Tricolor Files for Bankruptcy, Impacting Subprime Auto Loan Market

HOUSTON, Texas — Tricolor, a prominent subprime auto lender catering primarily to buyers without social security numbers or credit histories, filed for bankruptcy on Wednesday. Unlike most companies that file for bankruptcy hoping to survive, Tricolor plans to liquidate its assets.

This development poses significant challenges for customers reliant on lenders like Tricolor, predominantly undocumented immigrants in the Southwest. Additionally, major banks holding Tricolor’s debt backed by its loans are set to face losses as a result of the company’s liquidation.

Although Tricolor’s collapse raises concerns, experts believe it will not trigger a financial crisis comparable to the 2008 subprime mortgage disaster. Pamela Foohey, a law professor and auto finance expert, stated this type of bankruptcy is different due to the scale and structure of auto loans versus mortgages.

The subprime auto loan market is significantly smaller, valued at about $1.7 trillion compared to $12.9 trillion for the mortgage market. Foohey noted that auto loans are less leveraged than mortgages, which were bundled and sold to investors prior to the last financial crisis.

Despite this, the conditions for subprime borrowers are precarious. Higher interest rates combined with elevated car prices have resulted in substantial monthly payments. According to Experian, more than 15% of new car payments now exceed $1,000 a month.

Tricolor’s bankruptcy represents potential risks not only for its direct customers but also for investors who purchased bundled loans, including major banks like JPMorgan Chase and Barclays. The company’s bankruptcy documents indicate liabilities and assets each ranging between $1 billion and $10 billion.

In a statement, a representative from Fifth Third Bank confirmed ties to Tricolor and acknowledged potential losses due to fraud. Meanwhile, the implications of this bankruptcy and its aftermath begin to unfold in the subprime auto lending landscape.