CENTENNIAL, Colo.–Dozens of the biggest credit unions are still racking up losses from the bankruptcy of Centrix Financial, which reeled in more than 300 credit unions to its subprime auto loan program.
Losses on the $4-billion portfolio Centrix sold to credit unions have averaged around 38%, much higher than the company projected when it sold the loans to credit unions, according to NCUA.
The failure of Centrix has created havoc in the credit union loan participations market, and launched dozens of credit unions against each other in efforts to recover some of their losses.
In one case, Credit Union of Texas, one of the biggest participants in the Centrix program, agreed to buy back $13 million of a $90-million pool it sold to Mission FCU because the loans were sold with misstatement of facts. Dozens of other credit unions are still negotiating to unwind Centrix loan deals. Weighed down by the Centrix loans, the $1.2-billion Credit Union of Texas was one of the biggest credit union losers during the first three quarters of 2007, with losses of $8.3 million.
Another big loser was New Horizons Community CU, a one-time $340-million Denver credit union, which was bankrupted by its exposure to Centrix loans, and eventually liquidated by NCUA.
But the fall-out from subprime auto lending for credit unions was not limited, infecting dozens of other credit unions who ran their programs in-house or through other vendors. Many of those credit unions have terminated their subprime programs. Centrix, which has changed its name to Peak 5 Flatiron Financial Services, is continuing to service the credit union loans, which continue to go bad at a rate of over 30%, according to NCUA.
Meantime, the efforts by Robert Sutton, the founder and former owner of Centrix, is tangled up in the courts. A deal by Sutton and his financers, Everest National Insurance and Falcon Investments, to buy the company out of bankruptcy appears threatened by charges by Everest National and at least two other insurers of fraud against Sutton. The allegations surround a Bermuda-based reinsurer owned by Sutton that agreed to pay claims exceeding 20%, in effect, Sutton reinsuring his own insurers.
Everest also claims to be a victim of Centrix and has set aside $150 million in losses it expects to pay for credit union claims on the Centrix loans. That’s on top of the millions in claims it has already paid.
Some credit unions still see hope in collecting on most of their Centrix loans. Some are involved in a decomposition, that is, they have requested that Peak 5/Centrix give the loans back to the credit union to service on their own. This gave the credit unions the option of servicing the loans or selling them in the distressed loan market.
