Subprime Foray Has Steep Costs for CUs

ALEXANDRIA, Va. – Hundreds of credit unions continue to dig out of deep holes created by their ill-fated entry into subprime auto lending, helping form one of the worst periods in the industry in a decade or more during the third quarter.
 
Much of the losses are tied to the failed subprime auto loan program promoted by Centrix Financial, which resulted in hundreds of millions of dollars in credit union losses. But the red ink doesn’t stop at Centrix.  The economic woes moving around the country are exacerbating poor underwriting in many credit unions, forcing credit unions to boost loan loss reserves, report large losses and, in many cases, shutter their subprime or indirect auto loan programs.
 
Traditions FCU, a Georgia credit union serving the hard-hit textile industry, reported a $1.6 million third quarter loss related to its own failed subprime auto loan program, and expects to report even more losses in the fourth quarter. “We’re trying to get it all over with this year,” said David Miller, president of the $44 million credit union.
 
Tampa’s Bay Gulf CU terminated its two-year-old, first-time auto buyers program after wracking up big losses. The credit union had poor underwriting, with most of the loans being made at 120%-to-125% loan-to-value ratio, according to William Demare, president of the $200 million credit union. With high delinquencies, Bay Gulf reported a $608,000 loss for the third quarter and almost $1 million for the year-to-date. Auto repossessions are soaring, prompting Bay Gulf to terminate its indirect auto loan program altogether. Believe it or not, people are just driving it in and dropping off the keys, Demare told The Credit Union Journal.
 
Even credit unions without subprime programs are being dragged down because of their participation in subprime loan pools. The CEO of one Florida credit union attributed its $270,000 third quarter loss to the millions of dollars in Norlarco auto loan participations his credit union is holding. Those are different than the participations Norlarco sold in pools of south Florida real estate loans.
 
And dozens of credit unions are negotiating claims on millions of dollars in participations bought from other credit unions through the Centrix subprime loan program, which may have caused as much as $1 billion in losses for the 150 or so credit unions that participated in it.