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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
12
The Indirect Heat Wave
13
• 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
26
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
27
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
28
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
29
We offer a full range ofservices and specializations that span accounting,consulting, and wealth management to suit your specific needs.
ServicesInvestments
Insurance
Tax
Financial Planning
Investments
Family Office
Due Diligence
Investment Banking
M&ATax
Restructuring
Valuations
Business Planning
Performance Audits
Succession Planning
Compliance
Cybersecurity
Assessment & Planning
Development & Integration
Accounting for IncomeTaxes(ASC 740)
Accounting Methods
Compensation & Benefits
Credits & Incentives
International
State & Local
Controversy & Dispute Resolution
Tax Structuring
Transfer Pricing
Financial Statement Audits
Employee Benefit Plans
Public Company & SEC
Internal Audit
Outsourced Accounting
Contract Compliance
Sustainability
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.