From 1990 through 1997, Centrix Financial Corporation was in the business of developing and securitizing subprime auto loan pools and selling them to the institutional market. Then, in 1998, Robert Sutton purchased Centrix Financial Corp. and transitioned it into Centrix Financial, LLC and the company developed and implemented the Portfolio Management Program. The PMP was a turnkey indirect subprime auto-lending program that managed all aspects of the loan process through in-house underwriting, servicing, collections and portfolio reporting functions. Centrix claims it was the first company to create this soup-to-nuts approach, but the difference between it and other similar programs was an up-front insurance guarantee, on a loan-by-loan basis, designed to minimize inherent risks. That insurance coverage gave credit unions the sense of security that allowed them to freely offer loans to people of less credit worthy status, who initially were not members of the credit union. The added goodwill of credit unions fulfilling a charge laid out in the Federal CU Act, that of offering credit to those of modest means, was also an attractive incentive for CU boards of directors and management.

"In 1997 a gentleman came to me asking me to buy a business," Sutton remembered. "I'm an entrepreneur; that's what I do. It was an auto financing company, and I knew nothing about auto financing. But it seemed to be a good business so I went to Rollie Anderson, who is the former president of Lyndon Insurance, and together we developed an idea to securitize auto lending. We hired a consultant, Cheryl Ordonez, who put the policy and procedure and operations plan together."

It was then that Sutton said Carroll Beach, who was then the president of the Colorado Credit Union League, came to him. "Carroll asked to position the business for credit unions exclusively; that's why I didn't offer Centrix financing to banks and other lenders. It seemed to be uniquely geared to fit with the credit union philosophy of people helping people.

"In early 1999 Carroll told me to go to the Colorado State Banking Commissioner to present the plan, so he and I and some other key people did just that," recalled Sutton. "We met with examiners for an entire day. It went perfectly and we planned to offer it in all 50 states. Later on, we went to the NCUA. I think we met with the agency some seven or eight times from 1999 through 2005. We met with Dennis Dollar [former NCUA Chairman] and with the regional directors."

Here is where the paths of NCUA and Centrix seemed to wind around each other and it is an underpinning of Sutton's position that the agency seemed asleep at the switch and finally overreacted, killing the operation. "In each and every one of those meetings, we always asked of them, 'what else can we do? [to make this business plan better]. They never said, 'Don't do this,' or 'Do this or that better or differently.' In fact, we had no write up of any kind until 2005. There was no lawsuit and no problem with yields," he said.

So what happened to kill what he called a successful and profitable program? "I really think they [NCUA] just screwed up."

Losses

Essentially, Sutton's view of what happened to derail Centrix is that NCUA set out to prevent CUs from engaging in third party subprime auto lending through the PMP. The Risk Alert was the first of its kind ever issued by the agency and it literally brought a screeching halt to the business, as it applied not just to federal CUs but extended to federally insured state charters as well. Centrix was clearly targeted, say company documents, because the Documents of Resolution (DORs) sent to individual CUs instructing them how to conduct business with third party subprime auto lending vendors that offered insurance policies on each loan applied only to Centrix. No other vendor had such a set up. Despite the claim that no CU had yet reported a loss with regard to the PMP and no CU had undertaken legal action of any kind against Centrix and the agency had not expressed concern (says Centrix) to any credit union about the program, this sudden action came as a bolt from the blue.

NCUA exams of CUs involved in the PMP were conducted without a hitch, they say, and yet, NCUA regarded the company with suspicion. Then, NCUA took a long time (nearly seven months) after issuing the Risk Alert to clarify what CUs must do in order to conduct such business. NCUA's policy paper (and proposed rule establishing investment policy) outlining the approved method the static pool analysis required by the DOR came too late to reinvigorate the program. (NCUA's white paper was issued on March 17, 2006 and came after CUs pleaded for guidance, which was not forthcoming.)

Credit unions were loathe to resume business with Centrix until their DORs were lifted, which required that they satisfy new criteria laid out in the risk alert, obtain board approval of a new servicing agreement with stipulations about portability of insurance and conduct the pool analysis. Even if the CUs did so, they never got the green light from NCUA, the company contends.

Limbo?

Centrix claimed that in May 2006, almost a year after the risk alert that 83 CUs were in a kind of "Limbo" with some CUs having completed the necessary requirements and awaiting approval to restart. Another 43 CUs had less than 24 months in the program, so lacked sufficient data to conduct a thorough analysis, 12 others were ineligible due to reaching a cap (more than 100% of net worth), 11 others just gave up, and three had the DOR lifted but now were hesitant.

"In February of '06 the first credit union emerged from the DOR and was given permission to do business with us again," said Sutton. "But they couldn't because they were over the cap." The sole CU of the 153 CU partners involved at the time that was allowed to resume business was Aerospace Credit Union.

The Centrix theory has it that NCUA had concerns over several CUs that had invested in excess of 100% of their net worth with Centrix and that this overly aggressive approach led them to act without warning or notice, without a comment period and followed this overreach with the DORs, which had a cease and desist impact on all participating credit unions. It didn't make any sense to Centrix.

The structure of NCUA itself also contributed to the failure, says Centrix, because the decision to lift a DOR would be made at the regional level by the regional directors. This is what NCUA Executive Director Len Skiles confirmed to Centrix, they say. The decentralized decision process made for inconsistent interpretations of the policies set forth at NCUA headquarters. The net effect was to literally single out a corporation for dismantling.

Sutton doesn't take on the appearance or behavior of a paranoid person. In fact, he is soft-spoken, gentlemanly and pleasant. Asked if he believed if anyone, particularly staff attorneys at NCUA, including General Counsel Robert Fenner or Paul Peterson or Skiles, had it in for him, he replied, "I honestly don't know. It sure seems that way."

Sutton attributed the debacle that resulted to the loss of income from the abrupt stoppage of the business. "This is a very people intensive business. It's like Humpty-Dumpty; you can't put it back together." The way back to business proved long and arduous, he said. Still, throughout the summer of 2005, Centrix said it agreed to make numerous changes to its operational and legal relationship with its CU partners.

"In early 2005 we were in the process of going fully automated," said Sutton. "We tried to eliminate any gaps and deal with any problems. We wanted to streamline the process as much as possible," he said. That automation would make it easier to follow the progress of loans, track payments, etc.

Everyone's a Critic?

Sutton acknowledged critics of the program, particularly those who decry the high yields it promised, backed up by the security of insurance, making it a tempting program for normally conservative CUs. "We didn't promise certain high yields," he said. "We had projections that were based on bank projections, which have no lending caps. In the risk basis arena it should have been 19% [cap]. NCUA's lending cap is 18%. Still, we were in the 7%-8% yield area. I'd have loved it to be 9%."

As for those who have called the Centrix PMP a Ponzi scheme, he laughs. "It's simply crazy for anyone to say that it was a Ponzi scheme. How on earth did they come up with that?"

League Endorsements

Credit Union Times was unable to determine the exact list of state leagues that endorsed or marketed the Centrix PMP. The first was Colorado, and when asked for a statement regarding the league's analysis and due diligence, Credit Union Times received this statement from Karen Morgan, senior vice president, marketing and communications: "When the Centrix program first began, the then Colorado Credit Union League's service corporation was one of several state leagues or service corporations that endorsed the Centrix product. We rescinded that endorsement in 2006 when the problems of Centrix came to light following the NCUA actions related to third party vendors. Like all endorsements, it is important for each individual credit union to perform its own due diligence, determine whether a particular product is correct for that institution and then manage the product and/or program in a manner appropriate for its business plan and capacity."

Asked for a dollar amount earned by the league from Centrix loans granted, Morgan demurred, saying that financial information was proprietary.

Sutton noted that, "It was standard operating procedure for leagues to endorse programs from outside vendors. And depending on the level of marketing and sales support they gave the Centrix program they received payment. Each league had a different structure and conducted its own due diligence," he said.

"At the height I think we were working with some 30 state credit union leagues. Their commissions differed, somewhere between $25 and $50 per deal [auto sale] depending on the amount of services they provided."

CUNA didn't endorse the program, leaving it to the individual leagues to choose whether or not to work with Centrix. Asked about CUNA's decision, Mark Wolff, senior vice president of communications said, "Our operating philosophy in forming strategic alliances is to look for solutions when we feel credit unions are faced with an unmet need in the marketplace. With Centrix, we determined the company had a well-defined, complete turnkey offering. We didn't see CUNA's involvement as creating additional value and felt our resources could be better spent elsewhere."

Whether the national clout of a CUNA blessing might have given NCUA reason to tread more carefully in dealing with Centrix and its CU clients is a question left for the ages. But several powerful and influential leagues were involved, including Colorado and Texas, among others. California was a notable exception.

Dog and Pony Show?

Other critics to the program have said that Centrix put out the red carpet for visiting credit union CEOs, officials and board members, and that it was a first-class visit from start to finish. The notion, however, that many of these visits were designed to bowl over "Rubes" from the CU world is disingenuous at best. There were plenty of visiting CEOs who chose not to participate, even some from the Heartland. But even they were impressed by the limo pick-up at the airport, the whirlwind presentations and tours, the Ruth's Chris dinners and the plush hotel stays. One CU CEO even told this reporter that he tried to pay Centrix for the cost of his team's stay in Denver (after deciding not to join the program), but was politely rebuffed.

For Sutton, it was just the way he conducts business. "Every credit union that signed up for the program was required to come to Denver and see the operation and do due diligence. We answered all questions. We required a regulatory attorney and the board of directors to sign off on the program, approving it. None of these credit unions did business with us because the league told them to do so. Each visiting team from a prospective credit union spent at least a day-and-a-half talking to our underwriters, seeing our collections department, watching how the business was conducted," he said.

Lapsed VSI Coverage?

Sutton was firm on the subject that Centrix did not allow the Vendor Single Interest (VSI) coverage to lapse directly. "What happened is, we instituted another policy with Arch Insurance (New York City), which was a pay-as-you-go-policy. But at that time, June of '05, the Risk Alert came out and in July and August we simply ran out of money. On June 1st I got a new policy with The Great American Insurance Company (Cincinnati) for the life of the loan, which was a better policy than pay-as-you-go. The condition was, the requirement, was that Centrix remain in business. But the Risk Alert stopped the ongoing business cold."

He denied that credit unions were not told of mounting defaults. "They were absolutely told of ongoing defaults," he said. "Credit unions could look at any individual loan. There was no hiding the ball. When loans started defaulting at a higher rate they knew of it, absolutely."

He said many defaults were due to Centrix personnel being laid off as a result of the Risk Alert. "I laid off some 250 people in August of '05 and 200 more in December '05 and half of those were in the front end of the operation. So there was an erosion in quality."

He said he tried to coordinate an effort with involved CUs to deal with NCUA. "At the end of June '05 I called in 50 credit union CEOs and we had a two-day session. I asked them what they wanted us to do. Should we shut down? Should we work with the NCUA and try to get them on our side? Believe me when I say that we tried every conceivable approach to work with the agency."

Lyndon Suit

Sutton said he didn't know why Lyndon Property Insurance Company was suing some credit unions. Lyndon filed claims in the Colorado federal bankruptcy court alleging some 81 credit unions owe it $130 million for claims paid. They say the CUs cooperated with Centrix to hide losses in the portfolio and Lyndon should not have paid the claims.

Lyndon is seeking the return of monies provided to credit unions by Centrix as defaults were adding up because these payments were ostensibly used to keep some losses down, some CEOs have claimed, all of whom declined to be identified.

Sutton would only state that he made some goodwill payments. "I made some goodwill payments for fraudulent contracts because at one point we had a serious fraud perpetrated by a dealer. These were Russian immigrants and they were dishonest. I had the cash and I paid up, making it up to several credit unions that suffered losses. Ford and GM also got caught up in the fraud. We weren't alone."

The Everest Lawsuit

Everest National Insurance is suing Sutton and several other Centrix officials for fraud and civil conspiracy and Sutton would comment on that suit. "The lawsuit is bogus," he said. "It is completely without merit and I'll go after them. We've sent them a letter citing Rule 11 (Fed. R. Civ. P 11), which sets out the obligations of lawyers as officers of the court to refrain from bringing claims that are frivolous. They have an obligation to investigate the facts and the law and cannot congest the courts with claims that are without merit."

He had a quiet rage about the claim of fraud. "If they bring a claim that is groundless, then both the lawyer and the client can be held responsible for damages. Rule 11 is a fee-charging rule and there can be consequences. They can't just toss grenades because they're mad. When people lose a lot of money they are more apt to lash out, it's human nature. I understand that, but the claims are groundless. We've given them a warning with our letter and we've filed for dismissal or a transfer to Denver (the Everest lawsuit was filed in New Jersey)."

Sutton and his attorney, Glenn W. Merrick declined to discuss further details concerning the lawsuit. "I'm not free to comment on any possible settlement with Everest," said Merrick. "The litigation is ongoing and Bob will defend himself vigorously."

Last Word

What would Sutton have done differently if he could do it over? "I should have taken Len Skiles to lunch, at least once," he mocked. "We took the time to develop the business plan. We had a very experienced board of advisors who knew the credit union industry. They are some of the most well-known and most highly respected people in the credit union world. I just do not know what I could have done differently to change the outcome."

Sutton added, "I believe the NCUA, no matter how well intentioned, caused grievous harm. They started an enormous ball rolling down a hill. Our hearts were in the right place. This was clearly a tragedy, for Centrix and for credit unions. It didn't have to happen," he said.

"I still believe in this concept and still advocate for such a program. I think stopping it was an ironic outcome for a federal agency that regulates and supervises financial institutions that seek to serve the underserved. It's just a tragedy."

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