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ALEXANDRIA, Va. – For credit unions’ loan portfolios and membership ranks, indirect lending seemed to kick into fourth gear this year as a major factor. But that activity may have been tempered for the second half of 2005 after NCUA put federally-insured credit unions on notice with its Risk Alert letter that agency examiners would be checking on FICUs’ third-party, subprime indirect lending risk controls. Issued in June, the Risk Alert letter advised FICUs they should be prepared to discuss with NCUA examiners the controls and practices they have in place concerning subprime, third-party indirect lending activities. “Your examiner may also conduct on-site supervision contacts to evaluate your program in accomplishing appropriate due diligence, as reflected in this risk alert,” the letter signed by NCUA Chairman JoAnn Johnson and then-board member Deborah Matz stated. In their letter, Johnson and Matz wrote that, “Since September 2004, there has been a sharp increase in the number of credit unions engaged in outsourced, indirect, subprime automobile lending, and participation activity in such loans. We have a heightened concern that credit unions engaged in this type of lending activity may not have effective controls and monitoring systems in place. Based on the volume of activity, engaging in this type of lending without effective controls and monitoring systems may pose a risk to your credit union’s net worth.” The Risk Alert letter included several recommendations CUs involved with subprime indirect lending should take “at a minimum” to ensure proper risk controls and adequate due diligence. While Matz told Credit Union Times that NCUA’s concern was with the subprime indirect lending vendor relationship – not the product itself – and the Risk Alert letter didn’t name any specific vendor, credit union subprime auto lending specialist CENTRIX Financial has been taking the heat ever since NCUA put out its letter. Following the issuance of the Risk Alert letter, Robert Sutton, chairman and CEO of the Centennial, Colo.-based CENTRIX sent a memo to the company’s dealer partners notifying them that, “CENTRIX will be, for a short period of time, capping the amount of loans it places with credit unions.” Sutton’s July 25th memo also stated that he expected the matter to be “successfully resolved between the NCUA and credit unions in the near future,” and in the interim CENTRIX was “taking the necessary steps to have loans funded through alternate sources.” Since 1998, CENTRIX said it had underwritten 200,000 loans worth $3 billion for credit unions. The company stated it worked with 300 CUs in 42 states. Sutton added that, “We expect to be back to normal volume within 30-60 days.” That in fact, turned out not to be the case. In September, CENTRIX laid off 150 employees representing 10% of its workforce of 1,500. A company spokesperson said the layoffs were due to a dropoff in CU business and added that CENTRIX expected the dropoff “will be temporary.” But in November, the company laid off 100 additional employees. At the same time, CENTRIX announced it was merging its two operating divisions, the loan production group and the loan management group. -

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