Appeals Court Upholds $7.7 Million Judgment Against CUMIS

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CINCINNATI – A federal appeals court yesterday upheld a $7.7 million award to Michigan First CU against CUMIS Insurance Society for losses caused by credit union employees who blatantly disregarded approval policies for indirect auto loans.

The decision by the U.S. Court of Appeals for the Sixth Circuit upholds the lower court ruling that the credit union insurer violated its insurance bond when it refused to pay damages resulting from hundreds of defaulted indirect auto loans. The lower court found that the faulty loans were the result of the intentional violations of the credit union’s lending policies, and that CUMIS, a unit of CUNA Mutual Group, had wrongfully denied the $550-million credit union’s insurance claim under the faithful performance provision of the credit union’s bond.

More than 1,600 loans went into default under the program, developed through Aimbridge Indirect Lending, causing a $5-million loss to the Lathrup Village, Mich., credit union. Interest and legal fees brought the judgment to $7.7 million.

Michigan First filed the suit in Michigan after discovering that its vice president of lending failed to monitor its indirect loan program, which allowed applicants to apply for loans at car dealerships. Under the program, a third-party administrator approved low-risk loans, but riskier applications were sent to the credit union.

In denying the claim, CUMIS said the responsible credit union employees did not consciously disregard Michigan First’s lending policy and that the credit union did not enforce its lending policy. CUMIS lawyers also argued the loan policy was too vague to be enforced or violated.

But a jury rejected this argument and lawyers for Michigan First asserted the policy was a virtual copy of the model policy developed by loan expert Rex Johnson that appears in the Lending Manual for Credit Unions.

Representatives for CUMIS were not immediately for comment yesterday.

 

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