GM's subprime auto lending draws attention of U.S. investigators

Photo credit: BLOOMBERG

WASHINGTON -- Federal prosecutors are asking questions about the practices of General Motors Co.'s financing unit, subpoenaing the company in the midst of a resurgence in U.S. auto sales fueled partly by a subprime lending boom.

The Justice Department is seeking documents on underwriting criteria, origination, warranties and securitization of subprime loans since 2007, GM Financial said in a filing Monday.

"There are no allegations set forth in the subpoena and GMF is cooperating," said Chrissy Heinke, a company spokeswoman.

"It's an industrywide investigation, or industrywide inquiry, that they're making into the subprime order financing across a number of lenders," Dan Ammann, GM president, told reporters Tuesday in Singapore.

The company hasn't launched its own internal investigation into its own practices, he said.

The U.S. government's look into auto lending is using a 1989 law known as FIRREA that it relied on to go after mortgage lenders it accused of wrongdoing.

The law imposes a lower burden of proof than a criminal prosecution and threatens penalties of more than $1 million for each fraudulent statement or act.

The office of Manhattan U.S. Attorney Preet Bharara sent a subpoena for documents to GM Financial, a person familiar with the matter said.

Track record

Bharara's office has had success pursuing such FIRREA cases.

Last week, Bank of America Corp.'s Countrywide unit was ordered to pay $1.3 billion in penalties for selling defective mortgage loans to Fannie Mae and Freddie Mac in the run-up to the 2008 financial crisis. A federal jury in October found the Charlotte, N.C.-based bank liable for selling thousands of bad loans to the two government-sponsored enterprises after a trial last year.

"DOJ's use of FIRREA over the past few years has led to some enormous settlements or court-ordered penalties, particularly where mortgages are concerned," said Michael Bresnick, a former head of the Justice Department's financial fraud task force who is now a lawyer at Stein Mitchell Muse Cipollone & Beato LLP in Washington. The GM "subpoena shows that DOJ is emboldened by its success."

Easy credit has helped fuel U.S. auto sales, which are on pace for the best year since 2006. GM and Ford Motor Co. each reported jumps of more than 9 percent in auto deliveries for July as drivers continued to snap up SUVs. Chrysler Group's sales soared 20 percent.

Chrysler, Ford

Ralph Kisiel, a Chrysler spokesman, and Justin Leach, a Toyota Financial Services spokesman, each said their companies hadn't been contacted by the Justice Department on the topic of subprime auto loans.

Ford Motor Credit also hasn't been subpoenaed by the DOJ, said Margaret Mellott, a company spokeswoman.

While Ford has regular talks with regulators as part of the general course of its business it doesn't comment on those conversations, she said.

Gina Proia, a spokeswoman for Ally Financial Inc., declined to comment.

Wells Fargo declined to say whether the bank had received a subpoena as part of any inquiry into securitizing subprime auto loans.

"Principally, Wells Fargo does not sell our auto loans on the secondary market," said Catherine Pulley, a Wells Fargo spokeswoman. "We hold the auto loans we originate on our balance sheet."

Laurie Kight, a spokeswoman for Santander Consumer USA Inc., the top issuer of U.S. subprime auto securitizations, declined to comment.

GM Financial, the captive-finance arm of GM, represents the automaker's efforts to rebuild its ability to finance cars in-house after selling off 51 percent of then-GMAC to Cerberus Capital Management LP in 2006.

Barra's challenges

Following a bankruptcy reorganization in 2009, the automaker in 2010 purchased Fort Worth, Texas-based AmeriCredit Inc., which it renamed GM Financial, for $3.5 billion to write loans for subprime consumers and boost car sales.

In late 2012, GM announced a deal to purchase Ally's international operations to help expand GM Financial's efforts overseas.

"AmeriCredit, now GM Financial, are experts in subprime," Chuck Stevens, GM's CFO, told analysts during a conference call last month when asked about GM's exposure to subprime. "They never lost money during the downturn in 2008, 2009. They know how to manage and score these customers. And I think that they manage an appropriate level of risk associated with subprime."

The July 28 subpoena by federal prosecutors adds another challenge for GM Chief Executive Officer Mary Barra, who is already grappling with a separate Justice Department investigation over the automaker's slow handling of a defect linked to at least 13 deaths in its small cars.

While that crisis has roiled for six months, U.S. sales have increased with new products such as the Chevrolet Tahoe and Buick Encore.

Ally fine

"There's just so much capacity being added and so much more room for easy auto credit to keep pushing ultra-low monthly payment loans on a lower and lower quality of consumer," Adam Jonas, an industry analyst with Morgan Stanley, wrote in a note to investors Monday. "As one dealer recently told us -- 'You have to be a loser to not get 0 percent for 72 months on your car loan.''

GM Financial said the subpoena was part of an investigation by the Justice Department in the ''contemplation of a civil proceeding for potential violations'' of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, or FIRREA.

The Justice Department has been looking closely at the auto lending industry. In December, Ally agreed to pay a record $98 million to settle Justice Department and regulatory claims that the firm helped car dealers inflate the cost of auto loans to black and Hispanic borrowers.

Private equity

Since 2011, Ally Financial had caused about 235,000 minority borrowers to pay higher rates, according to a complaint filed in December at federal court in Detroit. Ally was required to pay $80 million to settle the U.S. civil allegations and $18 million to resolve parallel claims by the Consumer Financial Protection Bureau, according to a Justice Department statement.

The Justice Department and CFPB are investigating other lenders for similar practices, Eric Halperin, acting deputy assistant attorney general, said in December. The subprime auto segment has ballooned since contracting following the financial crisis.

Private-equity firms, attracted by the high margins, have flocked to the business during the past three years. New York-based Blackstone Group LP acquired Irving, Texas-based subprime lender Exeter Finance Corp. in 2011, the same year that Perella Weinberg partnered with CarFinance Capital LLC. The influx of new firms to the business has fueled concern that companies are lowering underwriting standards to win business.

ABS market

''Subprime auto lending from banks, captive finance companies and credit unions continues to increase and is pressuring more traditional subprime lenders to lend to even weaker borrowers to maintain lending volumes,'' Moody's Investors Service analysts led by Peter McNally wrote in a January report.

Issuance of securities backed by the debt had reached $10 billion this year through May 30, up 5 percent from the pace a year earlier, according to Wells Fargo & Co.

Total sales of $17.6 billion last year were more than double the $8 billion sold in 2010, when securitized-debt markets started to revive after all but shutting down amid the 2008 financial crisis. Investors are snapping up the bonds as the Federal Reserve suppresses interest rates, pushing investors to buy riskier assets to get higher yields.

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