When a lender falls, it’s tempting to believe it is an isolated failure. When a second lender fails, it’s time to look for broader patterns of stress in corners of the market. For subprime auto and broader consumer lending, PrimaLend’s chapter 11 bankruptcy, after months of missed interest payments and mounting creditor pressure, should be a catalyst for parties to re-evaluate how they conduct their diligence and protect themselves under contracts.
The combination of borrowers under stress and a lender unable to meet its own obligations are flashing signals that this is not just another credit event, but rather a structural strain.
The Tricolor Shock Wasn’t a One-Off
If Tricolor’s collapse did not feel like a wake-up call, it should have. The used-car retailer and subprime auto lender filed for chapter 7 liquidation amid fraud allegations associated with double-pledged collateral. This left major lenders facing potential nine-figure losses and a trustee scrambling to stabilize a portfolio of roughly 100,000 active loans. That was not simply a company blowing up; it was a test of practices and protocols up and down the chain.
The Pattern Behind the Headlines
Step back and a pattern comes into view. We’ve seen several subprime-focused auto businesses trip over deteriorating collateral, opaque data, and weak controls, from American Car Center’s abrupt shutdown and bankruptcy in 2023 to U.S. Auto Sales Inc.’s own failure the same year.
Delinquencies in auto credit have marched higher, particularly in subprime, converting governance and data-quality weaknesses into losses. When markets turn, vulnerability in underwriting, collections, and funding structures go from risks to realized losses.
What Healthy Skepticism Would Have Caught
The right “health checks” aren’t glamorous, but they are needed. Before you purchase, finance, or partner with an originator or dealer-lender, you want corroborated, real-time views of collateral and cash flows and sufficient inspection rights after closing.
If warehouse lenders and potential acquirers insist on and exercise deep collateral audits — tying loan tapes to physical vehicles, GPS/telemetry pings, and payment histories, and embedding fast-trigger inspection and data-access rights — they may identify anomalies or contain exposure before it’s too late. As reported, Fifth Third and JPMorgan each faced potential losses approaching two hundred million dollars on exposures linked to Tricolor; that’s exactly the kind of risk that robust audit rights are designed to pressure-test.
Translate that to PrimaLend’s situation: a lender missing interest payments is a red light that should automatically escalate to enhanced reporting, field exams, and borrowing-base re-verifications under a credit agreement. If your documents don’t let you see granular performance and inspect servicing practices on short notice, you’re in the dark when it matters most.
Where Better Diligence Could Have Made a Difference
Look at the last two years of subprime auto headlines and you’ll find multiple points where stronger pre-close diligence and post-close inspection rights would have limited damage. In Tricolor, earlier and deeper collateral testing might have reduced bank exposure or accelerated covenant remedies. In the 2023 distress at subprime-focused dealers and lenders, investors and creditors with rigorous audit rights were better positioned to tighten terms or exit before losses compounded. And with PrimaLend’s filing at a time of consumer credit strain, counterparties who can rapidly verify performance and enforce protective triggers will navigate the road ahead with far fewer surprises.
Conclusion — Paper It Now or Pay for It Later
If demanding tighter protective provisions sounds heavy-handed or causes concerns about jeopardizing a deal, consider what the alternative looks like. Governance, data, and documentation need to be built for a tougher credit cycle. The ability to conduct adequate health, early warning triggers and the authority to act before small problems turn into crises are not negotiable.
