NCUA Battles With Credit Unions Over Sub-Prime Loans Centrix Financial And Dealers Suffer Consequences

The fluidness of the auto finance industry was re-emphasized to auto dealers in late July 2005. On July 25, 2005, Centrix Financial’s CEO, Robert E. Sutton issued a letter to all of its dealer partners. It was a letter similar to many received over the years from other companies involved in sub-prime credit lending from other companies. The letter stated “…Centrix will be, for a short period of time, capping the amount of loans it places with credit unions.”

In short, that meant the third ranked sub-prime auto finance company as ranked by dealers in the Auto Dealer Monthly survey of Auto Finance companies was effectively halting originations at the same time the survey period was ending.

In June, the NCUA release a risk alert to credit unions across the country stating “…since September 2004, there has been a sharp increase in the number of credit unions engaged in outsourced, indirect, sub-prime 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 alert continued, “As a result of NCUA’s heightened concern, your examiner will contact you in the near future to discuss your controls and practices relative to this risk alert.”

This alert, with what appeared to be a stepped up campaign of the NCUA of audits on credit unions and intense scrutiny in this area, finally accompanied by cease and desist orders put Centrix in a precarious position that led Sutton to communicate the fateful words to dealers, “The credit unions that normally provide our retail customers with financing in your area may temporarily be unable to originate loans.”

While the NCUA opinions were known by some dealers, who had adjusted their contract mix accordingly, most dealers were caught by total surprise.

“We will lose eight to 12 special finance deals per month,” reported Paul Makarevich, special finance manager, Preston Dodge, Beaver Falls, Pa. He went on to add, “Fortunately, we only had one deal in for funding, but it has not funded yet (as of Aug. 10, 2005).

Sutton’s letter indicated it could be as late as mid-August before all contracts with approval prior to July 25 and received by Centrix by July 29, would be funded. At another Pennsylvania dealership, Tom Van Kempen, special finance manager, Camfango Chevrolet reported the two deals that he had in for funding on July 29 both funded by August 4. Van Kempen also indicated that he was confident that the problem would be short term. “After talking to officials at Centrix, I am confident they will continue shortly.”

Steve Norbut, vice president of sales and marketing at Centrix, echoed those comments. While in attendance at an industry special finance seminar on July 28, he commented on the situation to other participants. “It is not that we are out of money; we simply knew that due to the action of the NCUA some credit unions would not be able to continue funding contracts. We felt that it was better to take the high road and alert our dealer partners, rather than blind-side them by sending back contracts. In some markets where the credit unions passed scrutiny, it has been business as usual. We are asking dealers to keep submitting applications because new credit unions are coming on in a market by market basis, so where we may have lost a credit union temporarily, we have others ready to step in during the month of August.

Scott Hentgen, a general manager of a South Carolina Suzuki, gives credence to Norbut’s point saying, “Centrix never stopped buying paper from us. They told us the problem was solved by the end of the day on July 25.” They had eight contacts out on July 29 and all had funded by August 10.

Norbut also indicated that Centrix, for some time, had been looking outside of their credit union base for additional capital. “We received a Standard and Poors ‘A’ rating last Friday (July 22, 2005),” he told the audience. “This opens the door for us on a whole new array of capital, of which should be in place no later than Sept. 1, 2005.”

Norbut concluded by saying that Centrix had funded 12,000 loans in June 2005, would fund over 10,000 in July 2005 and expected as many in August.

Perhaps the group of dealers that have been impacted the most are the independents. Without access to some “franchise dealer only” auto finance companies, Centrix had been ranked first by the independents responding to the Auto Dealer Monthly survey. With Centrix’s philosophy that dealers using Centrix should net a minimum combined front and back end gross profit of $4,000 per contract, dealers with no where else to turn were reeling.

Shawn Foster, President of CarNation in Lafayette, Ind. said, “I got lucky. I had just funded my only outstanding deal with Centrix when I got the letter. Chase Custom has stepped up some, as well as Fifth Third. I hope that one of them will dance and pick up some of the slack.”

Centrix officials were asked to update the situation as this issue was going to press. With the fluidness of the situation, they weren’t able to offer anything additional.

Whether Centrix’s path takes the course of former companies such as Aegis or Fairlane, or follows the rapid and unpredictable resurrection of AmeriCredit, only time will tell. For dealers like Foster, they will have to wait and hope it is the latter.

Vol 2, Issue 9