SAN DIEGO -- The buzz that filled phone lines, dominated e-mail and occupied credit union boards last week was all about the Centrix Financial bankruptcy filing.
Indeed, CU executives across southern California, where many Centrix loans have been made over the years, began assessing the fallout, which by all accounts damaged scores of CU loan portfolios, undermined CU balance sheets and ruined careers.
The now serious nature of Centrix' problems and its impact on the servicing of existing subprime loans raised the specter of more delinquencies and losses for CU participants in the program offered by the once high flying third-party lender headquartered in a Denver suburb.
Some of Centrix' harshest critics complained both publicly and privately that the firm had made grave mistakes in its credit standards and servicing techniques with one California CEO calling the operation "a house of cards."
The critics maintained NCUA's June 2005 "risk alert", which eventually led to the Sept. 19 bankruptcy filing in a Reno bankruptcy court, was justified to prevent catastrophic results.
Still there were Centrix backers who suggested the firm had been innovative in performing a valued service while also bringing in large profits on indirect subprime paper.
Referring to the critics, Centrix spokeswoman Lauren Baker, vice president of communications, simply said "they are entitled to their opinions."
Several southern California CU execs said for months they worked mightily to reduce their Centrix exposure well before the NCUA risk alert.
"This credit union at one time had $25 million in Centrix loans and on Aug. 31 I just sold $1 million to RAC," said Joseph Schroeder, president of the $280 million San Diego Metro Credit Union, in a reference to a British auto insurer acquiring the CU loans. "We still have $220,000 on the books."
Schroeder, who joined San Diego Metro in April 2005, said the CU decided to get out of Centrix because of "poor performance with charge-offs and poor servicing."
Other CUs with Centrix have complained more recently that service has deteriorated badly as Centrix cut staff from a high of 1,500 to around 400 today.
A competitor in the indirect area, CU Direct Corp. of Rancho Cucamonga, Calif., operating the CUDL program, put out statements two weeks ago seeking to dampen speculation linking CU Direct with Centrix stressing the two organizations are being "inaccurately and unfairly" connected.
Speaking out on the Centrix filing, Henry Wirz, president of the $1.3 billion Safe Credit Union, North Highlands, Calif., and CUDirect chairman, argued CUs act poorly when letting an outside vendor take full control of both interest and principal on the loans. "It was an easy process making the loans but the credit unions left the heavy lifting to a third-party," said Wirz emphasizing there is nothing wrong with indirect lending, but "it has to be done the right way."
Diana Dykstra, a past chairman of the California Credit Union League and president of the $376 million San Francisco Fire Credit Union, called the Centrix bankruptcy "ugly" considering the number of CUs "which have been hurt and already written off" Centrix loans.
For the industry, she said conditions could rival the auto leasing problems of five years ago when CUs took large hits on loans made to third-party leasing firms. Another California CEO made reference to the "Bentley problem" regarding a troubled leasing operation.
Wirz, as the elected head of the CUSO-based CUDL which administers its program for 580 CUs and 7,800 dealers nationally, said CUs participating "in the Centrix model" erred by "putting all of their trust in a third-party" in a process that was made simple, but risky by the Colorado firm.
It was understood that neither Wirz nor Dykstra had Centrix loans in their CU portfolios.
Meanwhile, top CU management across the U.S., particularly with indirect loans in their portfolios, had the Centrix filing front and center as a priority matter.
Members of CUNA's CFO Council acknowledged Centrix e-mail communication has been ongoing for weeks with members trading information on "alternative" firms should Centrix finally go belly-up.
Brian McVeigh, chairman of the council and senior vice president of the $780 million New Union Credit Union of Lansing, Mich., said "servicing of the loans remains a big question" waiting for the legal process. "We're not getting bent out of shape yet," he said.
Apart from the bankruptcy filing, CU executives noted, however, that the legal process could be lengthy since there already has been a flurry of lawsuits in Denver courts against Sutton or Centrix, as reported in the Denver media.
As for lessons learned, Brian Turner, manager of advisory services for Southwest Corporate in Dallas, said the current tight margin environment "tends to focus on volume", but the third-party risk is that CUs "need to know the amount of control" being maintained in portfolios.
Discussing CEOs who have lost their jobs as a result of Centrix, one Orange County president lamented not for attribution that a failing in the CU structure is that "going into this, the CEO recommends the program and the board votes 7-0 in favor and then when things go wrong, the CEO is fired and the board is still there."
"Something is wrong with that picture," he quipped. --firstname.lastname@example.org