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In a troubling development for the broader subprime auto and asset-backed securities markets, several auto loans tied to Tricolor Auto were found to contain duplicate vehicle identification numbers (VINs), suggesting that the same vehicles were pledged as collateral in more than one transaction. An obvious issue hidden in a blind spot that indicates failure of attention, rather than inaccessibility to the information.
As reported by Bloomberg, a review of Tricolor's records following its bankruptcy revealed that approximately 29,000 loans — out of a total of 70,000 active loans — shared identical attributes with other loans, including VINs. These loans had been used as collateral for both bank warehouse lines and securitizations. The scale of duplication has raised serious concerns among creditors and federal investigators, who are examining whether Tricolor may have intentionally reused collateral to inflate the value of its portfolio or mask bad loans in the course of receiving billions in financing.
Impact on Investors and Market Practices
Investors in banks and other lenders rely on proper diligence being done before providing financing and ABS investors rely on trustees and servicers to ensure that the collateral backing their securities is properly documented and verified. When those safeguards fail investors, legal consequences follow.
One need only look back to the dozens of actions filed by or on behalf of investors in RMBS to see what could lie ahead without a course correction. ABS holders claimed they were defrauded by sponsors and underwriters for allegedly misrepresenting loan characteristics; trustees, acting on investors' behalf, claimed sellers breached contractual representations; sellers that were subject to trustee suits, in turn, claimed servicers failed to notify them of breaches; and the chickens all came home to roost when investors sued trustees for not upholding their fiduciary duties.
The lessons learned in those suits are available as a playbook for investors in subprime auto. The memory of those suits, and the damages paid by defendants, should be guardrails for lenders, servicers and trustees in their practices and standards.
Historical Context and Comparisons
The issue is greater than the problems in documentation that occurred in pre-financial crisis subprime RMBS. Back then, borrowers had gained some traction with "show me the note" cases that alleged the securitization trust did not actually own the loan, given an inability to produce the original note or evidence suggesting the loan had been included in other transactions. In most cases, such allegations resulted merely in delays in enforcement, rather than invalidation of the mortgage loan. The fast and furious pace of originations and securitizations contributed to some carelessness in the craftsmanship of the documents. In contrast, a scheme relying on no one seeing a problem hiding in plain sight impugns broader practices.
Significance of the Tricolor Case
Perhaps Tricolor's issues will turn out to be more analogous to the allegations of intentional misrepresentations of collateral that were isolated to specific RMBS sellers and resulted in significant settlements with the government. Either way, the Tricolor case underscores the importance of robust verification protocols and clear responsibilities of market participants.
Looking Ahead
History has a way of repeating itself. If we're to learn anything from it, one truth stands out: diligence isn't optional—it's essential . . . and an existential issue for the market.
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