Of course, the agency wants to protect the NCUSIF. The conservatorship of four CUs in 2006 due to loan losses attributed to third-party programs may inflict a wound to the fund, and provides an example of how such programs can ruin a credit union.

It's hard to ignore a powerful trend while it's steam rolling along, the profits are good and vice presidents and CEOs are deemed brilliant leaders making daring, innovative choices. In those times, due diligence can break down and risk assessment more easily becomes pro forma. No one likes a naysayer in boom times, and regulatory officials always face being charged with being conservative fuss-budgets not hip to the new thing. Afterward, the red flags wave, but it's too late.

The Centrix Example

The Centrix Portfolio Management Program wasn't the first third-party loan program to reach prominent failure, but it may be the most recent program of which NCUA has made an example. If NCUA's June 2006, amending of Rules and Regulations, Parts 701 and 741, Third-party Servicing of Indirect Vehicle Loans was a warning shot across the bow, CUs are being reminded, as sailors who explored uncharted waters long ago were by reading their maps: Beyond here, there be dragons.

Critics to the Centrix PMP have said the company put out the red carpet for visiting credit union CEOs, officials and board members. There were plenty who chose not to participate after the alleged 'dog and pony' show. Former Centrix CEO Robert Sutton, said it was the way he conducted business. "Every credit union that signed up for the program was required to come to Denver and see the operation and do due diligence. We answered all questions. We required a regulatory attorney and the board of directors to sign off on the program, approving it. None of these credit unions did business with us because the league told them to do so. Each visiting team from a prospective credit union spent at least a day-and-a-half talking to our underwriters, seeing our collections department, watching how the business was conducted," he told Credit Union Times in an exclusive interview.

"We didn't just give them a steak and put them under the ether," Sutton said. "If some felt that way, well, sorry, but it wasn't my intention. After they spent time visiting and talking with people, we'd have Cecilia [Binetti, Centrix's credit union liaison] and others go to the credit unions. Could we have done better? Yes, of course, we can all be better."

Some credit union CEOs told the Times that Centrix had told credit unions that its loans were as good as investing in any Ginnie Mae or Fannie Mae, but with a better yield. Centrix would sell a CU as much as it could handle, sources said. The source of the loans — used car dealers –would make loans, and when delinquencies mounted, critics say, is when a creative cover-up started. The lack of repossessions, extension agreements granted, weak collection efforts, lapsed insurance coverage, fees to borrowers for extensions that were not passed on to credit unions, and poor recordkeeping by Centrix, made for an eventual collapse.

Sutton asserted that it was NCUA that destroyed Centrix with its risk alert. While the NCUA was very concerned about Centrix much before that, it treaded softly, possibly owing to a threat of a "restraint of trade" lawsuit. Also, CUs had been pleased by the PMP's performance and were blanched by new requirements. They couldn't fund Centrix loans until the Document of Resolution NCUA imposed on participants was lifted. Sutton claims the NCUA dragged its feet and delays stalled the movement of capital.

He has supporters in the CU world. Gene Roberts, president/CEO of Financial 21 Community Credit Union in San Diego told the Times, "In his own gentlemanly way, Mr. Sutton said what I believe to be true, and that is NCUA screwed up. I'm disappointed that none of my credit union colleagues have publicly offered up that perspective. It is clear to me that NCUA's decision to issue the risk alert, fueled by 'not-on-my-watch' concerns, not only put Centrix out of business but caused losses to credit unions that might have otherwise been avoided," said Roberts.

"The only complaint I have about Centrix is their gross mismanagement of the very critical insurance piece of the PMP," Roberts continued. "We are now involved in a lawsuit with Lyndon because they claim we owe them money. The reality is that Lyndon owes a lot of credit unions a lot of money for unpaid claims and this could have been avoided had Centrix properly managed those relationships with the insurers."

Cecilia Binetti was hired by Centrix in 2000 as credit unions' liaison. She works for Sutton now as a consultant for Universal Special Auto Finance. "My job was to help train them in procedures, educate them in the program and help them perform due diligence. In a way, I held their hands through it."

Binetti said that CU officials needed enough knowledge and comfort with the PMP that they could successfully explain it to their boards. Once funded, she helped with ongoing due diligence. "Until the NCUA issued that alert, people were very happy. Loans were performing and credit unions got reports and our staff educated them about those reports. I had enough staff and experts in every area, reporting, accounting, etc. I also did a Web site for due diligence and examination preparation."

Binetti worked at CUs for 13 years, starting as a teller at Marine Air CU (now Patriots, in Aliso Viejo, Calif.) then moved into the loan department and collections. "So I kind of fell into compliance and was interested in it. I'm not a 'bean counter' but I admire those who are. I was later certified by CUNA," she said. The risk alert threw things into fifth gear, Binetti said, as Centrix tried to help its CUs cope. "At first I was optimistic. I thought, 'I'll do whatever I can to help them,' and many of the new rules were already put in place by us. We did conference calls and Web meetings."

Some CU officials reacted to the new Centrix exams with frustration and not a little anger towards the NCUA. Negative comments addressed examiners' preparation, methods, and attitude, while the adversarial nature of an exam also set nerves on edge.

In August 2005, John Hopkins Jr., president/CEO of Spirit of St. Louis CU, told Centrix following NCUA's exams that the examiners had "a checklist to complete without truly knowing what they are looking at. Then, we received a 'cookie cutter' DOR required by the regional office. They do not like the program and probably never will."

That same month, Alabama Credit Union League CEO Gary Wolter wrote NCUA Chairman JoAnn Johnson a letter of complaint, stating, "Unfortunately, the assumption of the examiners in the field and executive staff at NCUA is that any association with the Centrix Financial Program is automatically suspect, and must be terminated… Basically, the NCUA has found Centrix guilty until proven innocent, and then refuses to give Centrix an opportunity to prove their case." The Agency's "sudden actions" were questionable, felt Wolter, as the Centrix loans had shown a "six year history of being safe for the credit union, a strong earner and of significant value to over 200,000 credit challenged borrowers."

Texoma CU of Fritch, Texas, told Centrix that NCUA would no longer allow a payment to be deferred without prior consent; Texoma CEO Fred Cooper thought that was ridiculous. The CU was asked to shut the program down immediately. Binetti said that only five deferments were allowed during the life of a loan and that deferments are different from extensions. "If deferments were done, it was outside my area, in collections. My understanding was that if no contact or payment was received in a 45-day period then it went to repo. If there was communication (with the borrower) then deferments could be worked out." Repos weren't her area, either, Binetti said, but Centrix had companies that did the repos and there was a group dedicated to skip-trace.

Dennis Lombard, CEO of United One CU in Manitowoc, Wis., said the NCUA declined a merger of a CU into UOCU because of its involvement with Centrix. Examiners were unwilling to put another CU's capital in jeopardy.

Fiscal CU, Glendale, Calif., reported that an examiner said, "Centrix's financials are 'tricks' and the CU was being 'tricked.' "You can't rely on the accuracy of the financials and the reports," the examiner insisted. Comments about Centrix passing off unaudited statements as audited ones left the CEO with the belief that the NCUA's bottom line was to "get Centrix and CUs that work with them."

Paul Simons, CEO of CU I CU in Rantoul, Ill., told Centrex that its board had discussed the risk alert and was "comfortable" with the program and found it to be good for its bottom line and helped it fulfill its mission to serve the underserved. "It is unfortunate that NCUA is acting in such an arbitrary and capricious manner towards Centrix…"

Lyndon Insurance initially sued some 81 credit unions, claiming that $130 million it paid out in claims was paid under false pretenses. Lyndon claimed it had no knowledge of mounting losses in the PMG and was unaware of payments made by Centrix to several CUs. One of those is the Credit Union of Texas. Its CEO, John Lederer, said the suit remains active. "Lyndon is trying to settle with as many credit unions as possible, and I think as many as half have already settled, but we're now in the 'motions' process. This may take forever; I don't know if we'll ever settle." Lederer said that motions for summary judgment and dismissal might be heard early in the year.

Another lawsuit also lingering is the one brought by Everest Insurance, which provided the default insurance on Centrix loans, against Sutton and other Centrix principals filed in Federal District Court in New Jersey. Sutton has sued in Colorado District Court seeking to remove the case there. Glen Merrick, Sutton's attorney said that discovery is going back and forth and there has been "no material development." He noted, however, that it was doubtful the case would be removed to Denver.

Crossing lawsuits may settle something, but the ultimate question is whether, if left alone, Centrix loans would have performed as promised or would what regulators believe to have been a "house of cards," have collapsed of its own weight?

–[email protected]

Editor's Note: This is the second of a series looking into the Centrix Portfolio Management Program. Up next is the regulatory viewpoint, based on documentation and interviews with officials close to events.