Indirect Lending

Indirect Lending is the process by which a credit union and a dealer enter into an agreement allowing the dealer to directly offer credit to its customers through the credit union. You can experience this process at most automobile dealers: the dealer takes your credit information and acquires the loan on your behalf. You drive off with your automobile within hours rather than days and you never have to go to the credit union to acquire the loan.

In compensation for obtaining business for the credit union, the dealer is typically offered a financial incentive. This incentive is tied to each member indirect loan, which is booked and serviced by the credit union. Financial incentives can be in the form of flat fees or a portion of the booked loan interest, either of which can be paid out as a partial or full lump sum and amortized over the life of the loan. Financial incentives are determined by the agreement(s) between the credit union and the dealer.

If members pay off a loan early or default on a loan, the credit union may require the dealer return a portion of the financial incentives received. This issue is determined by the agreement(s) between the credit union and the dealer.

The following steps describe the process of acquiring an indirect loan:

1. Purchase: A member purchases an automobile from a dealer and chooses to pay off the purchase over time.
2. Dealer Loan Application: The dealer offers to acquire a loan for the member and prepares a loan application with the member’s credit information. The dealer forwards the loan application information to one or more financial institutions (by fax or other means) with which they have an indirect lending agreement.
3. Credit Reports: Each credit union processes the application as if it was received directly from a member. A credit report is retrieved and the application is scored and evaluated. The loan is either approved as received or with amendments or disapproved by the credit union’s loan officers. The credit union(s) forwards the decision back to the dealer.
4. Finalize Loan Agreement: From the approved applications, the dealer selects the financial institution to use, finalizes the loan agreement with the member, and sends it back to the credit union. The member takes the automobile home.
5. Credit Union Books the Loan: The credit union books and services the member portion of the loan. If the customer is not a credit union member, he/she is added as a new member. In addition, information necessary to service the dealer side of the indirect lending agreement (like dealer number, reserve type, etc.) is recorded and cross-referenced to the member loan.
6. Dealer Incentives: The credit union pays the dealer the incentive, according to the indirect lending agreement (flat fee or split amount), if the dealer balance is greater than the total amount of the holdback.