Florida Land Bust Sheds New Light on Loan Participations

FORT MYERS, Fla. – The failure of two Midwest credit unions after their involvement in Florida land speculation has brought another new challenge to the burgeoning credit union market for loan participations. One of the two credit unions, Norlarco CU, was sued in federal court in Denver three weeks ago by a Wisconsin credit union, Superior Choice CU. Norlarco sold Superior Choice CU participation in a multimillion dollar construction loan to finance a massive residential development that went bust. Norlarco, based in Fort Collins, Colo., and Huron River Area FCU in Lansing, Mich., made hundreds of millions of dollars in construction loans to investors in the Cape Coral and Lehigh Acres developments here, which have since gone sour. In asking for repurchase of its $12.1 participation and triple damages, Superior Choice CU claims Norlarco did not adequately disclose all provisions of the loan deal. Loan participations, known as syndications among banks, recently have come under scrutiny due to the failure of subprime auto lender Centrix Financial–which forced dozens of credit unions to fight amongst themselves over the spoils of the bankrupt company. In one recent settlement the Credit Union of Texas was forced to buy back $13 million of a $90 million participation pool it had sold to Mission FCU. Gary Elliott, president of Superior Choice, refused to comment on the dispute, saying only the case is being litigated. But according to allegations in the suit, Superior Choice was induced to participate in the loans because it was told the project’s developer, First American Mortgage, guaranteed the construction loans on behalf of the home buyers. Later, an independent consultant hired by the Wisconsin credit union, Counter Intelligence Associates, reiterated the existence of the builder guarantee as grounds for participating in the loan. But neither Superior Choice CU nor CIA was told of a new addendum to the agreement between Norlarco and First American Mortgage that eliminated the guarantee. As a result of the Florida mess, Norlarco, which was secretly taken over by NCUA in May, reported a 31% delinquency rate for its real estate loans and losses of $5.2 million at mid-year. Huron River Area reported a 13.2% delinquency rate for its real estate loans and losses of $58.9 million.