WAUWATOSA, Wis. – Central States Mortgage Corp., which provided mortgage services to 250 credit unions, was forced to shut its doors Monday after Members United Corporate FCU, its biggest lender, declared default and demanded payoff of more than $33 million, according to several sources.
The corporate credit union’s role was disclosed yesterday in a letter from Central States founder and former CEO Dick Jungen who was responding to the CUSO’s allegations in a civil lawsuit that he defrauded the company of $15 million. Members United’s action was confirmed by several sources yesterday.
Members United has told its member credit unions it expects to charge-off millions of dollars of loans it made to Central States as part of a warehouse line of credit and it expects to outline the action in its financial statement for 2008, expected next month.
Members United, which reported a $27.9 million loss for the first three quarters of 2008, is expected to report additional losses as it grapples with more than $2 billion on its investments, as well as the losses Central States loan.
Representatives of the $9 billion corporate were not available for comment yesterday.
In his response to the civil lawsuit, Jungen’s lawyers said the closure of Central States "is in no way the result of any action by Dick Jungen or any of the persons named in CSMC’s so-called ‘racketeering’ lawsuit filed last month."
"The problem here is Central States management and board that is in control has tried to conveniently blame it all on the Jungens (including Dick’s estranged wife Elaine) and other of my clients," Stephen Kravit, a Milwaukee attorney representing Jungen told The Credit Union Journal yesterday.
Officials with Central States did not return phone calls requesting comment.
Jungen founded Central States in 1984 and sold a majority stake in 1997 to a group of 25 credit unions and the Wisconsin CU League, while continuing to run the company. Last July, Jungen was fired after the board allegedly learned a company that was providing secondary funding to Central States, called Interim Funding, was owned by Jungen.
Kravit said the idea the Board just learned of Jungen’s role in Interim Funding was wrong. Interim Fund was formed in 1997, when the owners of Central States and Interim Funding were the same, according to Kravit. Loan officers and managers at Central States knew of Jungen’s role in Interim Funding, he insisted.
Kravit said Jungen believes this week’s closure of Central States was caused by a cash flow deficiency and not by any actions committed by Jungen.
Central States originated $523 million in loans last year, down from $707 million in 2007, and from a high of $1.4 billion as recently as 2004.
