CUNA Regulatory Comment Call
December 22, 2005
Third-Party Servicing of Indirect Vehicle Loans
(Applies to Federally-insured Credit Unions)
EXECUTIVE SUMMARY
The NCUA Board approved a proposed rule to regulate purchases by federally-insured credit unions of indirect vehicle loans serviced by third-parties. NCUA has previously addressed this issue in a number of Letters to Credit Unions, as well as a Risk Alert that was issued in June 2005.
The rule will limit the aggregate amount of these loans serviced by any single third-party to 50% of a credit union’s net worth during the first 30 months of a new third-party servicing relationship and to 100% of the credit union’s net worth after the initial 30-month period.
The rule only applies to indirect vehicle loans serviced by third parties and will not apply to servicers that are federally-insured financial institutions. The rule also includes provisions allowing credit unions to request a waiver to exceed these aggregate limits, as well as a “grandfather” provision so credit unions will not be required to divest these types of loans if they currently exceed the limitations, although NCUA will review any large purchases that were made before this rule becomes effective.
Comments are due by February 21, 2006. Please submit your comments to CUNA by February 10, 2006.
Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Associate General Counsel Mary Dunn at mdunn@cuna.coop and to Senior Assistant General Counsel Jeff Bloch at jbloch@cuna.coop; or mail them to Mary and Jeff in c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC 20004-2601. You may also contact us at 800-356-9655, ext. 6732, if you would like a copy of the proposed rule, or you may access it on the Internet at the following address:
http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/P-701-741.pdf
BACKGROUND
Indirect lending involves credit union financing for the purchase of goods at the point-of-sale. The merchant, which is usually an automobile dealer, brings a potential member/borrower to the credit union and also assists with underwriting. Since the dealer’s primary interest is in facilitating a vehicle sale and not necessarily in careful underwriting, NCUA has been concerned for some time about the risks that indirect lending poses for credit unions.
Some vendors offer indirect lending programs in which the vendor manages the credit union’s relationship with the automobile dealers and, through loan servicing conducted by the vendor or a related entity, the credit union’s relationship with the member. NCUA is also concerned that these indirect, outsourced programs pose additional risks beyond the general risks associated with indirect lending. These include credit, liquidity, transaction, compliance, and reputation risks.
For several years, NCUA has issued guidance related to this form of lending. These include two NCUA Letters to Credit Unions (LTCU). The first, titled Due Diligence over Third-Party Service Providers, was issued in November 2001 and outlines minimum due diligence practices over third-party service providers. NCUA issued a second LTCU in September 2004, titled Specialized Lending Activities, in which the agency expressed concerns with specialized lending and the associated risks. The lending activities addressed include subprime lending, indirect lending, and outsourced lending relationships. These letters are available at www.ncua.gov/letters/2001/01-CU-20.pdf and www.ncua.gov/letters/2004/04-CU-13.pdf.
In June 2005, NCUA issued Risk Alert 05-RISK-01, titled Specialized Lending Activities – Third-Party Subprime Indirect Lending and Participations, which outlines concerns related to subprime, indirect automobile loans underwritten or serviced by third parties. The Risk Alert also outlines due diligence practices and ongoing control mechanisms appropriate for these programs. The Risk Alert is available at www.ncua.gov/letters/RiskAlert/2005/05-RISK-01.pdf.
BRIEF DESCRIPTION OF THE PROPOSED RULE
NCUA has issued the proposed rule out of concern that some credit unions are still not undertaking the requisite due diligence to understand and protect themselves from the risks of these programs. In an effort to protect the National Credit Union Share Insurance Fund from these risks, the proposal will impose limits on a federally-insured credit union’s investment in indirect loans serviced by a single third-party.
The proposal will limit the aggregate amount of these types of loans serviced by any single third- party to 50% of a credit union’s net worth during the first 30 months of a new third-party servicing relationship and to 100% of the credit union’s net worth after the initial 30-month period.
These limits will only apply to loans made to finance vehicle purchases and do not apply to servicers that are federally-insured financial institutions or wholly-owned subsidiaries of federally-insured financial institutions. Credit unions will, however, need to conduct due diligence regardless of whether they are at or below these limits and regardless of whether the servicer is a federally-insured institution, both before entering into indirect, outsourced lending programs and on an ongoing basis.
Credit unions must also be familiar with other relevant regulatory limitations and guidance, including the LTCUs and Risk Alert described above. For example, loan portfolios of subprime quality will be subject to greater due diligence, as described in the Risk Alert.
A credit union that can demonstrate appropriate initial and ongoing due diligence and controls may apply for a waiver to exceed these limitations. These requests must be submitted to the regional director who will consider the following in determining whether to grant the waiver (state-chartered credit unions must first notify the state supervisory authority):
- The credit union’s understanding of the third-party servicer’s business model, organization, financial health, and the program risks.
- The credit union’s due diligence in monitoring and protecting against program risks.
- The credit union’s ability to control the servicer’s actions and replace an inadequate servicer, as provided by contract.
- Other relevant factors related to safety and soundness.
If granted, the regional director will include an alternative limitation, as well as a waiver expiration date. Although not included in the proposal, the preamble to the proposal also outlines detailed guidance on the information that credit unions should provide to satisfy the above criteria for obtaining the waiver.
The proposal will not require credit unions to divest these types of loans if they currently exceed these limitations. NCUA will, however, review any large purchases that were made before the rule becomes effective and may consider supervisory action, including divestiture, to ensure that the credit union’s actions were safe and sound.
QUESTIONS TO CONSIDER REGARDING NCUA’s PROPOSED RULE ON THIRD-PARTY SERVICING OF INDIRECT VEHICLE LOANS
- Are the above aggregate limits for indirect vehicle loans serviced by a third- party acceptable?
- Are there any other issues that need to be addressed regarding this type of indirect lending, such as a time period in which the regional director must approve or deny the request for a waiver?
- Other comments.
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Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com Lilly Thomas • Assistant General Counsel • (202) 508-6733 • lthomas@cuna.com Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com |
