Risk Alert Stings One Auto Lender

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It's been a trying year for indirect auto lender CENTRIX. After the June 2005 NCUA Risk Alert on the level of due-diligence credit unions were conducting on indirect loans through third parties, Centrix's businiess came to a standstill, layoffs followed, and the company began its own reorganization.

"We're stable," said CENTRIX VP of Communications Lauren Sides, who confirmed, "We've been hurt by the Risk Alert."

Throughout the process, CENTRIX officials insisted that the company had always generated profits for its 300 CU partners and that indirect auto lending remains a viable business opportunity. CENTRIX specializes in underwriting so-called "subprime" auto loans, aimed at people with poor or no credit. Sides said the loan slowdown cost 250 jobs total, but many employees had been rehired to service existing loans written as far back as 1998. CENTRIX Executive Vice President for Governmental Affairs John Frew had a straightforward assessment of the company's status.

"We're in business. We're making loans," he said. "We expect to make money in 2006."

Frew said the NCUA had been "very fair" with CENTRIX and said that sub-prime lending was a "necessary element in every credit union's toolbox to serve the underserved," and fits with the traditional CU mission of service to its members.

"It goes hand in hand," he said. "The CENTRIX model is different, but it works. That's why were the biggest and the best."

Frew also said the new NCUA proposed rule regarding third-party servicing of indirect auto loans is a step in the right direction that shows the "rules of the road" for CENTRIX and credit unions. The proposed rule will limit new indirect lending partners to 50% of their net worth if they have less than 30 months of experience with third party groups. After the initial 30 month period, credit unions can increase their loans to 100% of their net worth. CUs with long-term experience in third-party lending can request an even higher amount of loan levels, which NCUA will handle on a case-by-case basis. Credit unions have 60 days to file a comment with the NCUA. Frew said before the proposed NCUA rule, each CU was determining its own amount of indirect loans and risk.

"Now there are ground rules and that will help tremendously," Frew said.

Frew said the new rule will require CUs to prove they have the expertise to run an indirect auto lending program and show they have full control of their program.

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