should be sought.

Assurance, tax, and consulting offered through Moss Adams LLP. Investment advisory offered through Moss Adams Wealth Advisors LLC. Investment banking

offered through Moss Adams Capital LLC.