Benefits & Risks of Indirect Dealer Lending...Benefits & Risks of Indirect Dealer Lending cunastrategicservices.com . October 13, 09 | page 2 Agenda • Company Introductions • Automobile

Benefits & Risks of Indirect Dealer Lending

cunastrategicservices.com

page 2 October 13, 09 |

Agenda

• Company Introductions • Automobile Market Update • Risks, Policies and Monitoring Quality • Identifying Risks and Evaluating

Effectiveness • Analyzing Loan Pricing • Identifying Problem Loan Types


Certified Public Accountants with Over 60 Years

Collective Experience

Well Over $100 Billion in Loans Evaluated

Work Exclusively with Credit Unions


• Loan Level Risk Analysis – Provides a "Credit Quality Grade" to each loan based on current

characteristics of the borrower and their collateral. This risk-based approach is widely accepted by the NCUA and has been proven to pinpoint a high percentage of charge offs (70%-90%) in a small percentage of loans (8%-12%)

• Portfolio Stress Analysis • Collateral Confirmation for Consumer Loans (Black Book) • Collateral Confirmation for Real Estate (AVM) • Loan Allowance Validation



Founded in 1955 in Gainesville, GA

Owned by The Hearst Corporation since 1981

Independent source with the most timely updates and most accurate values

Over 3K lenders and 1K Credit Unions use Black Book as their Trusted Values

Originate loans at more accurate LTVs

Lost Business Analysis

Collection and Forecasting Models

Remarketing with the most accurate floors

41 of the top 50 auto finance providers use Black Book

Over 18,000 dealers in the US and Canada use Black Book values

Timely, Independent and Accurate™


Our Markets

» Cars, Trucks, Vans, SUVs » PowerSports - Motorcycles, Personal Watercraft, Snowmobiles » CPI – Collectibles and Exotics » MD & HD Trucks & Commercial Trailers » New Car Pricing and Specifications » Residual Value Projections » US & Canada


Timely, Independent and Accurate™


Where have we been in 2012? Increasing new car sales Jan – April: SAAR 14M+ May – 1st month of 2012 under 14.0M June – Surprised everyone

Excitement is back in the industry! New and redesigned models Better then expected new car sales increases More alternative fuel options Traditional fuel getting 40 mpg


Overall Average Used Values

A good market with reasonable retention

Adjusting to make room for the 2013’s

More supply in the market from increased new sales in 2012

Trade-ins are getting older and with higher miles.

No need to be alarmed

Retention levels won’t support early pull from lease and fleet


Indirect Dealer Lending Overview

• Benefits – Grow Your Portfolio – Grow Your Membership

• Risks – Less Control – Underwriting – Loan-to-Value


Risk Environment

• You Are Not the Underwriting/Originator – Your Best Interests

• Loan Growth • Member Growth • Well-Priced Loans Based on Risk

– Dealer’s/Salesman’s Best Interests • Making the Sale • Making the Sale • Making the Sale


Underwriting Policies

• What Bureau Are Scores Received From • What Factors Can Dealers Use to Mitigate

Insufficient Credit History – Income – Employment History

• Set Standards and Stick with Them • How Are Evaluations Recorded/Reviewed


Underwriting Policies (continued)

• Loan-to-Value – Three Different Prices – Sales Price* – Dealer Value – Off-The-Lot Value

*(Incl. Admin, Add-Ons, Warranties)

0%

20%

40%

60%

80%

100%

120%

140%

100% LTV 80% LTV Off-The Lot 100%

Sales Price* 23,000 Dealer Value 20,000 Off-The-Lot Value 17,000


What Could Go Wrong?

• Fraudulent Borrowers – Fictitious Income – Signing for Someone Else (Not Co-Signing)

• Inflating Borrowers Qualifications • Inflating the Value of Collateral

– Including Non-Existent Upgrades/Add-Ons – Outright Lying


What’s Different Today? Things we look for

Year, Make and Model

Trim

XL vs Lariat Altima: Base to S to SL Not always VIN identified

Content/Equipment

Condition matters: XC, C, A, R


What’s Different Today?

Things we look for (continued) Adds/Deducts

Mileage Less detrimental in a tight market


Vehicle Example


Would you buy stock based on last month’s WSJ listings?


Mitigating Risk

• Monitoring Credit Bureau Fraud Alerts – Remember: Only 22% Report

• Buyer Training – Information on What Constitutes Fraud

• Lending in Your Area • Verifying Basic Information


Hierarchy of Reliability and Evidence

• Most Reliable Evidence – External Documentation Received From Source

• BlackBook Valuation • Credit Report

– External Documentation Received From Dealer – Internal Documentation Received From Dealer

• Dealer Valuation • Dealer Documentation of Credit Review


Mitigating Risk (continued)

• Maintaining Dealer Relationships – Train Dealers on Fraud Prevention – Visit Your Dealers, Understand Their Business – Remind Them of Value You Bring

• Scrutiny of Dealer Practices – Eases Your Mind on “Safety and Soundness” – Makes Them Uneasy


Detecting Fraud

• First/Early Payment Defaults • Approval/Denial Ratio • Significant Overall Downward Migration

(Compared to Other Dealers and Direct Loans) • Exposure in Excess of Expectations


Credit Score Migration Analysis

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Don Ready Ford Gibby NewsomeDodge

Ben SelleckChevrolet

Brent GageHonda

Babs MerrickToyota

Paxton HardingBMW

Improvement 0 - 40 Decline 40 - 80 Decline 80 - 120 Decline > 120 Decline


Loan-to-Value Analysis

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

2005 2006 2007 2008 2009 2010 2011

Don Ready Ford Gibby Newsome Dodge Ben Selleck Chevrolet

Brent Gage Honda Babs Merrick Toyota Paxton Harding BMW


Pricing Analysis


Pricing Analysis (Net of Charge-Offs)


Changes in Risk


THANK YOU!

Dan Price Manager

352.634.0042 [email protected]

Ricky Beggs VP, Managing Editor

770.533.5221 [email protected]

Documents

Benefits & Risks of Indirect Dealer Lending...Benefits & Risks of Indirect Dealer Lending cunastrategicservices.com . October 13, 09 | page 2 Agenda • Company Introductions • Automobile