There are some lines of business that carry with them lasting scars. Those businesses remain as painful memories to those executives who were engaged in them, and they are determined never to experience such professional pain again. Chief among these businesses are in indirect auto lending. It’s a prime example to a business that you either love or passionately hate, where success is consistent and long-termed, or failure is massive and non-recoverable.

The regulatory environment and slack loan demand are driving banking executives to seek new sources of income. I dare to revisit indirect auto in this article, knowing full well that some of you will stop reading right now and click delete.

To be clear, this article is not a recommendation to re-enter indirect auto; it is a review of what it takes to be successful in this business beyond the usual requirements for any business success: a long-term commitment, executive sponsorship and effective execution.

1. You’re either in or out. This is a primary rule for success in any business, but it is especially so in indirect auto. Your dealers are looking for a commitment to being in the business during both good and bad times. They are willing to give up rate for that commitment and will switch providers for it. They are looking for consistent presence.

2.If it grows like a weed it must be a weed. Another tried-and-true rule I learned from Downey Bridgwater, CEO of Sterling Bank in Houston. High growth expectations are strongly correlated to low quality assets. Even if you’re looking for expansion, do it methodically and set prudent limits. Small to medium size portfolios have performed well for many banks for many years. It is the large portfolios that suffer the most.

3.Pick a reasonable time horizon. 3 - 5 years of moderate growth will help you get comfortable with the business and work out the kinks in your operations, underwriting and dealer relationships. Expect the business to hit its stride in a couple of years and again achieve moderate growth thereafter. If you expect more you might get it, which will not be good news as the loans season...

4.Use extensive decision sciences. Whether you’re a small or large bank, decision sciences are key to your success, and they are available to all bank sizes from various vendors, which means you can access their economies of scale. Prepare a sound infrastructure to your back office and go beyond the usual FICO score. Enhance the score with local factors, auto types you specialize in etc. to build a solid credit culture in this business. Also, all credit scores should be reviewed centrally by humans. The current environment involves uncharted waters, so the score is a good guide but should not be the final determinant.

5.Consider what autos you’d like to lend against. Auto types help you segment prospective borrowers. A Cadillac driver is very different from a BMW driver, a Toyota Sienna driver or a VW Jetta driver. Their credit behavior and relationship with their car are all different and will have a meaningful impact on their credit worthiness and repayment behavior beyond their ability to repay itself.

6.Establish predictive parameters using your own lending history. Once you start lending, spend resources on analyzing your portfolio behavior to identify underlying patterns. For example, what % delinquency will you experience for borrowers with credit scores of 780, 740, 700 etc. This might sound complicated but it really isn’t. A good summer intern can help you accomplish this, and the information is golden when it comes to setting credit parameters and managing the entire portfolio profitability and credit worthiness.

7.Service matters. Non-mega banks can truly differentiate in this business with service. For example, ensuring that the Finance and Insurance guy at the dealer’s ( F&I ) can contact a live person during their work hours to facilitate transaction is priceless and all too rare. Having specific call center agents stacked against each F&I person also helps establish rapport and build relationships which are very valuable to the F&I person.

8.Service matters part two. Turnaround time is also key. The customer needs a decision and the dealer needs to sell the car. You are the only barrier for both to realize their wish. The faster you can decision each loan, the better for all.

9.Service matters part three. Our main competitors are the captives. These lenders are extremely model driven and have minimal flexibility in their terms. The payment is often driven by the down payment, FICO score, time on the job, type of job, debt to income, payment to income etc. Our models are the same, but we have more flexibility. We can consider other variables, as mentioned above. For example, trucks retained value better than cars in the past (this can turn quickly as gas prices rise).

10.Service matters part four: Loan officer competency, consistency, availability, flexibility and professionalism. Surprisingly, indirect auto is a relationship business like our other businesses, except here the relationship is with the dealer. Who is the LO and their effectiveness are key to the dealer. The captive lenders are typically too model-focused and very light on loan officers. Their LOs aren’t always competent, which dealers find to be most frustrating.

11.Service the dealers. The dealer is your customer. Surveys indicate that rate is only 3rd or 4th on their list of priorities. Flexibility is more important, as is the ability to have a conversation with the underwriter. Give your underwriters flex time so you can offer coverage to match dealer hours (often 8 - 8 ). Also establish a set of mitigating factors your underwriters can access when the FICO score doesn’t match the deal. This is NOT to say compromise your underwriting criteria. Rather, just like in the commercial bank, mitigating factors can and should be considered.

12. Manage the entire portfolio daily. Analyzing the portfolio daily for performance, loss curve, migration, collection effectiveness etc. is key to success. This is a dynamic business and conditions change often. Staying on top of the portfolio helps you optimize the business from both yield and loss perspectives. Look back to see which of your decision rules is getting tripped more often and why; plus what the impact is on the credit worthiness of those loans where the rule has been relaxed.

13.In or out of the footprint? I confess I personally am scared of indirect out-of-footprint businesses. This is a decision that needs to be made prior to entry. If you do go out of state, establish solid limits by state and by dealer.

14.What about motorcycles? Interestingly, many people will give up their home before they default on their Harley or other road hogs’ loans. Their relationship with their bikes is emotional and strong. Lending against large bikes can also be a lucrative and credit worthy business.

15.Cap exceptions. Loans with exceptions should not exceed a small percentage of the portfolio (say 5% ) to ensure credit quality.

16.Floor planning should not be a condition to indirect lending. It might be a good business for you to get into with any particular dealer, but not as a condition to getting their indirect auto business. You should win that on service. Similarly, accepting B or lower paper as a part of the flow should not be a condition to the relationship.

17.Credit administration plays an important role in the business. Their loan review for consistency and effective application of the rules is essential to both portfolio soundness but also to compliance and Fair Lending. Teaming up with credit admin, legal and compliance might seem cumbersome at the onset but will pay dividends and ease your pain later.

The point of this article is simple: take a fresh look at some of the businesses you sold, abdicated or closed in the past. Even if those businesses didn’t work for you five or ten years ago, they might be winners today. Laying a strong operational foundation, credit parameters and effective execution are the secrets to success.