A default-prone portfolio of loans to ITT Educational Services students has come back to haunt Eli Lilly Federal Credit Union, a full-service but otherwise conservative institution.
The $1-billion-asset credit union recorded a $26 million loan loss allowance at the end of 2012, when it reserved “70 percent of total loan balances for a specific Private Student Loan program.”
A credit union official confirmed the charge was related to the ITT loans.
The disclosure of the large loan loss reserve wasn’t made until recently, in a footnote as part of the credit union’s 2013 annual report.
In fact, the loan loss provision also radically altered Eli Lilly Federal Credit Union’s previously reported $8.9 million in net income for 2012. The most recent annual report states that the Lilly credit union suffered a $13.9 million net loss in 2012.
The original 2012 annual report is now conspicuously missing from the credit union’s website. The credit union posted 2013 net income of $12 million.
Eli Lilly Federal Credit Union took the lead role in a group of seven credit unions that from 2009 to 2011 originated $189 million in loans to students of ITT Educational Services, which is the parent of ITT Technical Institute.
Some of those loans carried interest rates as high as 16-1/4 percent, for the most credit-challenged students, according to a lawsuit filed against ITT in February by the federal Consumer Financial Protection Board. It said nearly half of those students had a credit score of 600 or lower.
As such, some of those loans also carried a 10 percent origination fee, the federal agency said in a case broadly alleging predatory loan practices by ITT.
Lilly for years has made student loans to its members seeking education at public and private institutions.
But lending to ITT students was a different ballgame altogether, with default rates in excess of 70 percent, according to the CFPB’s suit in U.S. District Court for the Southern District of Indiana.
The federal agency did not identify or name Lilly or its partner credit unions as defendants in the complaint. Eli Lilly FCU is no longer participating in the program.
“Nobody can charge a high enough rate to absorb those kinds of [default] losses,” said Mike Renninger, principal of Carmel financial consultancy Renninger & Associates. “Somebody ought to have massive egg on their face for doing this.”
The Indianapolis credit union counters that it was serving a need in the community.
“ELFCU is committed to students at all financial levels and life stages who attend hundreds of colleges and universities. We’ve been doing this for the past 25 years in the student lending business,” said Chief Financial Officer Joseph Hasto Jr.
The credit union’s 49,000 members may wonder how the loan loss reserves affect the services they receive. Credit unions typically roll their profits back into providing more attractive loan and savings rates and other offerings for their members.
ELFCU is downplaying the $26 million loan loss allowance on student loans.
It should be more than enough to cover anticipated losses later—a one-time, non-cash move, Hasto said.
“We can kind of put it behind us,” he said, quickly adding that the credit union is “well capitalized.”
The National Credit Union Administration defines “well capitalized” as an institution having net-worth-to-asset ratio of 7 percent or higher. Eli Lilly FCU’s ratio fell from 9.82 percent in 2011 to 8.24 percent in 2012, the year it made the ITT loan loss allowance.
Last year, that ratio rose to 9.03 percent—below the 10.62 percent in its peer group of credit unions of more than $500 million in assets.
Student loans appear to be the biggest thorn in the side of ELFCU when it comes to delinquencies. Of $6.4 million of total delinquent loans at Dec. 31, $5.9 million were non-federally guaranteed student loans, according to financial data it filed with the National Credit Union Administration.
The credit union took outright charge-offs on $3.3 million in student loans last year and $4.9 million in 2012.
Lure of young, new members
Given the potentially precarious nature of student loans, why exactly did Eli Lilly’s credit union enter the realm of lending to ITT students?
A Kansas consulting firm that worked with ITT, The Rochdale Group, started making the case for a credit union collaboration known as “Student CU Connect,” back in 2008.
In marketing literature, it noted concerns credit unions were facing from declining loan demand to limited interest income.
Rochdale also cited things such as “significant credit union membership potential among younger Americans”—pointing out that students who borrowed would become members of the credit union.
The goal would be to introduce thousands of ITT Technical Institute students to credit unions, offering the institutions access to a younger target market “while remaining true to the core credit union philosophy of helping those of modest means achieve financial independence.”
To Renninger, it sounds almost like goals of banks under the federal Community Reinvestment Act. “I don’t know if the word is admiration or stupidity,” Renninger said. “If a bank had done this, the manager who made the decision would be fired.”
But ITT offered ELFCU and the six other participating credit unions some protection. According to Rochdale, there was a risk-sharing agreement that guaranteed repayment of loans that are charged-off above a certain percentage, based on annual dollar volume.
It wasn’t immediately clear what kind of relief the credit unions would be granted. ITT acknowledged there was a risk-sharing agreement, but spokeswoman Nicole Elam said she didn’t immediately know what it entailed.
Was the three-year Student CU Connect program a success?
“I would have to defer that to those credit unions,” said Tony Ferris, a principal of Kansas-based Rochdale.
The other credit unions involved in the ITT deal were Bellco Credit Union, in Greenwood Village, Colo.; CommunityAmerica Credit Union, Lexana, Kan.; Workers’ Credit Union, Fitchburg, Mass.; Directions Credit Union, Toledo, Ohio; Veridian Credit Union, Waterloo, Iowa; and Credit Union of America, Wichita, Kan.
ITT under scrutiny
As for the Lilly credit union, Hasto would say only that it fulfilled its three-year commitment and opted not to continue it, in early 2012.
With these private loans disappearing, Elam said ITT now provides scholarships to students, instead, amounting to $170 million in the most recent year. The publicly traded ITT, with more than 140 campuses in 35 states, also reduced the cost of many of its programs, she added.
The for-profit college had among the highest prices in the nation, according to the federal government. An associate’s degree cost up to $44,000, while a bachelor’s degree could cost $88,000.
The Consumer Financial Protection Bureau said the credit-union consortium provided funding for that portion of the tuition over and above any federal aid a student received—essentially filling the gap.
The agency’s suit alleges that ITT first offered a temporary credit to many students, giving them time to pay it off at the end of the academic year.
But it said many students were unable to do that, at which ITT “coerced” students into paying them off through high-interest, high-fee private loans payable over 10 years.
One of those programs involved the seven credit unions.
“SCUC was the brainchild of ITT or its paid consultants, and ITT was actively involved in the creation and support of SCUC by developing the underwriting criteria, providing a credit facility, and paying the credit union membership fees in the lead credit union (Lilly) on behalf of the students” who took out the loans, the government’s lawsuit states.
The agency said ITT provided a stop-loss guarantee to the credit unions. That is, if defaults exceeded 35 percent, “ITT would make the credit unions whole for any further defaults.”
But, as early as mid-2011, ITT’s consultants projected a gross default rate of 61.3 percent for the existing book of credit union-based loans, the government claims.
ITT has generally denied the CFPB’s allegations and has vowed to fight them in court.
As for Eli Lilly Federal Credit Union, all else seems to be going smashingly well. It finished 2013 with net income of $12 million.
Hasto said the credit union has added six additional loan officers to drive new mortgage lending and to build relationships with real estate agents.
It’s working on programs such as one designed to deliver a mortgage in as little as 15 days.
It also grew its auto lending program to $77.3 million, through new relationships with local car dealers including Dreyer & Reinbold, Indy Honda, Lockhart Cadillac and Dellen Chevrolet.
“Our credit union is on track to exceed its annual goals in membership and loans. We remain well-capitalized with projections to hit or exceed the year-end goal of 9.5 percent net worth,” Hasto said.
Despite the ITT loans, which amounted to about half the credit union’s student loan portfolio, it continues to offer student loans.
As of last Dec. 31, Eli Lilly FCU had $68.3 million in total non-federally guaranteed student loans on its books—making it one of few credit unions in Indiana to make loans specifically for education.
Student loans are the credit union’s fourth-largest category of loans, which totaled $675.3 million on Dec. 31. The top category is first-mortgage loans, at $289.7 million.•