INDIANAPOLIS – A thriving market for loans backed by life insurance policies has proven problematic for FORUM CU, which has been stuck with defaulted loans it purchased by a now-defunct Michigan credit union, Capital Community CU.
Fishers, Ind.-based Forum has filed suit against DFCU Financial, claiming the Dearborn credit union giant, which acquired the assets of CapCom in 2009, is obligated to buy back the failed loans it purchased under a recourse clause in the $6 million participation deal.
The loans were made by CapCom to trusts set up by elderly members and wealthy individuals to fund high-value life insurance policies, according to the suit, filed in U.S. District Court for the Southern District of Indiana. The loans were intended to pay the first few years’ premiums, after which they would be sold on the secondary market. CapCom projected the proceeds from the sales would be enough to repay the loans plus interest. Forum purchased its participation in the loans in 2007 after being approached by Allied Solutions on behalf of CapCom.
In 2008, there was a material change to the value of collateral on at least two of the loans because of changes in the life expectancy tables used to calculate the values of the polices, the suit says. Eventually, the borrowers stopped making payments and defaulted on the loans.
FORUM claims the contract requires CapCom, as its successor, to repurchase the loans if they go bad, which they eventually did, according to the suit.
DFCU claims the recourse clause, agreed to after the initial sale, was meant to apply to loans going forward and not loans already funded and acquired by FORUM.
The life insurance loans helped sink CapCom, which reported losses of $15 million in the two years before DFCU acquired it.
Officials with DFCU declined to comment on the dispute yesterday. Lawyers for FORUM also would not comment.
