Subprime Auto Lender Goes Bankrupt—Fraud Alleged, Cars Repossessed

Based in Dallas, Tricolor specialized in offering high-interest loans to undocumented workers ad people without notable credit history—a market segment often ignored by traditional financiers.

Founded to serve customers who lack traditional credit histories, Tricolor made it possible for borrowers to obtain financing without a Social Security number or credit file. In 2023, it issued over $1 billion in auto loans, often packaging those loans into asset-backed securities sold to investors.

Last week, the lender filed for Chapter 7 bankruptcy liquidation, putting billions of dollars in loans and securities at risk. Federal investigators are now exploring a potential fraud case, as evidence surfaces that Tricolor may have pledged the same cars as collateral to multiple lenders.

According to Bloomberg, at least one regional bank—Triumph Financial—has already sent teams to repossess vehicles tied to its loans, securing them at used-car lots across Texas. Meanwhile, Clear Haven Capital Management, a Manhattan-based investment firm that held Tricolor’s asset-backed bonds, is trying to rally fellow bondholders to fight off big banks and preserve their claims. The WSJ is reporting that more than 100,000 car loans could be up for grabs.

Major players, including JPMorgan Chase, Fifth Third Bancorp, and Barclays, are combing through their records to determine the exact extent of their losses. Fifth Third has already warned of a potential $200 million hit, citing what it called a “corrupted” loan database that may have distorted balances, credit scores, and even vehicle information. At this time, the extent of the alleged fraud is unknown.

Auto lenders often use their portfolios of car loans as collateral to secure short-term financing, known as warehouse credit lines. These loans from banks provide the day-to-day cash needed to keep operations running. The system breaks down when fraud enters the picture.

In what’s called a double-pledging scheme, a lender offers the very same portfolio of auto loans to multiple banks as if each were the sole holder of the assets. That means every bank believes it has an exclusive claim to the loans’ cash flow or value—only to later discover that others have been promised the same collateral.

If fraud is confirmed, it could shake investor confidence in auto loan-backed securities, a market that has helped fuel the rise in subprime lending for more than a decade. The collapse comes during an ugly time for auto finance. Delinquencies and repossessions are climbing toward 2009 recession levels with debt levels stretching into the trillions, and some worry that Tricolor may not be the only canary in the coal mine.

The real worry is contagion. If subprime auto debt can unravel so rapidly, it may be only a matter of time before defaults spread to other fragile sectors of consumer credit, such as those Buy Now, Pay Later loans people are using to order pizza and pay for jeans.

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