Indirect, Subprime Lender Hoping To Restore Volume

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New business for a company that specializes in subprime, indirect auto lending has come to a screeching halt months after NCUA issued a Risk Alert containing warnings over such loans.

CENTRIX, which has grown rapidly and has underwritten $4-billion in subprime auto loans at credit unions since 1998, acknowledged credit unions have hit the brakes on such lending, but it believes that once some adjustments are made, business will once again resume.

Indeed, CENTRIX CEO Robert E. Sutton has used newspaper advertising featuring a letter to credit unions to address the issue following the June issuance of the NCUA Risk Alert.

The Risk Alert was issued after NCUA officials learned of the sharp increase in "outsourced, indirect and subprime auto lending" since September 2004 and that credit unions around the nation haven't enacted "effective controls and monitoring systems that may pose a risk to your credit union's net worth." The agency said that as the member's credit score declined the "default rate increases markedly," with the regulator saying it was concerned that too many CUs had adopted third-party underwriting criteria "with little or no substantive analysis."

Under the CENTRIX program, the company essentially guarantees auto loans made to so-called subprime borrowers who otherwise would be denied a loan. The program charges rates significantly above average credit union auto loan rates, but below that of other lenders in the category.

Sutton wrote that CENTRIX PMP has produced profitable results for 300 CU partners since 1998 and that he is confident that indirect lending will soon return to the benefit of all parties.

CENTRIX VP of Communications Lauren Sides told The Credit Union Journal that credit unions have backed off indirect loans as they work through their internal guidelines and practices. Sides said it was a "temporary halting" of new loans while CUs get up to speed with new indirect loan guidelines.

Sides said roughly 120 CENTRIX employees were laid off as a result of the slowdown, but added 40 to 50 of those employees have since been brought back on in new positions in loan management in other company programs. Sides said the CENTRIX remains in good fiscal condition as it continues to service that $4 billion in loans, and that it is seeking to raise its profile through sponsorships that have included the NFL Denver Broncos, NASCAR racing sponsorship and the Colorado Ballet.

"These loans need to be managed," she said. "Part of our strategic plan is to diversify beyond our credit union base."

CENTRIX has also been holding extensive meetings with NCUA, Sides said, sitting down "several times a month, having very good discussions" in order to resolve the agency's concerns. Sides said CENTRIX agrees in principle with NCUA's concerns, but is discussing individual points she that she declined to detail. Sides said the essence of the NCUA Risk Alert was that each credit unions must perform its own due diligence.

"We haven't been sitting back waiting to see how this works out," she said.

Sides said credit unions have been generally supportive of CENTRIX and have asked for help performing their due diligence as required by NCUA.

"These programs can get complicated," she said. "They're eager to get back in the program."

NCUA spokesman Nick Owen confirmed the goal of the Risk Alert was to encourage due diligence and was not aimed at getting credit unions out of the business of indirect, subprime lending.

"NCUA is pleased with the significant progress that credit unions have made in their due diligence," he said, declining to comment on any discussions the agency is having with Centrix.

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