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CENTENNIAL, Colo. – While it’s yet to be determined whether credit unions involved in third-party subprime indirect lending have implemented controls and practices to mitigate the risk of the product, as NCUA is expecting them to do, at least one subprime indirect lending vendor that does business with credit unions has responded to the NCUA directive. According to a July 25 memo which was addressed to “All CENTRIX Financial Dealer Partners” from the “Desk of Robert E. Sutton,” Centrix chairman and CEO and which Credit Union Times obtained a copy of,”There are new and previously unpublished regulations from the government agency known as the National Credit Union Administration (NCUA) pertaining to certain auto financing by credit unions. As a result, CENTRIX will be, for a short period of time, capping the amount of loans it places with credit unions.” The “regulations” Sutton refers to aren’t regulations at all, but NCUA’s Risk Alert on third-party, subprime lending. It continues to state that: “The credit union that normally provides our retail customers with financing in your area may temporarily be unable to originate loans. We anticipate, however, that this matter will be successfully resolved between the NCUA and credit unions in the near future. In the meantime, in order to maintain volume, we are taking the necessary steps to have loans funded through alternate sources. We expect to be back to normal volume within 30-60 days. “During this transition, we will be capping the number of loans that we approve until we can get all of the adjustments completed, However, we encourage you to continue sending applications. You will receive notice from us as soon as these new originations become more widely available in your area.” Geoff Bacino, executive VP, governmental affairs for CENTRIX, said the company sent the memo to dealers because “we felt we owed it to our dealer pipeline that the pipeline may slow down for awhile. We want to make sure we do everything we can to make sure credit unions are living up to the due diligence NCUA wants for credit unions involved with third-party, subprime indirect lending.” He explained that the phrase “capping the amount of loans it places with credit unions” is not an overall cap and will vary by credit union. “Some credit unions won’t feel anything and will continue to fund the loans as they always have, while others may find they’re not funding as many loans for the short term.” As for having loans funded “through alternate source,” Bacino said that pertains to the “handful” of outside investors in CENTRIX “who by investing in the company show the confidence they have in us and our product.” The memo further stated that, “All contracts with approval must be received in our offices by Friday July 29th.,” and Bacino said the date – the last Friday of the month – was set since the contract processing 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 vendor authority expired in 2000, and the agency has not examined or audited any non-CUSO vendor that provides indirect lending services. He added that “NCUA has conducted informal reviews of several CUSOs that facilitate indirect lending. However, NCUA’s authority over CUSOs does not extend to non-CUSO vendors. If NCUA were to visit a non-CUSO vendor that provides indirect lending services (or any services for that matter), the agency could only review whatever the vendor permitted. The vendor could restrict the agency from whatever it wished. In fact NCUA has made requests for contracts and other documents from some vendors, and on occasion those vendors have simply refused to comply.” Owens stated that, “NCUA desires to work with all interested parties to ensure credit unions conduct proper due diligence and engage in safe and sound third party vendor relationships. Ultimately it is not the function of NCUA to perform due diligence for credit unions. Credit unions are responsible for their own due diligence, including vendor-related due diligence. We expect that vendors who desire to serve credit unions will cooperate with credit unions as they move forward in the due diligence process.” Credit Union Acceptance Corp., an indirect lending multiple-owned CUSO in fact had a voluntary audit done last year. President/CEO Adrian Dominguez said he was asked by NCUA Regional Director for Region V if he could bring six or seven examiners in for a voluntary audit of the CUSO, and Dominguez said that was fine. Noting that “they gave us a great review,” Dominguez said he wouldn’t have a problem being audited by NCUA “because we do business the right way.” The CUAC president said he’d heard from some of the dealers in the CUAC network who had received the memo from CENTRIX and who inquired about the implications for credit unions’ involvement in indirect lending. “We’ve told all our dealers who have received the letter that we see ourselves different from Centrix. First we’re a credit union-owned company and Centrix isn’t. I honestly don’t know too much about their internal business. I can tell you we’re not a subprime lender. We generate loans for new members but also serve current members and that’s a way to mitigate risk. We offer a full service turnkey solution from origination to dealer development to funding the dealer, packaging the loan and offering the credit union a complete and accurate package with all the loan documents for the credit union to take over and service,” Dominguez explained. As for the underwriting standards CUAC uses, he said the CUSO uses the credit union’s own underwriting standards for loans for current members, and uses CUAC standards for new member. About 75% of CUAC production is for new members, Dominguez reported. There are 62 CUs in the CUAC program. “Credit unions have always been in the business of helping credit challenged members to re-establish themselves. If you take that away and let the dealer deal with that member through a program that’s not really controlled by regulations, then you take away CUs’ ability to mitigate risk,” said Dominguez. Still, he said, “there are different ways to make that work and control the risk without having to have another vendor service those loans, as CENTRIX does. There’s a need for credit unions to increase their membership and loan demand, but credit unions also have to be aware of what’s being underwritten.” [email protected]

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