ALEXANDRIA, Va. – Nearly 60 days after the NCUA's Notice of Proposed Rulemaking 12 CFR 701 and 741 concerning "Third-Party Servicing of Indirect Vehicle Loans" was published in the Federal Register and coming up on the Feb. 21 deadline for filing comments, only a handful of credit unions and other interested parties had lined up behind Centrix Financial and filed comment letters with the agency in response. At press time, NCUA had received nine comment letters, including one from Robert Sutton, chairman and CEO of Centrix. Neither the NPR issued on Dec. 15 which proposes limits on the volume of a CU's third-party, indirect subprime loans based on its net worth and length of time involved in the practice, nor the previous Risk Alert letter NCUA issued in June 2005 concerning federally insured credit unions' implementation of third-party, subprime indirect lending risk controls mentioned Centrix specifically and in fact wasn't directed at any specific vendor. However, Centrix Financial felt a lot of repercussions from both. In fact, in the last quarter of 2005 the company wound up laying off 250 of its 1,500 employees. At the time, Centrix said the layoffs were due to a drop off in its CU business but was confident the decline in business would be temporary. Speaking at Centrix's booth at the recently held National Automobile Dealers Association's annual convention in Orlando, Fla., Lauren Baker Sides, vice president, communications told Credit Union Times that NCUA's June Risk Alert was a "total surprise" to Centrix because "there had never been a risk alert like that from NCUA and there was no warning the NCUA was even looking at the issue." She added that, "In effect it shut down the subprime indirect lending business for those credit unions that used a third-party. We weren't at all pleased with the abruptness of it. It slowed Centrix's business down dramatically as well as credit unions. It wasn't so much what NCUA did as the manner it was initiated." Now that NCUA has issued its NPR, Sides said, "Credit unions now have a clear regulatory environment, they know what the rules are," adding that Centrix is already seeing a movement of credit unions back to doing business with the company that had previously desisted in reaction to NCUA's Risk Alert and NPR. She added that the dealers in Centrix's network are also "eager to have credit unions on board again." Even before NCUA issued its Dec. 15th NPR, Centrix had been involved in ongoing discussions with NCUA Executive Director Len Skiles to discuss the agency's concerns. Centrix was alerted that NCUA planned to issue the NPR. Even since the NPR was issued, Sides said Centrix and NCUA have continued to discuss the issues at hand, including whether the insurance on the Centrix loans is portable. She explained that Centrix services the loan for the life of the loan, and that even if a CU decides it no longer wants the company to do the servicing, the loan is still insured by Everest National Insurance. "NCUA wants to be sure credit unions are protected, that's been their primary concern," said Sides. The other eight comment letters to the NCUA's NPR came from: Alan Pughes, Community One FCU; Jay Gratwick, Delta Community CU; Ralph Jones, Credit Union Loan Source LLC., Jim Roundtree, Capital Lending Strategies (written by Dan Phillips); Frank Berrish, Visions FCU; Kelley Malton, Great Plains FCU; Rick Foley, Delta Community CU; and Robert Braswell, commissioner of the Georgia Department of Banking and Finance. Braswell was the only state regulator to submit a comment letter. Sutton's comment letter offered five recommendations: * amend the proposed rule to allow the aggregate amount of vehicle loans serviced by a third-party servicer and its affiliates to exceed 50% but not more than 75% of a CU's net worth during the initial 18 months if the CU's third-party servicing relationships provided the CU has a CAMEL 1 rating and its regulatory exams related to its third-party, indirect lending program during that 18 month period were successful; * amend the proposed rule to read: "One hundred percent of the credit union's net worth after the initial 18 months of that third-party servicing relationship; * amend the proposed rule to allow Regional Directors to grant a waiver of the limits in paragraphs (h)1(i) and (h)1(ii) to permit greater limits on written application by a credit union; * amend the proposed rule to clarify: how the waiver must be requested; how the waiver process will be conducted; what documentation the CU must provide as part of their waiver request; and that higher concentrations are allowed for programs that are insured by an A-rated insurance company that assumes the majority of the risk of losses on the program. * amend the proposed rule to specifically define that the calculation of percentage of net worth will be based on the active loan balance as a percent of net worth. Pughes took the position in his comment letter that "implementing industry-wide loan limitations addressing "potential" safety and soundness concerns is unnecessary. We feel the existing guidelines provide adequate protection for credit unions utilizing third-party servicing firms for indirect loans and that sufficient NCUA enforcement actions already exist." Visions FCU's Berrish also offered that regulating a credit union's participation in indirect lending is necessary. "Guidelines should be given to credit unions. Undue losses are severe across the board for all credit unions, there appears to be no reason to place new regulations on credit unions," he stated. Berrish added though that Visions agrees "it is appropriate" to limit the aggregate amount of indirect vehicle loans serviced by any single third-party to 50% of the CU's net worth for the first 30 months of the relationship, and that after that the concentration limit should be raised to 100% of the CU's net worth. Visions also agrees that the proposed rule provides criteria that would be considered by the regional director in determining whether a CU should be granted a waiver from the concentration limits and doesn't recommend any additional criterion that should be considered. Capital Lending's Phillips similarly felt that while "the proposed capital limits may be appropriate for an indirect third-party program in which the program provider controls the origination, underwriting and servicing functions" the proposed regulations "may be over-broad as applied to all credit unions; in that the regulations may unjustly prohibit credit unions from engaging in otherwise safe and sound lending and servicing practices." Both Foley and Gratwick from Delta Community CU, as well as Jones, wrote their comment letters to inform NCUA about Credit Union Loan Source LLC, a Georgia limited liability company and CUSO owned by DCCU and two other CUs – Atlanta Postal CU and Georgia Telco CU – as well as the Georgia Credit Union Services Corp. Each owner, they explained, has a 25% ownership position and a single board seat. As a multi-owned CUSO that's subject to examination by the Georgia Department of Banking and Finance, Foley and Gratwick requested NCUA modify the terminology in section 701.21(h)(3)(l) to replace the phrase "a wholly-owned subsidiary of a federally-insured depository institution" with "an entity having a majority of its voting interests owned by federally-insured depository institutions." Commissioner Braswell of the Georgia Department of Banking and Finance also focused on the CUSO in his comment letter, stating that, "We believe in particular that our regular examination of the CUSO provides some risk mitigation that should be recognized in the proposed regulation." He requested the NCUA amend the phrase Foley and Gratwick referred to, stating that, "Additional language could be added to make reference to this entity being subject to regulatory examination authority, if the Board considered this to be appropriate." Meanwhile, Sides told Credit Union Times that Sutton has been working since last spring on diversifying Centrix's capital base. "It was built on credit unions, but now in addition to getting Centrix's credit union partners back, he wants to get banks and other large institutional investors in the capital market as partners as well," she said. -

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