Subprime auto’s long, smooth ride through the pandemic, recession, and changes in administrations has come to a screeching halt with the chapter 7 bankruptcy of Tricolor on September 10, 2025. Whether the practices at Tricolor are an anomaly or an example of more widespread problems or irregularities at other lenders, the truth is out there – and it’s likely to be found.
Weak markets, like the current auto market, have a tendency to expose unsustainable results and questionable business models. Similarly, abrupt policy changes can shine a light on risky practices and vulnerabilities. Given the high stakes, going forward there will be a premium placed on the ability to trust issuers and counterparties. Disclosures of practices, loan characteristics and borrower attributes, and the veracity of those disclosures, will determine the market’s trajectory.
Some Color on Tricolor
Tricolor Holdings was a used-car dealer with a focus on providing financing to low-income, undocumented immigrants with poor to no credit history. The company carried a Community Development Institution designation, touting environmental, social and governance principles to investors. In 2023 alone, Tricolor reportedly issued more than $1 billion in auto loans and operated 65 retail centers within 22 cities across Texas, California, Nevada, Arizona, New Mexico and Illinois.
Now the lender is under investigation by the Department of Justice over allegations of fraud, including the double pledging of loans to warehouse lenders. Barclays, JPMorgan and Fifth Third collectively face losses of billions of dollars from loans tied to Tricolor. Bond investors are facing significant losses as prices of Tricolor’s securities have sunk.
What’s Next for Subprime Auto?
In the past, when borrowers defaulted, the market shrugged. After all, credit enhancements have generally been more than adequate to keep ABS investors safe. And when a subprime lender crashed, like Honor Finance in 2018, it was considered a one-off due to misconduct.
Downgrades of subprime auto ABS have been few and far between. In fact, any talk of a widespread collapse has usually been met with, at best, a skeptical stare, and at worst, an exposition on the differences between subprime auto and subprime RMBS. Those differences, including short maturity dates and significant overcollateralization, have supported sellers making generally fewer loan-level representations than in the pre-financial crisis subprime RMBS deals. But representations serve two purposes: one is to support recourse against the seller or collateral for misrepresentations, and the other, just as important, is the disclosure of facts so that buyers and investors know that a matter has been considered and can make informed decisions.
The looming question now is which other subprime lenders or maker participants could be headed in the same direction as Tricolor. Even lenders that differ in strategy or structure may now need to take precautionary steps to avoid investor and counterparty scrutiny. Regulators, warehouse lenders, and ABS investors, now more than ever, will seek comfort that the sellers are who they say they are and do what they say they do. They will increasingly focus on verifying that collateral, borrower status, and the business structure can withstand stress conditions.
For example, on September 12, 2025, Credit Acceptance Corporation submitted answers to select inquiries to the SEC. In response to the question regarding the percentage of loan portfolio originated involving borrowers without SSNs or ITINs, the company responded that all borrowers are required to provide a valid government-issued photo ID and that the amount of loans under this structure is “de minimis” relative to their overall loan portfolio.
Who Will Withstand Scrutiny?
Beyond the larger lenders, lesser-known industry players like regional finance companies, in-house dealership lenders, and fintech lenders targeting “non-traditional” borrowers are generally at risk in the market. These companies may operate with thin margins, loose oversight, and heavy dependence on securitization to maintain liquidity. The viability of their operations is partly built on idealized borrower behavior, a foundation that can obscure underlying credit and other risks.
Once data is in the hands of would-be plaintiffs, AI programs will facilitate re-underwriting and issue spotting, reducing the cost of forensic and expert reviews and accelerating the time to court. They will also have the benefit of new law and standards created in subprime RMBS litigation. See, Five Things to Know to Prepare for Consumer ABS Litigation.
Conclusion
More disclosures and deeper diligence should be coming to subprime auto. These are self-regulating tools available for any market to course-correct . . . unless of course the results expose systemic issues.
