"Maybe a friend or a cousin told them to take a ride across Alligator Alley (the corridor that connects Florida's east and west coasts) two or three years ago because they couldn't afford to buy in Broward County. Out here, homes are more affordable and they could have a little yard. They walked into the First Homebuilders trailer, that's how it happened."

20% Off

Abrams said he's written letters to the developer and the credit unions "because my clients can't finance the homes so they can't close." The response so far has been that "they understand and are willing to drop the price by 20%. But even at that, my clients still can't qualify, and these contracts are now two or three-years-old." He added that out of curiosity he took a drive to see for himself. "It's a suburban development showing wear and tear," is how he described it. "These people were thinking of moving there, or for a few, maybe it was a second home purchase, but none of them were aware that they were joining a credit union," said Abrams.

The southwest Florida market may be the worst in the country with regard to declining value and a glut of available homes. In December 2005 the median price of a single-family home was $322,300. In July, the price was $246,100, a drop of almost 24%.

G. Donovan Conwell Jr. and Reed Kirkpatrick are Tampa attorneys that represent some 40 clients from around the country who filed a lawsuit alleging that Whitney and Associates and the Millionaire's University in Cape Coral used TV infomercials and other advertising to entice investors by claiming they could make large profits in buying lots for single home sites on what Conwell called "mostly scrub brush land. In many cases, it was just a vacant piece of property or a single home on one lot amid empty blocks."

"We are now waiting to hear the court's decision on motions to sever. They want to break up the cases," said Conwell. "These deals were put together by Russ Whitney, who had relationships with other named defendants and lots of other co-owners," Conwell previously told Credit Union Times.

Norlarco and Huron River Area CU gave the loans through The Construction Loan Company, (CLC) of Howell, Mich. (www.loantobuild.com) or through United Mortgage, a Florida corporation that "acted as an agent to obtain mortgages and loans for the lenders," as specified in the suit.

The way the scheme worked, he said, was that the property was included at an inflated appraisal, which "got their assets up to where they could qualify for the loan," said Conwell. The Florida rules on treatment of second or vacation property were also part of the scheme, as the property was presented as the borrowers' primary residence.

Most of his clients got financing through Huron River, but six got loans from Norlarco. "The credit union was extending loans to people who didn't have the assets to pay the loan," he said. Kevin Caraotta, president of United Mortgage completed and supervised preparation of the loan documentation containing the false appraisals, says the suit.

The charges include fraud, abuse of fiduciary duty, and violation of Florida land sales practices, unfair and deceptive sales practices, fraud and inducement, civil conspiracy and violation of the Florida RICO conspiracy statute among others. The lawsuit seeks rescission of the promissory notes (loans) and treble damages along with attorney costs and fees.

In Colorado federal court, Superior Choice Credit Union of Wisconsin is suing Norlarco, alleging false representation and deceptive practices. The charges involve lack of disclosure that placed Superior Choice at financial risk for its involvement in handling some of the Florida loans. There may also be other lawsuits surrounding loan participation deals.

Who Takes the Hit?

Together Norlarco and Huron River hold $438 million in loans tied to these sprawling and now mostly vacant developments in Lee County. Norlarco reportedly owns $56 million in delinquent loans, while Huron River had $37.4 million. Huron Area has already started foreclosure proceedings on some 30 homes in Lee County, but Norlarco hasn't done so as yet.

The endgame scenarios NCUA is facing include a possible merger of both CUs, an option known as a Purchase and Assumption (P&A). It's hard to imagine any credit union assuming the loan losses and numerous lawsuits to gain membership growth and expansion under those circumstances, several CU experts Credit Union Times spoke with said.

Another option involves stripping out the bad loans and indemnifying any acquiring CU from lawsuits, or stripping the loans and allowing the CUs to continue and manage the lawsuits as best as possible. The loans might be sent to the Asset Management and Assistance Center in Austin, Texas, where bad CU loans are managed or sold. Or NCUA and the CUs might negotiate the sale of loans on a discounted basis to investors or the developer (or a combination) to limit the losses as much as possible. A straight liquidation is a more remote option.

Some of these potentials involve the National Credit Union Share Insurance Fund absorbing the losses. But the amount of such a hit and its impact on the Fund cannot be determined at this time. "I don't want to go too far down that road just yet," said NCUA Director of Public and Congressional Affairs John McKechnie. "Speculating is difficult at best," he added.

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