Indirect Lending At Year-End 2016

Indirect loans are taking an ever-increasing share of the auto portfolio, but growth is not even across credit union location and size.

Indirect lending at credit unions continued to pull ahead of direct lending in the last quarter of 2016. As recently as first quarter 2015, direct lending accounted for more than 50% of total auto lending at credit unions. In the fourth quarter of 2016,it was indirect lending that accounted for approximately 56% of total auto lending.

According to available fourth quarter performance data, credit unions had $165 billion in outstanding indirect loans and $130 billion in direct loans at year’s end. Indirect lending growth in the fourth quarter was more than three times faster than direct lending 21% versus 6%, respectively.

Region appears to play a role in a credit union’s auto loan composition.

Southeastern credit unions posted the largest growth rate of direct auto loans and one of the lowest rates of indirect-to-direct loans. Conversely, credit unions in New England, Michigan, Wisconsin, and New York posted negative growth for direct loansand 25.7% growth in the indirect loan portfolio. Indirect lending now accounts for 66% of these credit unions’ auto loan portfolios.

But New England credit unions are not alone in their high rate of indirect lending, as these loans account for 69.1% of the auto loan portfolio at western credit unions.

And in every region, indirect loans increased at double the rate of direct loans.

In addition to location, size plays a role in the composition of a credit union’s auto loan portfolio. More specifically, larger credit unions tend to have a larger portion of their portfolio dedicated to indirect lending.

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The proportion of indirect auto loans in the portfolio of credit unions with less than $50 million in assets is only 7.96%. For credit unions with assets between $50 million and $100 million, the proportion of indirect loans climbs to 27.6%. And for creditunions with $1 billion to $10 billion in assets, the proportion of indirect loans in the portfolio soars to 67.7%.

Overall auto loan growth, including both direct and indirect, appears to be positively correlated with assets. As assets increase, auto loans increase at a faster pace. Although this relationship exists in both categories, it is a stronger correlation for indirect lending. The rationale behind this stronger correlation is most likely due to the amount of infrastructure needed to originate and manage indirect loans.

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