of 25 Wisconsin and Illinois CUs and the
Wisconsin Credit Union League, all shareholders in CSMC.
Many of the CU investors have already reported year-end losses from CSMC loan write-downs. However, the $190 million Prime Financial CU of Cudahy, was placed into conservatorship by the state Feb. 27.
Management of CSMC, which served 250 CUs nationwide, is now looking for a new home for its portfolio of $523 million. CSMC said it would stop "actively originating loans" but still help CUs "transition to other providers while continuing to service loans."
Apparently figuring in the abrupt CSMC shutdown was a $33 million default by CSMC on a funding loan from Members United Corporate Federal Credit Union of Warrenville, Ill., reportedly due March 13.
A spokeswoman for Members United declined to comment "on matters in litigation," but officials said loss of a funding source triggered a decision by the CSMC board to suspend operations.
"I can only surmise that when Members United pulled the line, there was no cash and that was the death knell," observed Sue Cowan, director of the Wisconsin Office of Credit Unions, whose agency along with the NCUA and other state and federal regulators have been investigating faulty CMSC transactions dating back to 2007.
CMSC has been embroiled in litigation for months. Attorneys for former CEO and founder Richard Jungen, fired last July, claimed their client, who was accused of racketeering by siphoning $15 million, had been unjustly framed as the cause of CMSC troubles.
The day of the CSMC shutdown, Milwaukee attorney Stephen Kravit fired off a four-page statement claiming CSMC collapsed because of recent mismanagement and the "serious cash flow" problem brought on by the Members United loan default.
"The cessation of operations is in no way the result of any action by Dick Jungen" or any of the ex-employees named in the February racketeering lawsuit brought by CSMC, charged Kravit.
Further, as of March 5, "CSMC reported positive cash flow to its clients and employees and a rosy plan for the future," Kravit wrote, complaining that everything changed Friday, three days before the shutdown, which led to insolvency.
Cowan, the state's top CU regulator, had a meeting scheduled last week with current management of CSMC and the CEOs of the 23 affected Wisconsin CUs to assess future loan losses and their overall condition; two more CU-investors were located in Illinois.
She said her office had previously asked the Wisconsin CU shareholders to write down their investment in CSMC to the tune of $3 million, but now "we have to find out what is in the loan pools," and the losses there are still undetermined.
"All of the investigations are ongoing, and the issue now is how to fix the problem," Cowan told Credit Union Times, maintaining that the lesson learned so far from the CSMC collapse is that CUs should be "doing a better job on full due diligence in investigating third parties."
In hitting the basics, she said, CUs need to perform "like an MBA student" and exercise good full faith judgment in determining "who the partners are, what are the finances, the operations, the policies, marketing plans" before jumping into this kind of endeavor.
Cowan said she did not anticipate any further regulatory takeovers like Prime Financial, which reportedly lost $8 million in 2008. Of the 23 Wisconsin CUs that had ownership stakes in CSMC, 14 posted a loss for 2008 and three had drops in net income, according to an article in The Milwaukee Journal-Sentinel.
Regarding the shutdown and the notice to regulators, Cowan acknowledged there was some confusion on CSMC following proper procedure since officials in the state Department of Banking had not been informed of the suspension, instead learning of it through the media. Cowan said her office was made aware of CSMC intentions, but word spread late to other relevant state agencies.
Cowan said she planned to meet with Dean Wilson, the new chairman of CSMC and president/CEO of FOCUS CU of Wauwatosa to review the status of the participants.
Wilson, who met briefly with employees and members of the media on March 9 in front of CSMC's offices, has repeatedly expressed regret at the shutdown and developments saying the decision to close "was a difficult but necessary one in the best interest of our shareholders."
"While the firm is no longer actively originating loans for the 250 credit unions it had served nationwide, some staff remains on board to help transition those operations to other providers," said Wilson. He did not name the providers, but said "The firm will continue servicing loans for credit unions."
Just how that might be accomplished was unclear. Cowan said, "I don't think they know" exactly the firm's next move.
CSMC, formed in 1984, originated $523 million in loans last year, down from $707 million in 2007 and its high of $1.4 billion in 2004.
On its Web site (http://www.centralstatesmortgage.com/companyLoc.asp), CSMC said it was a company "focused on community-minded mortgage banking," and "In the years since we became a CUSO in 1997, our credit union-ownership base has expanded dramatically. From a core of 12 initial credit union shareholders, we've grown to 25 shareholder credit unions and the Wisconsin Credit Union League."
The Web site continued, "This makes our family of companies a homeownership destination serving both retail clients and over 250 credit unions across the country. By providing proven value along with a solid Midwestern work ethic, we originated more than 7,700 loans worth over $1.1 billion in 2005, even in a market where industry-wide mortgage volume was down 30%." CSMC concluded that this "made us the third ranked multiowned CUSO in the country."