Writer: Chris Taylor
Editor: Lillian Guevara-Castro
Reviewer: Adam West
The recent collapse of Tricolor Auto, the nation’s largest pre-owned car dealership chain, was characterized in stunned stories. “Shock waves,” “Messy,” “Dire.”
As surprising as it was to see a prominent name in the subprime world fall into severe trouble so quickly, it could get worse if others don’t take action right away.
That means lenders with similar risk profiles of catering to those with little or no credit history. That means banks which do business with them, and perhaps have securitized loans on their books. That means ratings agencies and regulators, who need to pay closer attention to something that could spill into the wider economy.
It’s always better to overprepare than to underprepare. That’s why lenders need to tighten up standards, not be so reliant on securitized offerings that package risky loans into products of opaque value, and be honest about where they are particularly exposed — like immigrant communities that are under extreme pressure.
Household Budgets Under Siege
Looking at the wider numbers of people falling behind on car payments, some corporate failures shouldn’t be a shock at all.
Consider that 5.1% of Americans with auto loans are behind on at least one account, according to LendingTree. That includes 2% that are over 30 days late, 0.9% over 60, and 0.9% between 90 and 120 days.
Zero in on subprime specifically, and the picture is quite a bit grimmer: 6.56% of subprime debtors were 60 or more days behind, according to Fitch Ratings. That’s the highest level since data collection began.
It’s starting to affect other institutions with exposure, like Fifth Third Bank and JPMorgan Chase, wrestling with hundreds of millions in potential losses. That brings up another frightening outcome: contagion.
Tricolor’s collapse serves as a cautionary tale for subprime lenders, revealing the shaky state of the market.
Of course, it’s not like we haven’t seen this movie before. The housing problems of 2008-2009 started with a few collapses, such as Countrywide Financial, before turning into a full-blown crisis.
Lurking in the background here, and what makes the Tricolor situation distinct: The uncomfortable issue of immigration enforcement. TAG served the Hispanic community in particular, and its latest securitized loan pool comprised 60% of borrowers with no credit history whatsoever.
That indicates a measure of undocumented workers who secured loans via Taxpayer Identification Numbers instead of Social Security numbers.
As that community is now under constant threat — workplace raids, detentions, deportations — it is not surprising that the loans they took out are now under siege, too. If making a wage has become that much harder, you are obviously less likely to be on time with your monthly bills.
Beyond the immigration question, though, there are broader budget pressures at work that are affecting every single American. Inflation is proving sticky — the latest numbers near 3%, still well above long-term targets.
And tariffs on countless products have not helped, as many companies simply pass on those increased costs to consumers. Higher bills for life’s basics — groceries, gas, utilities, housing — affect vulnerable households the most.
Now, combine that with the latest car loan data we’re seeing from Edmunds: Record-high amounts being financed, at longer terms than ever, at wallet-choking interest rates. That’s a recipe for bad financial health.
Time to Relearn Some Lessons
Sometimes hard financial lessons need to be relearned, and this may be one of those times. If we’re looking to the housing crisis for some guidance, we can take away a few pointers: tighten up lending standards, act quickly in shoring up one’s books, and be transparent about it.
One obvious fix here is stronger underwriting requirements. As the saying goes, the best time to take action was years ago, but the next best time is today.
An example of that is Automotive Credit Corporation, which in August put all new loan originations on hold as it looks to hunker down and weather this credit storm.
It would be smart for the government to step in and help put a lid on this before it boils over. A closer regulatory eye on the risks being taken would encourage lenders to self-police more, and rein in some of their worst habits. But given the current administration’s reluctance to impose regulatory burdens, that seems unlikely.
Backing away from loading securitized loans of questionable value onto your books would be eminently wise, too. As we saw in the financial crisis, the ratings agencies aren’t always rigorous in evaluating underlying holdings — and it was those Collateralized Debt Obligations (CDOs) that poured gasoline on the financial fire in 2008.
A loosening interest rate environment could help. The Federal Reserve just announced a quarter-point cut, which could be the first of many as it attempts to kick-start a slowing economy. This will ultimately filter down into lower-cost loans, which would make monthly payments more manageable and force fewer borrowers into arrears.
That will take time, though. In the meantime, we need to deal with the scoreboard as it stands right now: more subprime borrowers falling behind, more lenders under strain, and more associated banks coping with mounting losses.
If this football game is in the third quarter, we still have some time to change the outcome. But it means we need to get out the old playbook for the last time subprime lending blew a hole in the economy. We need to look at what worked, what didn’t — and apply those lessons all over again, quickly.
