DENVER -
In an extraordinary plea, NCUA sent a public letter to Everest National Insurance urging the Bermuda-based insurance giant to continue paying default protection insurance claims while pursuing civil fraud charges against Centrix and its founder and former CEO Robert Sutton.
"We further believe Everest has a legal obligation to continue to pay DPI claims regardless of what Centrix, Everest's agent, did or did not do with (optional insurance)," said the letter, signed by NCUA's General Counsel Bob Fenner.
'Great Concern' Rides On Everest Decision
The NCUA plea comes as more than 130 credit union customers of the firm continue to have thousands of loans serviced by the company, now called Flatiron Financial Services, while the insurers are paying millions of dollars in claims on defaulted loans.
"I think there would be great concern if Everest were to decide there was no coverage," said Christian Onsager, a Denver lawyer representing credit union giants Easter Financial Florida CU and Landmark CU.
"Of course, everybody's concerned," said Matthew Brown, a Denver attorney who is representing four credit unions with more than $50 million in loans still be serviced by Centrix/Flatiron; NASA Financial FCU, Suffolk FCU, Quorum FCU and Southwest Oklahoma FCU. His clients just hope to run the portfolio down, he said.
"We just want to run this thing out and reduce our expenses," added Brown, who conceded, "I think every credit union in this is accruing losses."
The Centrix problems have contributed to the failure of at least one credit union so far, New Horizons Community FCU, a $300-million Denver credit union that NCUA took over last year and has been trying to sell since then. NCUA officials said last week that while the credit union exposure is huge, they are confident that few will be pushed into insolvency if the insurers balk at future payments.
Flatiron Financial tried last week to reassure more than 130 credit union participants in its subprime auto loan program that millions of dollars in payments will continue to keep flowing as the once high-flying broker tries to reorganize itself under bankruptcy.
"Credit unions have continued to receive the proceeds of insurance claims regularly from Everest Insurance. We continue to facilitate the claims fully and claims continue to get paid," said Kevin Barry, the former director of servicing for Centrix and now the CEO of Flatiron Financial.
Barry acknowledged the concerns about whether the insurer will continue to pay default protection insurance claims, in light of last week's public plea by NCUA to the insurer. "The trepidation, I think, is understandable," he said.
But Barry conceded he could not speak for the insurers.
Attorneys for Everest and company representatives did not respond to calls seeking comment last week.
No Longer Legally Responsible
But in a number of civil suits being litigated around the country, Sutton insists that Everest is no longer legally responsible to pay the DPI claims.
The reason is that Sutton, through an insurer he owns called Founders Insurance, had agreed to limit the potential DPI losses on the portfolio-in effect, to reinsure his own insurer. Sutton would be on the hook for millions of dollars in personal payments if Everest continues to pay DPI claims.
A Separate Suit Also Pending
In a separate suit, filed as part of the U.S. Bankruptcy case in Denver, Lyndon Insurance, another Sutton insurer charges Sutton with self-dealing in a variety of cases, including the Everest-Founders agreement and an agreement with another Bermuda-based insurer, called Universal Insurance.
Court documents indicate Sutton earned almost $15 million in by steering business to Universal.
Lyndon also alleges both Centrix and its credit union customers engaged in fraud by approving the loans-as many as 180,000-without following proper underwriting standards, and, in fact, violating their own underwriting standards.
The court cases also raise the question of a hedge fund controlled by Sutton, called Centrix Funds LLP, to which Sutton apparently steered the best subprime loans, in direct competition with his credit union customers.
Sutton's lawyers did not return phone calls last week.
But the unraveling of Centrix represents a major comedown for Sutton, the once high-flying figure in the credit union movement and in the community, who sponsored the Denver Grand Prix for many years and maintained a box at the Indianapolis Speedway, home of the Indianapolis 500.
Barry said Flatiron is now owned by a Boston investment firm, called Falcon Investments. Under the bankruptcy court agreement, Everest acquired an option to acquire 20% of the firm. Sutton continues to serve on the Flatiron board but no longer has a day-to-day role in the company he created.
Centrix/Flatiron, which once serviced a portfolio of more than $4 billion in subprime auto loans for credit unions, hopes to use the remaining $1.3 billion in loans it is servicing to expand into other servicing lines, according to Barry.
The company's dealer network, which once numbered more than 1,000 around the country, no longer exists, he said.
Quantifying CU Losses Difficult
It's hard to quantify the losses accrued by credit unions, most of whom paid a premium of as much as 20% to acquire the subprime loans brokered by Centrix.
While defaults on subprime auto loans are known to average as high as 30%, the Centrix/Flatiron credit unions loan default rate has risen to close to 40% in recent months. The soaring default rate forced Everest to set aside an additional $60 million in its first quarter to cover the losses.
Credit unions, on average, are losing about $2,000 on each defaulted loan, including costs to clean up and sell the autos, according to lawyers in the case.
Barry acknowledged the high default rate of subprime loans credit unions bought through Centrix, an average as high as 38%, but said most of the remaining portfolio is seasoned beyond 30 months, so the defaults are expected to fall. "The worst is in the rearview mirror," Barry said.
