The loan term was 66 months, making for a monthly payment of $358.44 after a $1,000 down payment. Centrix earned $4,159.03 on the loan, of which only $1,393 was for insurance. So is charging a consumer $14,986 for a vehicle with a $10,000 retail value (at best) a real service to the poor and does it fulfill the credit union philosophy of serving the underserved?

The Centrix template breaks down this way:

- Centrix fee: $1,770.31

- Association fee: $50

- Acquisition fee: $795

- Insurance Premium: $1,393.73

- Administration fee: $150

- Total: $4,159.04

The document's Truth in Lending Disclosure shows clearly that the consumer agrees to pay 17.90% for $14,986.36 that will cost him/her $8,670.68 over the term of five-and-a-half years. That makes the total cost of buying the car, including the $1,000 down payment, $24,657.04.

This consumer's debt to income ratio alone doesn't make for such a high rate loan, said a former credit union CEO consulted for this analysis. "I don't think 41% is a high enough ratio to make this person a subprime candidate. I'd ask why he or she was placed in the subprime category to begin with. Without seeing the credit score, it doesn't seem necessary. But the other charges are typical of the subprime category," he said.

Another source (all of whom insisted on anonymity because they provided documentation) said that the central misrepresentation that Centrix made to credit unions was that the loans in the program were current. "To say that the NCUA shut this program down is to go along with the Centrix spin. What the NCUA did, and did far too late in my opinion, was say that, OK, if you want to make these loans, you can, but you cannot have the same third party be both the seller and the servicer of the loan portfolio."

All Centrix had to do to keep the program alive, he added, was to agree to a third party audit. "If they had agreed to an independent audit of their servicing books, so that credit unions could know for sure that the monies they said they were collecting were really being collected, then it might have been settled. But Centrix wouldn't agree to that, he said. The credit union's up-front insurance payments for insurance and purchase also didn't make sense, he said. "Anyone in the subprime auto business for five minutes would tell you that. That's a ridiculous set-up."

The consumer on the other side of the deal may not always be honorable either, or may knowingly agree to such a high rate of interest and add-ons because they have no intention of making all the payments, he allowed.

In that case, he noted, a dealer will take a huge mark up if the consumer is willing to pay $5,000-$6,000 or more over the book value of the car knowing that he/she couldn't get a loan elsewhere. Loans like that, which are 130%-150% over the car's wholesale value usually result in the car being in $6,000-$7,000 in negative equity when it rolls out of the lot.

This big mark up in the face value of the car was typical of Centrix loans, according to several sources at credit unions that held them. One told Credit Union Times that Centrix kept giving reports to CUs that put the delinquency rate at about 1%. But that was only possible because Centrix was allowing "skips" or payment skips. When that happened, the amount of the payment was added to the loan amount, increasing the principal. According to terms in a CU contract, only one payment skip per year was allowed, or a maximum of three over the life of the loan. "The central fraud here was simply that Centrix kept giving skips in violation of its agreement with credit unions and kept telling them that delinquencies weren't going up."

More (Lawsuit) Fallout?

The recent buy back of a $13 million loan portfolio the Credit Union of Texas sold to Mission Federal Credit Union in San Diego, which was one of the largest participating credit unions in the Centrix indirect auto loan program, was positioned by MFCU as a "successful resolution of all claims between itself" and the CU of Texas, one of the major originators of Centrix loans in the country.

The credit unions jointly owned in excess of $90 million dollars in subprime auto loans that were part of the Centrix indirect lending program. MFCU said it exercised its rights under the terms of the Loan Participation Agreements requiring that Credit Union of Texas buy back Mission's 90% participation interest in the Centrix loans as the proper remedy for "unintentional misstatements of fact."

But John Lederer, acting CEO of the CU of Texas was surprised to hear the deal put in those terms. "I'm amazed they'd even issue a press release like that," he said. "We thought it was a pretty good deal for us, frankly, because we only bought back performing loans. None of these loans were bad; none are in default. Mission and attorney Brad Pizer of Pizer & Associates made it sound like they forced this sale on us. That's not the case." MFCU suffered a $5 million loss due to bad Centrix loans last year, so selling back good loans to the CU of Texas might not have added to its losses over time.

Lederer was at a loss to explain what MFCU called "unintentional misstatements of fact," either. "We made what we thought was a good settlement and they seemed to put out there that we cratered. That's funny, because our examiner even thought it was a good deal."

At Mission FCU, meanwhile, CFO Jim Miller is no longer with the CU. According to a spokeswoman, he "has not been let go. He is with the CU until mid-July, at which time he will undertake some consulting assignments and other opportunities in the financial arena." Efforts to reach Miller were unsuccessful at press time. Ron Martin, president/CEO of Mission, remains at the helm.

The CU of Texas is one of a handful of CUs being sued by Lyndon Insurance for what Lederer termed a "laundry list" of items, including first payment defaults and Centrix paying claims to CUs without telling Lyndon, which was one of the providers of Default Protection Insurance (DPI).

"Lyndon alleges that Centrix was the agent for credit unions and defrauded them for the benefit of credit unions, but the question is, did credit unions know this? There are so many allegations that it's hard to say. There haven't been any responses to this yet, either, so it could drag on for quite a while," said Lederer.

He also noted that Centrix was also the agent for the insurance company, so the added complication that they may have served two masters only adds to the confusion. Still, the suit is worrisome for a handful of credit unions, if only because of the potential cost of defending against it.

–[email protected]