Indirect loans can be very convenient for financial institutions and borrowers alike. Concisely, an indirect lending program provides access to a wider pool of potential borrowers, while helping people secure the loans they need without having to shop around for various lenders.
Although indirect lending can produce major results for a credit union or bank, the question remains whether your financial institution is ready for adding new loan products, such as manufactured home loans, to its portfolio.
Is Your Institution Ready to Venture into an Indirect Lending Program?
Each bank or credit union must develop its own credit risk strategy, based on the objectives that guide its credit-granting activities. The risk strategy should be periodically reviewed in conjunction with the latest market trends. Furthermore, a bank or credit union should analyze the risk inherent in any new loan products it intends to add to its portfolio.
So, besides deciding if your financial institution is ready for an indirect lending program, another important consideration is whether manufactured home loans can deliver the financial benefits expected.
The indirect lending opportunities that provide specific loan products, such as manufactured home loans, have been proven successful for many credit unions and banks. However, there are a few important points a financial institution should consider before opting for an indirect manufactured home lending program. These are:
Potential Benefits – A well-run indirect manufactured home lending program can become a lucrative portfolio diversification strategies for your financial institution. For example, opting for an indirect lending program that offers high-yield, low-risk manufactured home loans could considerably lower portfolio volatility, increase risk-adjusted returns, and provide a higher loan origination volume and interest income. Additionally, establishing appropriate portfolio concentration and diversification limits along with minimum standards for credit scores and debt-to-income ratios can help your financial institution make the most of an indirect lending program.
Market Conditions – A prudent approach to indirect lending consists in assessing the local manufactured housing market in addition to the manufactured home loan products and services provided by competitors. Analyzing relevant data will allow you to set reasonable and attainable goals as well as understand what pitfalls you should avoid and what best practices you can develop in order to make the program successful. The lenders that provide indirect lending programs are a good source of information.
Available Funds – Before opting for an indirect manufactured home lending program, a financial institution should have enough money available to fund an additional loan source. As well, the source of funds should be consistent throughout the entire lending program.
Portfolio Management – When it comes to indirect manufactured home lending, another critical area is portfolio management. Establishing a comprehensive portfolio-monitoring system and performing a regular multi-dimensional portfolio analysis will allow you to improve your portfolio performance and take early action when adverse performance trends occur.
Resources necessary – A financial institution might not have the experience and resources necessary to handle the additional workload resulting from an indirect manufactured home lending program. In this case, it’s important to know that some indirect lending providers offer all the services that you might need, including applicant screening, underwriting, loan origination, customer communication, payment processing, and performance monitoring. This means that you won’t have to cover the upfront costs typically associated with servicing a new category of loans.
Potential Delinquencies and Losses – Regardless of the loan products you intend to add to your portfolio, some of your borrowers might experience financial difficulty that prevents them from meeting their financial obligations. Being prepared and planning ahead accordingly could help you offset the negative effects of potential loan delinquencies and losses. As well, using customer data analytics could give you a better understanding of your borrowers’ needs and help you address those needs proactively. This will ultimately translate into lower default rates.
Partner Selection – Teaming up with a reputable indirect lending provider that not only has plenty of experience in the industry but also ensures full compliance with applicable industry regulations and offers manufactured home loans only to prime borrowers with a healthy FICO score can help your financial institution mitigate risks and reduce losses.
The value provided by an indirect manufactured home lending program and the relationship that results from building one alongside a reliable lender can be very rewarding. Additionally, making available affordable financing alternatives to communities won’t only produce more income for your financial institution but also build confidence with potential borrowers who will see your institution as the healthy option for obtaining the financial products and services they need.