SAN FRANCISCO — Patelco Credit Union decided it had enough and chose to stop digging when it availed itself of the opportunity to sell its subprime auto portfolio and investment in ACC Consumer Finance, LLC of Laguna Niguel, California.

Based on a review of the 5300 and information provided by Chris Oldag, senior vice president of lending for the $4 billion Patelco, the CU sold its approximately $235 million portfolio and its nearly $1 million CUSO investment in ACC to CompuCredit for $195 million. That provided the CU with an exit strategy for a poorly performing subprime auto lending business. Oldag now says that Patelco no longer has any ACC loans.

“We sold our ACC portfolio early this year and with it our interest in the company. It was bought by CompuCredit, which acquired ACC.” As a result of the sale, Patelco had a charge of $41,554,653 in non-operating expense at yearend 2006. As a result of the $41.5 million expense the CU lost $8.2 million for the entire year of 2006, negating the profits it had built over for the first 11-months of the year.

“This wasn't a fire sale or a distress sale. It wasn't an 'Oh, no!' event at all,” said Oldag. CompuCredit announced the acquisition and sale in early February in a press release that said, “These assets were originated and are serviced by ACC on behalf of Patelco.”

“Why did we sell? We were trying to protect ourselves,” explained Oldag. “We saw the losses starting to increase and assessed the potential impact it would have on our bottom line over time and we got out.

“We entered the ACC program to bring credit union value to credit-impaired auto purchasers,” he said. “We were essentially offering 'D' credit quality borrowers loans at 'C' rates and our losses exceeded our projections, causing us to rethink our involvement. After careful reconsideration we decided to sell the loans from this portfolio to the investor [CompuCredit] who purchased the company called ACC. We made loans in this program from July 2004 to December 2006.” Oldag stated that at its peak the ACC portfolio totaled $250 million.

Credit Union Times estimates that the losses from the ACC portfolio are an accumulated $15 million since inception, based on available data.

Trying to find a niche in the subprime auto lending business in order to do good just didn't work out the way Patelco had hoped it would, Oldag allowed. “We set out to do good and we did. That part did work out. The people we gave loans to got a much better deal than they would have elsewhere, they got a good deal.”

He noted that the subprime auto lending business and credit union nexus has had a troubled history, given the experience some credit unions had with Centrix. “The timing just wasn't ideal for the subprime auto deal industry.”

Oldag stressed that he had the highest regard for the people at ACC and the efforts they made to make the venture work. “Our venture with them was excellent. It was the right thing to do then and it was the right thing to do when we sold the portfolio. This wasn't about cutting into an artery. We've since put the money to other uses. This has been a tough year in the auto lending business, but we recently had our best production month year-to-date. Loan growth has been slow going.”

Tough Turnaround

“We're still off our planned growth for 2007. We are sitting at 2.27% growth in loans over year-end and have grown assets 4.3%. Auto loans have been particularly competitive in this marketplace and volume has been off significantly for us, especially via the CUDL indirect channel. It appears that the captives are buying far more business that would normally have come to the credit union,” he admitted. (Captive financing at Toyota Honda, Ford, Nissan dealerships and for GM dealers is being kept in-house.)

Patelco's average number of auto loans this year overall is down from 2,354 per month in 2006 to 1,628 in 2007, Oldag said. (The 2006 auto loan numbers are net figures and do not include any subprime ACC originated loans, he added.) “Our average indirect auto loans last year per month were at 935 compared to this year's average of 516 vehicles, with 676 for July. Fortunately credit card lending, unsecured lending and home loans have remained in strong demand by our members through out the year. “

The Good Old Days?

In October 2005, a CreditUnions.com story by Joe James titled, “The Power of Partnerships in Subprime Lending” quoted Oldag, “The exposure to the

inner workings of the ACC subprime servicing operation immediately highlighted our inherent weakness in both origination and servicing of these higher risk assets.”

The story noted, “By partnering with ACC Consumer Finance, Patelco is able to provide subprime auto loans without making a large investment in staffing to originate and service these loans. ACC does a thorough verification of all credit application components, going into such detail as speaking with landlords and employers and seeking the down payment proceeds.”

Initially, the program had promise, as the story cites Patelco attracting $46 million in loans with a net yield in the mid-6% range and gaining several thousand new members. And the charge-off ratio was a low 0.39%.

But as the program seasoned and defaults grew, the promise soured, leading Patelco to cut its losses and exit the program. Losses at Patelco are generally watched closer as it is the nation's largest privately-insured credit union.

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