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Subprime auto probe widens as Fort Worth-based GM financial arm gets subpoenas

🕐 4 min read

Sarah Mulholland and Matt Robinson (c) 2014, Bloomberg News.

NEW YORK — Investigations of the subprime auto finance business are spreading as General Motors said its lending arm received additional subpoenas seeking details of its underwriting practices.

Fort Worth-based GM Financial, which specializes in loans to people with spotty credit, said in a regulatory filing Thursday that attorneys general of states it didn’t identify and other government offices are demanding documents related to its business of making car loans and pooling them into bonds that are sold to investors. The Detroit-based lender, along with Santander Consumer USA Holdings, disclosed a similar probe by the U.S. Department of Justice in August.

The scrutiny is intensifying at the same time more borrowers are falling behind on their payments and sales of securities backed by the loans increase. Auto-finance firms that lend to people with bad credit lowered their standards amid increased competition as new entrants flooded the business to capitalize on cheap funding, according to Moody’s Investors Service.

“Subpoenas travel in packs,” Erik Gordon, a professor at the Ross School of Business at the University of Michigan, said by telephone. “There’s never one company in an industry subpoenaed because they’re mostly all doing the same thing.”

GM Financial said in the filing it’s investigating the matter internally and cooperating with the requests. It didn’t say how many attorneys general or government offices issued subpoenas. Chrissy Heinke, a spokeswoman for GM Financial, said the company is not providing additional comment.

Payments at least 60 days late rose 15 percent from a year earlier to 3.8 percent in August, Citigroup analysts led by Mary Kane said in a report this week. Losses on the debt climbed to 6.54 percent in August from 4.64 percent a year earlier, Standard & Poor’s said in an Oct. 22 report, citing the latest available statistics.

The additional scrutiny of the market and rising delinquencies have done little to damp investor appetite for the subprime auto securities as more than six years of near-zero interest rates pushes investors toward riskier assets.

Both GM Financial and Santander issued new deals in September, one month after the Justice Department’s inquiry became public. Wall Street sold $17.7 billion of the bonds through Sept. 26, a pace that would make 2014 the busiest year since 2006 when a record $27 billion was issued, according to Barclays Plc.

Subprime auto debt is still performing relatively well for investors and new loans still trails behind the market’s peak in 2006, according to Loomis Sayles & Co. analysts led by Gary Mitchell. Lenders made $20.6 billion of the loans as of this year’s second quarter, up from $10.9 billion during the same period in 2010 and below the $27.5 billion in 2006, the analysts said in a report Thursday.

“This negative trend shouldn’t automatically be perceived as a threat,” the analysts wrote. “The claim that a situation is becoming worse is different from the claim that it is becoming threatening.”

Investors are demanding 1.65 percentage points more than benchmark interest rates to hold bonds linked to subprime auto loans and rated BBB, the lowest tier of investment-grade, according to Wells Fargo & Co. That’s up from 1.08 percentage points three months ago, analysts led by John McElravey said in an Oct. 21 report.

Investment firms such as Blackstone Group and Perella Weinberg Partners have jumped into the market to capitalize on the growth. Blackstone, the private-equity firm run by billionaire Stephen Schwarzman, acquired Irving, Texas-based subprime lender Exeter Finance in 2011, the same year that Perella Weinberg partnered with CarFinance Capital.

As the Justice Department and other government offices scrutinize lending practices, the U.S. Securities and Exchange Commission has been seeking to ensure investors get adequate information on the risks they’re taking by buying securities backed by the loans.

The SEC in August approved expanding disclosure for publicly registered asset-backed securities including auto debt. However, it shelved a proposal to extend that to private deals that are often issued by market newcomers such as Exeter and CarFinance. The bonds can be sold to investors who receive only broad data such as aggregate credit scores and typically lack details on the individual loans.

Late payments on subprime auto loans aren’t increasing uniformly, with some lenders experiencing higher delinquency rates, the Citigroup analysts said their Oct. 21 report. They didn’t cite specific issuers.

“We are keeping a close eye on the deterioration,” in subprime auto-loan performance, the New York-based analysts wrote.

Robert Francis
Robert is a Fort Worth native and longtime editor of the Fort Worth Business Press. He is a former president of the local Society of Professional Journalists and was a freelancer for a variety of newspapers, weeklies and magazines, including American Way, BrandWeek and InformatonWeek. A graduate of TCU, Robert has held a variety of writing and editing positions at publications such as the Grand Prairie Daily News and InfoWorld. He is also a musician and playwright.

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