Mortgage Lender's Bankruptcy Leaves CUs High and Dry

SAN FRANCISCO - Dozens of credit unions around the country are struggling to untangle their finances from a local mortgage lender that filed for bankruptcy, the first sign of contagion for the credit union industry from the meltdown of the subprime mortgage market.

Last month's Chapter 7 filing by LoriMac Inc. has caused the U.S. Bankruptcy Court to freeze millions of dollars in credit union funds and left thousands of credit union borrowers who had their mortgages serviced by the lender in the dark. "I see this as the start," said Mike McHale, president of Steinbeck CU, of the potential for credit union exposure in the melting mortgage market. "This could have a domino effect."

Steinbeck, which had more than $500,000 in mortgages serviced through LoriMac and $6,000 of its funds frozen by the courts, was one of more than 30 credit unions-most of them small-listed as creditors for the failed mortgage lender.

The biggest credit union customers of LoriMac were: Transit Employees FCU, which had $17.2 million of its loans serviced by the company; Queens Postal FCU, $5.8 million; Kings FCU, $3.5 million; and GE Employees FCU, $3.6 million. GE Employees FCU and three other credit unions have filed a breach of contract against the failed lender, but there appears to be few assets to recover, as LoriMac listed just $735,000 in assets and $5.7 million in liabilities in its bankruptcy filing. In their suit, the credit unions claim LoriMac used their funds to pay off other expenses.

Credit unions all over the country are listed as unsecured creditors, including Transit FCU, in Washington; School District Employees 40 FCU, in Moline, Ill.; Idaho Falls Teachers FCU; Health Associates CU, in Orange, Calif.; Cessna Employees CU, in Wichita, Kan., and many others.