One of our new loan people is asking me if we can, as a bank, purchase new car loans from a car dealership. He is also suggesting other options, such as we enter an agreement with the dealership that they would pay us a fee if we make a low rate car loan to their customer.

We need loans, but I have only had experience with purchasing/selling Grade A/good mortgage loans.

Are we opening a can of worms if we get into the auto loan market? Can you point me to what regs would cover this kind of activity, other than Reg Z disclosures.

Your opinions/comments/help is much appreciated.

We have a huge market of this type of lending in our area. We require all dealers from which we purchase paper to maintain a "reserve" account with our bank with varying levels dependent on the amount of paper we will purchase. The reserve account is used to charge against in the event of early payoff - to recoop some of the interest paid to the dealer up front. We underwrite each loan request seperately instead of accepting anything the dealer sends us. Also, if you get into this type of lending, make sure your collections department is adequately staffed since a large portion of your past-dues will come from type dealer paper. Good Luck!

Nanwa - In a typical indirect auto portfolio, you are orginating loans from participating dealerships you have entered into an agreement with. The agreement will cover issues such as the reserve schedule you pay as commission. Typical agreements theses days may pay the dealership 75% of the spread (reserve) upfront, with a no charge back policy after a set amount of days (in the event of early payoff). It will incorporate rules if a vehicle is repossessed (ie: full chargeback of reserve), an amount to maintain the the reserve account at all times, and other policies such as the rate spread cap (usually 3%) - so if your discount rate is 4% to dealer, the most they can charge customer is 7%. Other things such as your policy on accepting contracts with credit insurance, extended service contracts, gap insurance all need to be figured in. There is terminology in the Indirect business called "line 3 and line 5". Basically, it means if an application is submitted for $15000 and you approve it, normally they can then add on the financing of extras such as credit insuarnec, etc, which can easily boost that loan amount to $20,000. Not a huge risk because they are all cancellable and refundable on a pro-rated basis. You need to consider what applications you'll accept and what method - some use fax, some use dealer software. What contracts you'll accept. Lots of issues that were around 15 years ago no longer exist, but you should be aware of them. Banks used to accept "full recourse" deals, so if you approved a loan that was horribly below your guidleines, a delear may offer to provide full recourse, meaning if the loan went bad, they would staisfy the contract and go after the customer or vehicle themselves. Rule of 78 loans used to be very popular - not anymore. Funding of contract can be done via drafts or via ACH. If your program was to be of any substantial size, you will need appropriate systems to underwrite, validate, and fund apps & contracts.

As far as collections - that all depends what your philosophy will be. We have a portfolio of about $160 million, but we have established ourselves over the past 15 years as a conservative lender. We trade great rates for basically "A" paper, and consequently, our losses are negligible. We may lose some opportunities, but this has worked for us in a crowded field.

So much more to consider, also. Rate structure - tiered or not. rates based on year of vehicle? How much will you advance (loan value on used, invovie or msrp on new...)?

Staffing - sales person/buyer/input & validation clerk (operations).

I could go on and on!

How do you handle CIP requirements if you are purchasing the dealer's already executed "retail contract"?

See this thread And if you do a search on the CIP forum and type in "indirect" in the search field for the past 6 months, you will see other thoughts.

Nanwa, you are probably aware that Wisconsin has some of the strictest repo laws in the country. You have to send a right-to-cure notice and then obtain a court judgement before you can self-help repo. Make sure your collection area is well versed in those laws and has a good attorney in place to handle your court cases!

Good points, JJ. And make sure that attorney can handle reaffirmations on bankruptcies, and that your contracts allow for the recovery of legal fees on bankruptcy reaffirmations.

I concur with everything that CubDave said and would only add that you should be sure your loan policy adequately covers your indirect lending underwriting guidelines, percent of loans and capital, etc. At my bank, underwriting of the indirect portfolio leans toward the liberal side but so far has worked out for us.