Indirect Lending Trends

You would think that indirect loans are a staple of every credit union loan growth effort, but the fact is that only about 36% of all credit unions engage in indirect lending. And for those credit unions - what an interesting ride the last two years have been. Take a look at the chart below, which depicts the year-over-year percent change in both the total number of indirect loans and the total dollars in indirect loan portfolios. While indirect loans are still growing, there is a clear and stark deceleration of the indirect loan growth rate.

Total Loans and Total Dollars

Now when credit unions report on their indirect loan engagement, the call report requests a couple of different indirect loan type designations. Per the NCUA, these types are as follows:

  1. Point of Sale Arrangement: An arrangement where a credit union contracts with a merchant to originate loans at the point of sale, such as an auto dealer.

  2. Outsourced Lending Relationship Arrangement: An arrangement that allows a third-party vendor such as a Credit Union Service Organization (CUSO) or other outside party to perform activities related to indirect lending: including underwriting, servicing, repossession, or insurance processing.

Typically when discussing indirect lending, most people think of the Point of Sale arrangement rather than the Outsourced Lending Relationship arrangement, but where do credit unions fall in terms of these arrangements, and have each of these “sources” of indirect loans performed similarly to the aggregate trends shown in the previous chart? Let’s see.

The chart below shows the dollar growth of each channel. There is a reason most people think of Point of Sale (POS) when thinking about indirect loans. It is the primary source and driver of indirect loan relationships.

Source Drivers

To the question of performance. Have each of these indirect sources suffered the same type of decline, or does one have better staying power than the other? The chart below answers the question.

Interestingly the OLR source has performed better over the last couple of years in this context: its rate of decline is less than that of the POS source. But clearly both sources have suffered a similar slow down.

Now to the reason why we’ve seen this kind of decline. Auto sales trends. Sales trends declined which consequently lessen the opportunity for indirect loan growth. See below.

Vehicle Sales

Of course that makes sense, especially when you look at it in terms of year-over-year percent change, and compared to indirect loan changes as in the following chart.

Membership Growth

The surprising thing about the chart above is how credit union indirect loan channels held on even with the downturn in auto sales.

Now to why this really matters. As much as credit unions like to talk about indirect lending as a service to current members, many credit unions would not have any kind of membership growth without indirect lending. That means that an indirect downtown as significant as this has a notable impact on membership growth. How much? The average membership growth rate for all credit unions in 2020 was -.26%. For credit unions not engaged in indirect lending the growth rate was -1.12%. And for credit unions that are engaged in indirect lending? It was 1.24% - which means that indirect lending is the lifeblood for membership growth for more than 30% of the credit union community.

Incidentally, the membership growth rate for those indirect loan-driven credit unions is now half of what it was two years ago - a decline driven by the changing winds depicted in the charts above.

One last point to reiterate. Credit unions without indirect lending had, on average, negative membership growth of 1.12% in 2020 - a trend that began in 2010. We plan to explore this a little further in the future after a more thorough scrubbing of the data (we made some adjustments for very large data outliers, such as excessive membership growth rates driven by large mergers, but we did not do much more than that). We look forward to sharing what we find.

Photo by Dan Gold on Unsplash