Writer: Eric Bank
Editor: Lillian Guevara-Castro
Reviewer: Adam West
Key Takeaways
The latest auto lender to go under is PrimaLend Capital Partners, which is based in Texas. This is an object lesson on how tight lending can cause trouble. The subprime auto lender filed for Chapter 11 because it was unable to make the payments on its bonds. It plans to sell the business.
The company will continue to fund and service loans — at least for now. But its fall is shaking confidence in the sector. PrimaLend listed estimated assets and liabilities both below $500 million. It filed court documents in the Northern District of Texas.
Among PrimaLend’s lenders are Canadian Imperial Bank of Commerce and Amarillo National Bank. There was no comment from either.
PrimaLend was a lender that worked hard to approve loans. It financed small dealers that catered to subprime car buyers. Rising borrowing costs and tighter budgets have hit subprime borrowers hardest. Many are missing payments. Defaults are piling up at rates not seen since the Great Recession.
PrimaLend CEO Mark Jensen said, “No debt is being called due or accelerated as a result of this process.”
Rising Defaults
The collapse comes after Tricolor Holdings and First Brands filed for bankruptcy. Both had ties to subprime and private credit markets. Experts worry that more bad news may be on the way.
Donald Clarke of Asset Based Lending Consultants said, “You need financial statements from your borrowers now, tomorrow, every month. Not in a few months when a whole new slew of defaults could have already hit.”
“You’re going to lend hundreds of millions of dollars to a company and not open the hood to see how it looks inside? Is money that free?” Clarke asked. “Until we get intellectually honest about the risks that we face and the need for more robust due diligence, we are vulnerable.”
JPMorgan’s Jamie Dimon put it bluntly: “When you see one cockroach, there are probably more.” The signals were ignored by many lenders, as they chased returns in a booming market. Now, those decisions are catching up with them. Even strong lenders face funding trouble in addition to tighter oversight.
Global Warning
Across the pond, Bank of England Governor Andrew Bailey warned that the collapses of First Brands and Tricolor could be a “canary in the coal mine.”
“Until we get intellectually honest about the risks that we face and the need for more robust due diligence, we are vulnerable.” — Donald Clarke of Asset Based Lending Consultants
The BoE plans a “system-wide stress test” involving banks, insurers, and private equity firms. It will examine problems with private credit. Bailey said the central bank sees parallels with the early stages of the 2008 crisis — high leverage, weak underwriting, and hidden risks.
If regulators in the U.K. and U.S. tighten their grip on private lenders, funding for riskier credit could dry up. That means less access to financing for subprime car buyers, as well as tougher conditions for small dealerships.
The ripple effects could hit securitization markets and investor confidence. That would raise costs for everyone involved.
The Bottom Line
PrimaLend’s collapse is a warning about what happens when easy money meets weak safeguards. Subprime lenders must reckon how risky credit gets financed in America and beyond.
