CENTENNIAL, Colo. - While it's yet to be determined whethercredit unions involved in third-party subprime indirect lendinghave implemented controls and practices to mitigate the risk of theproduct, as NCUA is expecting them to do, at least one subprimeindirect lending vendor that does business with credit unions hasresponded to the NCUA directive. According to a July 25 memo whichwas addressed to "All CENTRIX Financial Dealer Partners" from the"Desk of Robert E. Sutton," Centrix chairman and CEO and whichCredit Union Times obtained a copy of,"There are new and previouslyunpublished regulations from the government agency known as theNational Credit Union Administration (NCUA) pertaining to certainauto financing by credit unions. As a result, CENTRIX will be, fora short period of time, capping the amount of loans it places withcredit unions." The "regulations" Sutton refers to aren'tregulations at all, but NCUA's Risk Alert on third-party, subprimelending. It continues to state that: "The credit union thatnormally provides our retail customers with financing in your areamay temporarily be unable to originate loans. We anticipate,however, that this matter will be successfully resolved between theNCUA and credit unions in the near future. In the meantime, inorder to maintain volume, we are taking the necessary steps to haveloans funded through alternate sources. We expect to be back tonormal volume within 30-60 days. "During this transition, we willbe capping the number of loans that we approve until we can get allof the adjustments completed, However, we encourage you to continuesending applications. You will receive notice from us as soon asthese new originations become more widely available in your area."Geoff Bacino, executive VP, governmental affairs for CENTRIX, saidthe company sent the memo to dealers because "we felt we owed it toour dealer pipeline that the pipeline may slow down for awhile. Wewant to make sure we do everything we can to make sure creditunions are living up to the due diligence NCUA wants for creditunions involved with third-party, subprime indirect lending." Heexplained that the phrase "capping the amount of loans it placeswith credit unions" is not an overall cap and will vary by creditunion. "Some credit unions won't feel anything and will continue tofund the loans as they always have, while others may find they'renot funding as many loans for the short term." As for having loansfunded "through alternate source," Bacino said that pertains to the"handful" of outside investors in CENTRIX "who by investing in thecompany show the confidence they have in us and our product." Thememo further stated that, "All contracts with approval must bereceived in our offices by Friday July 29th.," and Bacino said thedate - the last Friday of the month - was set since the contractprocessing is tied to go month by month. According to Bacino,CENTRIX has invited NCUA to do a voluntary audit of the company,"but they haven't come out. We'd be more than happy to have them."But NCUA's Nicholas Owens, Special Assistant to the Chairman &Director of External Affairs said NCUA's third-party vendorauthority expired in 2000, and the agency has not examined oraudited any non-CUSO vendor that provides indirect lendingservices. He added that "NCUA has conducted informal reviews ofseveral CUSOs that facilitate indirect lending. However, NCUA'sauthority over CUSOs does not extend to non-CUSO vendors. If NCUAwere to visit a non-CUSO vendor that provides indirect lendingservices (or any services for that matter), the agency could onlyreview whatever the vendor permitted. The vendor could restrict theagency from whatever it wished. In fact NCUA has made requests forcontracts and other documents from some vendors, and on occasionthose vendors have simply refused to comply." Owens stated that,"NCUA desires to work with all interested parties to ensure creditunions conduct proper due diligence and engage in safe and soundthird party vendor relationships. Ultimately it is not the functionof NCUA to perform due diligence for credit unions. Credit unionsare responsible for their own due diligence, includingvendor-related due diligence. We expect that vendors who desire toserve credit unions will cooperate with credit unions as they moveforward in the due diligence process." Credit Union AcceptanceCorp., an indirect lending multiple-owned CUSO in fact had avoluntary audit done last year. President/CEO Adrian Dominguez saidhe was asked by NCUA Regional Director for Region V if he couldbring six or seven examiners in for a voluntary audit of the CUSO,and Dominguez said that was fine. Noting that "they gave us a greatreview," Dominguez said he wouldn't have a problem being audited byNCUA "because we do business the right way." The CUAC presidentsaid he'd heard from some of the dealers in the CUAC network whohad received the memo from CENTRIX and who inquired about theimplications for credit unions' involvement in indirect lending."We've told all our dealers who have received the letter that wesee ourselves different from Centrix. First we're a creditunion-owned company and Centrix isn't. I honestly don't know toomuch about their internal business. I can tell you we're not asubprime lender. We generate loans for new members but also servecurrent members and that's a way to mitigate risk. We offer a fullservice turnkey solution from origination to dealer development tofunding the dealer, packaging the loan and offering the creditunion a complete and accurate package with all the loan documentsfor the credit union to take over and service," Dominguezexplained. As for the underwriting standards CUAC uses, he said theCUSO uses the credit union's own underwriting standards for loansfor current members, and uses CUAC standards for new member. About75% of CUAC production is for new members, Dominguez reported.There are 62 CUs in the CUAC program. "Credit unions have alwaysbeen in the business of helping credit challenged members tore-establish themselves. If you take that away and let the dealerdeal with that member through a program that's not reallycontrolled by regulations, then you take away CUs' ability tomitigate risk," said Dominguez. Still, he said, "there aredifferent ways to make that work and control the risk withouthaving to have another vendor service those loans, as CENTRIX does.There's a need for credit unions to increase their membership andloan demand, but credit unions also have to be aware of what'sbeing underwritten." [email protected]