"White paper" on subprime loans pushes guarantees

DENVER – It might sound far-fetched, but now is the time for credit unions to consider shifting a percentage of loan funds into members with “impaired credit” as long as financial guarantees are in place. The result can be an improvement in ROA. That is the advice of Centrix Financial LLC, an Englewood, Colo. risk management firm that has been pushing insurance guarantees on sub prime loans arguing that CUs need a “safe haven” during a period of rising delinquencies, increasing deposits and reduced loan demand. The Centrix primer on “Swimming with the Current” is spelled out in a new “white paper” issued by the Colorado firm detailing the benefits of its three-year-old Portfolio Management Program product designed to “safely” increase a CU’s ROA. “While you might think that shifting a small percentage of the credit union’s resources to low credit-rated members would have a detrimental effect on the credit union’s financial stability, under the right conditions it can actually be a good strategy,” argues the Centrix primer. The right conditions, continues the document, “would have to include a financial instrument that provides a financial guarantee that improves the safety and returns of non-prime and sub-prime loans” and under these conditions CU’s could “invest excess savings deposits in member loans, increasing loan volume, improving charge-offs and increasing interest income.” In response to present economic conditions, CU members are seeking “safe havens in which to park their funds while at the same time reducing spending and borrowing” with the result being a decline in loan to share ratios. Centrix maintains its PMP cash management product “improves the safety and returns” of non-prime and sub-prime loans. Under PMP, loans are made on a loan-by-loan basis and up to 90% of loans in a portfolio can be sold on the secondary market “restoring capital and creating a strip of interest income for the remaining life of the loans that were sold,” said the white paper. Centrix, which has more than 110 CU clients, a more than three-fold jump from the 25 last February, says its operational system currently handles 12,000 special financing loans. The Centrix product “safely and profitably addresses the asset liability management issues of a changing economic environment whether it’s in a weak or strong phase,” declared the chairman of Centrix, Robert E. Sutton, in a statement accompanying the white paper. Citing NCUA data, Centrix noted that federally insured CUs had asset growth of $39 billion or 8.90% during the first half of 2001, but during the same period loans increased by $8.4 billion or 2.79%. “This unbalanced growth resulted in a large decline in the loan-to-share ratio from 74.46% at yearend to 74.45% as of June 30,” noted Centrix adding “this imbalance will certainly be more dramatic when year-end figures are reported.” In the long term, noted Centrix, as the financial status of many members declines, their credit rating may be “damaged” making it difficult for the CU to approve what limited demand for loans does exist. -