Lender says Freedom Financial asset sale amounts to default

A Springfield-based consumer finance company taking steps to pay off a $12 million line of credit due at the end of January is feeling the heat from the very lender that set the chain of events in motion by yanking the financing.

In the second quarter, Freedom Financial Group Inc. (OTC: FFGR) learned that its New York-based lender, ReMark Capital Group LLC, had decided not to renew or extend a $15 million revolving line of credit secured in January 2008. To that end, FFG stopped purchasing auto receivable notes in late September and began seeking prospective buyers for its $19 million subprime auto loan portfolio.

Freedom Financial acquires auto loans from car dealers in Missouri, Illinois, Indiana, Kansas, Oklahoma and Tennessee that cater to customers with low credit scores.

Houston-based First Investors Financial Services Inc. (OTC: FIFS) has agreed to purchase the portfolio in a sale expected to close Dec. 15, according to Securities and Exchange Commission filings.

Upon learning of Freedom Financial's plans, ReMark - a Goldman Sachs Group Inc. affiliate - came down hard on the company by characterizing the suspension of auto loan purchases and the pending asset sale as a "material adverse change" that constitutes a default.

"The lender asserts it is entitled to cease making further advances to us, declare the entire balance of the ReMark loan immediately due and payable, and enforce the lender's security interest in all of our assets," Freedom Financial said in an SEC 8-K form filed Oct. 13. "We are not in default in the payment of any amount due under the loan agreement. Nevertheless, we have agreed to the amendment in order to avoid an acceleration of the ReMark loan and the lender's sale of all of our assets that secure the ReMark loan at this time."

Jerry Fenstermaker, president and CEO of Freedom Financial, said he voluntarily notified ReMark about the company's plans to stop originating loans, liquidate its assets, distribute the proceeds to some 2,750 shareholders and close its doors.

"We gave them that notice, and they fired back with that kind of an interpretation, which we disagreed with," he said. "But, nonetheless, they hold all the cards, and they can do anything they want. ... They could take over the company, basically."

Under the amendment, ReMark has agreed to refrain from exercising certain default remedies until Nov. 9, and the lender reserves the right to appoint a supervisory servicer to monitor or take control of Freedom Financial's loan servicing at the company's expense. As of Sept. 23, ReMark also began assessing default-rate interest equal to the existing rate plus 4.5 percent, according to the SEC filing.

Freedom Financial's Board of Directors approved a liquidation and dissolution plan Oct. 6, but company officials don't expect the asset sale, which requires stockholder approval, to close before Nov. 9. A special stockholders meeting has been tentatively scheduled for Nov. 16 at University Plaza Hotel.

Fenstermaker said ReMark may extend the deadline 30 days, and he expects the lender to exercise that option.

Assuming the asset sale goes through, Freedom Financial expects to receive about $14.6 million for its loan portfolio, according to a preliminary proxy statement filed Oct. 9 with the SEC. In addition to $2.1 million in cash on hand, the company should end up with almost $16.8 million, according to the filing.

Once the ReMark loan is paid off - along with assorted operating expenses - the company should have about $2.4 million left to distribute to stockholders, who should receive an estimated 12 cents per share. At best, the company estimates stockholders could receive 17 cents per share, according to the proxy statement.

"Legal fees are a big issue in these things," Fenstermaker noted. "You don't know what they are until you're finished with the whole process."

Freedom Financial was created in January 2003 through the bankruptcy reorganization of its predecessor, Stevens Financial Group, known in local circles for bilking some 2,800 investors out of $54 million. Most of Freedom Financial's stockholders are holdovers from Stevens Financial Group, whose owner Clarence Stevens was convicted of securities fraud and related offenses and sentenced to five years in prison.

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