DENVER - As the industry waits for the outcome on whether a newaccounting standard could affect loan participations with creditunions close to the 12.25% member business lending cap, CentrixFinancial LLC is moving forward with its nearly two-year oldprogram. Known for it's highly successful auto-lending program toborrowers with checkered credit histories, Centrix is also seeingsuccess with its PMP Liquidity Control Process loan participationventure. Launched in 2002, Centrix facilitated $22 million in loanparticipations and in 2003 that total grew to $192 million. Thisyear's growth is projected at $600 million, said Jeff Hutcheson,vice president of portfolio managment for Centrix. Loanparticipations have been around for quite some time in theindustry. NCUA regulations permit credit unions to buy up to a 90%participation in nonmember loans that were originated by othercredit unions. The originating credit union is required to retainat least 10% of the loan. Regulation 701.22 and 701.23 furtherclarifies that the seller must only make loans to members; retainoriginal or copies of the loan documents; use the same underwritingcriteria as for returned loans; execute a master agreement beforethe transaction takes place; and obtain board approval for sale.Buyers do all of the above and also ensure individual loanpurchases do not exceed 10% of unimpaired capital and surplus. Theexchanging of a loan participation among credit unions is at theroot of a Financial Accounting Standards Board (FASB) proposal thatsome in the industry say could hurt those close to the 12.25%member business-lending cap. FASB has proposed amending FASBStatement No. 140, Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities, and the rightof setoff - the common-law right of debtors and creditors to setoff(net) amounts due to one another if one of the parties defaults,becomes insolvent, or enters into bankruptcy or receivership. TheFASB is considering banning the sales aspect for loanparticipations indicated by rights of setoff. If an institution isin bankruptcy or receivership, setoff allows the customer to offsetor cancel any debts owed to them with any outstanding loans. Thatinstitution can offset or cancel any debts owed with any depositsbelonging to the customer. This would mean CUs would have to usethe less beneficial accounting choice of keeping their assets assecured borrowing. Typically, the accounting portion of a loanparticipation allows the transfer of part of the loan off theselling CU's books to the CU purchasing the book. Meanwhile,Centrix's LCP is marketed on the premise of the loans being shortterm, very liquid in nature and allowing credit unions to getgeographic diversification in their portfolio, Hutcheson said."Many credit unions are limited to the community they serve,"Hutcheson said. "This allows them some flexibility." At one point,Austin, Texas-based Velocity Credit Union was selling between $5and $10 million loans at one time, said Jack Jordan, vice presidentof lending. That problem was solved because Centrix "aggregates thesmaller borrowers." "You can see from the national numbers thatcredit unions are having a hard time keeping their loan-to-shareratio up," Jordan said. "There are pockets of credit unions thathave more than they need. (Loan participations) allows the industryto better distribute the business that's out there." Jordan saidVelocity CU has made $150 million in loans to members and retained$59 million on the books, selling participation between $80-$90million. The retaining amount has been pivotal for asset liabilitymanagement goals and controlling loan to share has "boosted ourbottom line." "On any given month, we make 10 new loans and sellfive," Jordan said. "Our ROA is going to be substantially higherthan normal." Hutcheson said when the LCP program initiallylaunched, it was limited to credit unions with $100 million or morein assets. That barrier has since been lifted to include those withas little as $5 million in assets. "Small credit unions areprobably the ones that need loan participations the most,"Hutcheson said. "Yield can suffer, you can't have too much cash. Bypooling them all together, it allows credit unions to purchase ashare of a much larger share." Centrix execs are hoping LCP willfollow the path of its older sister program - Portfolio ManagementProgram (PMP). Launched in 1998, some say it has tapped a nichethat many credit unions probably would have shied away from giventhe risks: providing financing to the subprime borrower. Today, PMPhas surpassed its projections. The program allows credit unions tooffer subprime auto loans with a lower interest rate than memberscould get from other lenders, according to the company data. In2003, the company achieved several PMP milestones: it added 54 newcredit unions and nearly 4,000 new auto dealerships to the PMPprogram, brining the total number of partners in both industries to200 and 7,000 respectively. By year's end, Centrix had also securedendorsements from 35 credit union leagues and service corporationsand PMP was being provided in more than 40 states, according to thecompany data. In June 2003, it reached the $1 billion in loansunderwritten and that August, it passed the $1 billion in assetsunder management mark. "The key to our success has been helping theunderserved," Hutcheson said. "The magic bullet (with PMP) is thereis a default insurance protection that goes with each loan andmitigates any losses." Jordan admits that some credit unions arenot aggressively loaning money to people with credit problems."Quite frankly, some of us have turned our backs on them," Jordansaid. "Here's an opportunity to give members a second chance,perhaps to those we would not have considered before."[email protected]