Tricolor and Treasury’s Seal of Approval

Did a political blessing from the feds encourage a lack of due diligence by lenders to the failed subprime auto lender?

WSJ editorial. Excerpts:

"For example, Texas regulators had cited Tricolor more than 130 times between 2019 and 2022, including for selling cars for which it didn’t hold title. The dealer also sold cars at prices on average 46% more than Kelley Blue Book’s “fair purchase price” value. Many customers defaulted in short order, resulting in cars being repossessed, which Tricolor then resold.

Yet the Treasury Department in 2019 designated Tricolor as a Community Development Financial Institution (CDFI). Congress established the program in 1994 with the goal of expanding credit for minority and lower-income folks. The CDFI designation makes businesses eligible for special grants. It can also lower their borrowing costs. 

Banks can meet their Community Reinvestment Act obligations to invest in low-income communities by lending to CDFIs."

"Much of Tricolor’s marketing was hype, but investors didn’t notice or care. Tricolor borrowed billions of dollars from banks to make loans to customers, which were then packaged and sold as part of asset-backed securities to investors such as Pacific Investment Management Co. and AllianceBernstein.

Tricolor said last year that a bond offering “was oversubscribed by nearly 6.5 times.” The Treasury imprimatur and financing by sophisticated institutions may have given investors a false sense of security and caused them to relax underwriting standards. An eternal lesson relearned the hard way."