DENVER – In a case that could exacerbate financial turmoil throughout the credit union industry, almost three dozen credit unions being sued by the insurer for Centrix Financial on Friday asked the federal bankruptcy court for a jury trial to determine whether they colluded with the failed subprime auto lender in order to fraudulently continue to collect insurance payments.
The insurer, Lyndon Property Insurance, claims Centrix and as many as 80 of its credit union clients failed to conduct proper underwriting and servicing of the subprime auto loans and misrepresented material facts about the condition of the loans so they could continue to collect on Default Protection Insurance.
Lyndon has paid out more than $130 million DPI claims to the credit unions, representing the difference between the outstanding balance on loans and the value recouped through the resale of the vehicles.
The insurer claims the credit unions and Centrix did not report all of the eligible DPI claims, which kept the premiums charged by Lyndon artificially low; and that the credit unions collected insurance on so-called First Payment Defaults, which was barred under the Lyndon contract with Centrix. First Payment Defaults occur when a borrower fails to make the first payment on a car loan.
Among the credit unions seeking a jury trial are the biggest participants in the Centrix program, including The Credit Union of Texas, Allegacy FCU, Security Service FCU, Texas Partners FCU, Credit Union 1, Texas Dow Employees CU, Financial 21 Community CU, Landmark CU, Corporate America Family CU and Charlotte Metro CU.
Many of these credit unions wracked up large losses in 2007, in large part because of their participation in the Centrix program, including: CU of Texas, a $13.7 million loss; Allegacy FCU, an $8 million loss, and Texas Partners FCU, a $2 million loss.
Lyndon has asked the court to order the credit unions to repay millions of dollars in claims paid to them through the DPI coverage.
The credit unions asked the bankruptcy judge for a jury trial outside of the bankruptcy court.
