House of Cards Threatens to Collapse Around Subprime Auto Lender Centrix Financial

DENVER – In an extraordinary plea, NCUA on Friday publicly urged the insurer for subprime auto lender Centrix Financial to continue paying out claims to hundreds of credit unions even while the insurer presses a civil fraud case against Centrix founder Robert Sutton. The suit by Everest National Insurance, and a separate action in U.S. Bankruptcy Court by another Centrix insurer, Lyndon Property Insurance Co., threatens to destroy any chance of Centrix rebuilding its industry-leading subprime auto program, and to bring down dozens of credit unions that still have substantial claims against the company. At least one credit union, $300 million New Horizons Community FCU, has failed because of its Centrix business and is now under NCUA conservatorship while the federal regulator tries to sell it. Officials at Centrix, which recently changed its name to Flatiron Financial Services, did not return phone calls Friday. Everest and Falcon Investments, who financed Centrix, bought the Centrix assets out of bankruptcy and the two companies own Flatiron. Sutton is apparently no longer involved in the operation. In a civil fraud suit filed in U.S. District Court in Newark, N.J., Everest charges that Sutton breached his contract to reimburse the company for payouts to credit unions of default insurance protection, and also siphoned millions of dollars out of Centrix through sham reinsurance agreements. In a letter sent Friday, NCUA urged Everest to continue making insurance payments to credit unions while it litigates with 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. In a separate suit, Lyndon Property Insurance, claims Centrix and its credit union customers failed to follow appropriate underwriting guidelines for originating and servicing subprime auto loans covered by Lyndon under a DPI policy and that Centrix misrepresented the losses on the credit union loans in order to obtain favorable premiums. The Lyndon suit also names Credit Union of Texas, Landmark CU, Meadows CU and F&A FCU, the biggest Centrix credit union customers, and all the other Centrix credit unions as a defendants. The two suits allege a twisted case of self-dealing in the Centrix case, with claims by Founders Insurance, a reinsurer owned by Sutton, that Everest owes it $6 million for a policy to limit Everest’s losses; and that the proposal to buy Centrix out of bankruptcy was an elaborate scheme to hide the various financial interrelationships. In other words, that Sutton agreed to reinsure his insurer. The stakes in the Centrix battle are enormous for more than 100 credit unions, who still have more than $1.5 billion in auto loans being serviced by the company.