Auto lender Centrix Financial is running out of gas.
The Centennial-based company has cut its ranks from 1,500 to about 500. It has bailed out of its sponsorship of Denver’s Grand Prix auto race. Car dealers complain it’s not paying bills. And a group of investors have sued the company and its CEO, Robert Sutton, alleging he defrauded them.
The investors claim Sutton took $5 million from the company, unbeknownst to them, and concealed other financial information by transferring assets between layers of subsidiaries. Sutton was unavailable for comment Thursday. He and his privately held company have yet to answer this complaint in court.
“Anybody can sue anybody for anything,” said Centrix spokeswoman Lauren Baker. “That (lawsuit) will be defended vigorously.”
The struggling company is reviewing its options. People close to Centrix – and car dealers – told me they believe a bankruptcy filing is weeks away. Baker would not confirm this.
“Our intent is to look at our options and find the best one we can that will allow us to go forward,” she said. “We think this is an important business for a growing number of borrowers.”
That business is subprime auto lending – a financial-industry euphemism for making loans to people who don’t always pay their debts. Centrix, founded in 1990, devised an innovative way to do this.
The company went to credit unions, promising to process subprime loans for them and get insurance to cover defaults. Eager to serve the underserved and keen on bagging profits from high-interest loans, credit unions bought the pitch.
All was well with this plan until last year, when the National Credit Union Administration, which regulates credit unions, became concerned about growing portfolios of risky auto loans at credit unions. The NCUA now prohibits credit unions from using third parties such as Centrix for subprime loans. Consequently, Centrix’s loan volume plummeted.
The company still has a healthy business processing loans, and it’s been looking for other sources of loan capital to make more loans, but time is running out.
“They didn’t make contingency plans,” said Elaine Harper-Redondo, who was laid off at Centrix on June 16. “They just based all their funding on credit unions.”
As a rank-and-file employee, Harper- Redondo said she has long anticipated the company’s troubles. “There were a lot of corners that were cut,” she said.
Centrix’s financial controls are at the heart of the investor lawsuit filed in state district court in Arapahoe County.
“Centrix Entities have failed to follow corporate formalities, have failed to properly maintain separate corporate records, and have commingled corporate funds and assets,” the lawsuit alleges.
Centrix, however, is not in trouble because of this alleged financial chicanery. It’s because regulators cut off its primary source of loan capital.
There are two ways to view this. 1) Meddling regulators ruined a perfectly good business. 2) Credit unions were too steeped in risky loans, setting the stage for a potential crisis.
At Taylor Automotive Group, a car dealer in Toledo, Ohio, some customers had to return their cars after Centrix’s financing fell through, said finance director Jake Bernard. The dealership, Bernard said, is now pursuing Centrix for tens of thousands of dollars in unpaid bills. But Bernard said he suspects his company will just have to get in line behind other creditors if Centrix files for bankruptcy protection.
Bernard said that before Centrix was in trouble, it spent a lot of money entertaining car dealers at auto races.
Sutton is a longtime motor-sports enthusiast who not only owned the Grand Prix in Denver but made Centrix the “official auto finance company of NASCAR.” He has also sponsored cars in the Indianapolis 500 and the Baja 1000, a desert race he has won himself twice.
It’s almost as if Sutton started this company to finance his love of racing.
“They wined and dined us and took us to the Indy races,” said Bernard, who in hindsight says he should have seen this as a red flag. “Sometimes dealers are naive, and so are finance directors.”
Al Lewis’ column appears Sundays, Tuesdays and Fridays. Respond to him at denverpostbloghouse.com/lewis, 303-820-1967 or alewis@denverpost.com.
