The Enabler And The Lifeline: Diamond Resorts And Quorum FCU by Roddy Boyd, SIRF
Purchase, New York is a woodsy, suburban hamlet on the Connecticut state line that’s known as much for its residents’ extraordinary wealth as it is for being the headquarters address for corporate heavyweights like MBIA, PepsiCo and MasterCard.
The town is also home to Quorum Federal Credit Union, a small member-owned and tax-free cooperative whose website suggests it’s still the type of plain vanilla alternative to big banks that it was set up to be 82 years ago, where profits reduce the cost of loans and boost the interest-rate paid on savings accounts.
What can’t be easily seen, however, is the fact that Quorum has become a major lender to the vacation ownership interest business, i.e. the new iteration of time-share sales, the controversial–if long-standing–vacation concept. Loans made to customers of Diamond Resorts International are the biggest part of this portfolio and it’s no embellishment to say that without Quorum, Diamond Resorts wouldn’t be where it is today.
(Southern Investigative Reporting Foundation Readers will recall our March investigation into Diamond’s financial filings, revealing a picture that’s entirely at odds with the growth juggernaut that management touts. A January New York Times investigation discussed allegations of high-pressure or misleading sales practices at several Diamond resorts.)
[drizzle]Access to the Quorum lending facility is a key component of Diamond Resorts’s business model — the credit union funds loans that are eventually securitized, providing the cash it needs to keep its operations going and to maintain its investment-grade credit rating. To that end, Diamond’s annual report disclosed it extended the lending agreement into 2017 and the loan facility raised to $100 million.
This is not the most favorable moment for a VOI marketer to be looking for replacement financing — loans are showing mounting delinquencies and more broadly, the industry is coming under renewed regulatory scrutiny. (To that end, in its recently filed Proxy, Diamond Resorts disclosed that its board of directors has formed a “Strategic Risk” committee to assist the board in its “oversight of the business, affairs and management of the Company.”)
One former Quorum official told the Southern Investigative Reporting Foundation that with respect to its relationship with Diamond Resorts–circa 2014 through early 2015–their impression was that Diamond sent its “riskier seeming” loans to the credit union. During certain periods of the year, up to 1,000 VOI loan applications per day would come to Quorum “with easily half from Diamond,” they said.
(Diamond Resorts has usually been about 30%-37% of Quorum’s VOI portfolio, according to its annual reports, but in 2015 fell to 27%.)
Additionally, this official recalled many of these loan applicants having FICO scores under 660, a key criteria in determining whether a borrower is classified sub-prime. They said “most” of these loans were approved as Quorum sought to grow its membership.
Membership is a key concept in keeping a credit union vigorous because unlike a bank, it can’t issue shares or debt, nor have ancillary units like investment management or securities trading.
For Quorum, growing membership–and the assets members bring in the form of checking and savings account balances–was the reason they struck a deal with Diamond Resorts in early 2010 in the first place, according to the former Quorum official. Take a look at Quorum’s 2009 call report to see why: a loss of $1.1 million, declines in membership and assets, and a spike in loan delinquencies.
The deal provided up to $40 million worth of loans for Diamond Resorts and in return the borrowers would become members of Quorum. But joining a credit union requires people to have a common professional or vocational bond, like working at a specific employer or in a certain industry. Quorum threaded this needle by having borrowers sign a document that made them a member of the American Consumer Council, a consumer advocacy group with an “affiliate relationship” with Quorum. After the VOI borrower is a member, per the Diamond contract, Quorum would seek to market other types of loans to them.
For every loan application Quorum approved, according to the former Quorum official cited above, Diamond Resorts purportedly deposited $25 in the borrowers savings account.
American Consumer Council president Tom Hinton, in an email comment about the use of his group’s affiliate relationship as the first step in a VOI loan process, said, “I appreciate you bringing the matter of time share loans to my attention. While ACC does not make consumer loans, if consumers are being manipulated or abused financially, we are very concerned. Let me investigate this matter further and be in contact with you shortly.”
At the center of Quorum’s VOI loan strategy is the Vacation Ownership Funding Company LLC, or VOFCO, an entity 79% owned by Quorum and 21% by its president and founder, Todd Fasanella. Known as a credit union service organization, or CUSO, VOFCO consults with Quorum on VOI loan sourcing and portfolio management, although being more specific than that is difficult because after being prominently mentioned in the front of recent annual reports, it’s not referenced again.
Whatever VOFCO does, it does well, at least in the eyes of Quorum president and chief executive officer Bruno Sementilli. When the NCUA floated a proposal to expand CUSO disclosures in August, 2011, he felt strongly enough to pen a bluntly-worded letter in opposition. Referencing VOFCO, he wrote, “in less than two short years, we estimate our credit union has earned over $4 million dollars in loan interest and generated $60 million in member deposits.”
He added that VOFCO is “an innovative enterprise, borne out of the ashes of the credit crunch, [that] required non-disclosure agreements from many parties.”
Tracking VOFCO’s contribution to Quorum’s bottom line is difficult since the credit union stopped breaking out its performance in the second quarter of 2011. The last call report with VOFCO’s earnings was the end of the first quarter in March, 2011 and it showed a loss of $283,000, an improvement over the prior quarter, the end of the fourth quarter in December, 2010, which disclosed a loss of $1.5 million. The most recent call report only noted that Quorum had loaned VOFCO and its four other CUSOs a total of $1.9 million; other documents appeared to suggest that much of this total was to VOFCO.
VOFCO’s chief executive Todd Fasanella is also a full-time investment banker at Beverly Hills-based brokerage Imperial Capital. It’s an unusual arrangement for Wall Street circa 2016: he works at Imperial advising or trying to drum up business from VOI industry clients and then turns around and manages a $158 million portfolio of their loans for someone else.
Multiple attempts to contact both Imperial’s general counsel and president to discuss Fasanella’s two jobs were unsuccessful.
In a prior job as an asset-backed securities banker at Credit Suisse, one of Fasanella’s key clients, National Century Financial Enterprises, perpetrated a massive fraud. Briefly, NCFE’s senior managers inflated the amount of receivables NCFE had purchased from medical practices and then, using the proceeds from securitizations of the bogus receivables, sent payment “advances” to healthcare providers they owned undisclosed stakes in.
When the scam unwound in the autumn of 2002, Dublin, Ohio-based NCFE was accused of