Tricolor, a prominent subprime auto lender specializing in loans for buyers without social security numbers or credit histories, has filed for bankruptcy and is ceasing operations. The Texas-based company, which primarily served undocumented immigrants, plans to liquidate its assets rather than reorganize, a move that signals trouble for its unique customer base and the major banks invested in its debt.
While the collapse raises concerns, experts assert it is unlikely to trigger a systemic crisis similar to the 2008 subprime mortgage collapse that nearly toppled the US economy.
“It’s not something to worry about in terms of a market collapse,” Pamela Foohey, a law professor at the University of Georgia and an expert in auto finance and bankruptcies, told CNN. “I think it’s troubling for people that they take out subprime loans and then potentially have their cars repossessed if they can’t afford the payments.”
Several critical differences distinguish the subprime auto loan market from the mortgage market that imploded in 2008. The total auto loan market, valued at $1.7 trillion by the Federal Reserve, is only one-eighth the size of the $12.9 trillion mortgage market. Auto loans are also less leveraged, meaning they are not bundled into complex securities and sold to investors as aggressively as mortgages were before the financial crisis.
Crucially, the underlying assets behave differently. Unlike homes, which were expected to appreciate indefinitely, cars are depreciating assets. Lenders anticipate this loss in value and factor it into their business model.
“The biggest difference is the expectations of the lenders of what will happen with the assets – the cars – when the buyers default,” Foohey explained. “In many ways, subprime auto lenders actually expect borrowers will default and they’ll get the cars back pretty quickly at some point and then resell it.”
Repossessing a vehicle is also far simpler and quicker than foreclosing on a home. Lenders can legally reclaim vehicles swiftly after missed payments. Many subprime lenders install GPS trackers and remote ignition disabling technology in their vehicles, making repossession highly efficient.
Despite not posing a systemic risk, the auto loan market is under pressure. High interest rates and near-record vehicle prices have driven car payments to historic highs. According to Experian, a record 15% of new car loans and leases now have monthly payments exceeding $1,000. Even in the used car market, where subprime borrowers are more active, 4% of loan payments top $1,000 per month.
Data from Experian shows that subprime loans have constituted 15% to 16% of the auto loan market over the last three years. The “deep subprime” sector, where Tricolor operated, accounts for less than 2% of the total.
Tricolor’s bankruptcy filing lists both assets and liabilities in the range of $1 billion to $10 billion. Its major secured creditors include JPMorgan Chase, Barclays, and Fifth Third Bank.
In a recent filing, Fifth Third Bank disclosed that it had discovered fraud in its relationship with a commercial borrower and was cooperating with law enforcement. The bank, which expects to take a charge of up to $200 million related to the losses, confirmed to CNN that Tricolor was the borrower in question.
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