Centrix Financial Expands Loan Participation Program to Smaller Credit Unions; Participation Volume Booming in Industry

DENVER – As the industry waits for the outcome on whether a new accounting standard could affect loan participations with credit unions close to the 12.25% member business lending cap, Centrix Financial LLC is moving forward with its nearly two-year old program. Known for it’s highly successful auto-lending program to borrowers with checkered credit histories, Centrix is also seeing success with its PMP Liquidity Control Process loan participation venture. Launched in 2002, Centrix facilitated $22 million in loan participations and in 2003 that total grew to $192 million. This year’s growth is projected at $600 million, said Jeff Hutcheson, vice president of portfolio managment for Centrix. Loan participations have been around for quite some time in the industry. NCUA regulations permit credit unions to buy up to a 90% participation in nonmember loans that were originated by other credit unions. The originating credit union is required to retain at least 10% of the loan. Regulation 701.22 and 701.23 further clarifies that the seller must only make loans to members; retain original or copies of the loan documents; use the same underwriting criteria as for returned loans; execute a master agreement before the transaction takes place; and obtain board approval for sale. Buyers do all of the above and also ensure individual loan purchases do not exceed 10% of unimpaired capital and surplus. The exchanging of a loan participation among credit unions is at the root of a Financial Accounting Standards Board (FASB) proposal that some in the industry say could hurt those close to the 12.25% member business-lending cap. FASB has proposed amending FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and the right of setoff – the common-law right of debtors and creditors to setoff (net) amounts due to one another if one of the parties defaults, becomes insolvent, or enters into bankruptcy or receivership. The FASB is considering banning the sales aspect for loan participations indicated by rights of setoff. If an institution is in bankruptcy or receivership, setoff allows the customer to offset or cancel any debts owed to them with any outstanding loans. That institution can offset or cancel any debts owed with any deposits belonging to the customer. This would mean CUs would have to use the less beneficial accounting choice of keeping their assets as secured borrowing. Typically, the accounting portion of a loan participation allows the transfer of part of the loan off the selling CU’s books to the CU purchasing the book. Meanwhile, Centrix’s LCP is marketed on the premise of the loans being short term, very liquid in nature and allowing credit unions to get geographic diversification in their portfolio, Hutcheson said. “Many credit unions are limited to the community they serve,” Hutcheson said. “This allows them some flexibility.” At one point, Austin, Texas-based Velocity Credit Union was selling between $5 and $10 million loans at one time, said Jack Jordan, vice president of lending. That problem was solved because Centrix “aggregates the smaller borrowers.” “You can see from the national numbers that credit unions are having a hard time keeping their loan-to-share ratio up,” Jordan said. “There are pockets of credit unions that have more than they need. (Loan participations) allows the industry to better distribute the business that’s out there.” Jordan said Velocity CU has made $150 million in loans to members and retained $59 million on the books, selling participation between $80-$90 million. The retaining amount has been pivotal for asset liability management goals and controlling loan to share has “boosted our bottom line.” “On any given month, we make 10 new loans and sell five,” Jordan said. “Our ROA is going to be substantially higher than normal.” Hutcheson said when the LCP program initially launched, it was limited to credit unions with $100 million or more in assets. That barrier has since been lifted to include those with as little as $5 million in assets. “Small credit unions are probably the ones that need loan participations the most,” Hutcheson said. “Yield can suffer, you can’t have too much cash. By pooling them all together, it allows credit unions to purchase a share of a much larger share.” Centrix execs are hoping LCP will follow the path of its older sister program – Portfolio Management Program (PMP). Launched in 1998, some say it has tapped a niche that many credit unions probably would have shied away from given the risks: providing financing to the subprime borrower. Today, PMP has surpassed its projections. The program allows credit unions to offer subprime auto loans with a lower interest rate than members could get from other lenders, according to the company data. In 2003, the company achieved several PMP milestones: it added 54 new credit unions and nearly 4,000 new auto dealerships to the PMP program, brining the total number of partners in both industries to 200 and 7,000 respectively. By year’s end, Centrix had also secured endorsements from 35 credit union leagues and service corporations and PMP was being provided in more than 40 states, according to the company data. In June 2003, it reached the $1 billion in loans underwritten and that August, it passed the $1 billion in assets under management mark. “The key to our success has been helping the underserved,” Hutcheson said. “The magic bullet (with PMP) is there is a default insurance protection that goes with each loan and mitigates any losses.” Jordan admits that some credit unions are not aggressively loaning money to people with credit problems. “Quite frankly, some of us have turned our backs on them,” Jordan said. “Here’s an opportunity to give members a second chance, perhaps to those we would not have considered before.” [email protected]