GM Financial subpoena opens new front in auto lending crackdown
The U.S. Department of Justice opened a new front in a multifaceted crackdown on auto lending by federal regulators when it subpoenaed General Motors Financial Co. last month to produce documents relating to its subprime auto loan contracts.
The Justice Department’s action is new in several ways:
1. Its investigation involves subprime auto loans, in contrast to actions the department, the Consumer Financial Protection Bureau and the Federal Trade Commission have taken in the last couple of years that have addressed prime-risk loans and F&I products. The only other action on subprime loans, a consent order between the FTC and Consumer Portfolio Services earlier this year, was in the realm of collections.
2. The Justice Department is delving in particular into subprime auto loans that were bundled and sold to investors in the form of so-called asset-backed securities. Until now, analysts who specialize in asset-backed securities have pointed to the segment as a safe investment that had survived the Great Recession and has boomed since.
3. Finally, the GM Financial investigation doesn’t appear to involve discriminatory loan pricing against legally protected groups such as minorities or women. Such discrimination has been front and center in other recent actions, such as the consent order late last year involving Ally Financial Inc., the Justice Department and the CFPB.
“It looks like the DOJ is focusing on the subprime auto lending market with regard to representations made in the context of securitizations,” said Ken Rojc, managing partner in charge of the auto finance group for Chicago law firm Nisen & Elliott.
“This doesn’t appear to involve dealer rate participation or discriminatory lending practices,” he told Automotive News.
On Monday, GM Financial disclosed in a document filed with the Securities and Exchange Commission that on July 28 it received a Justice Department subpoena “to produce certain documents relating to its and its subsidiaries’ and affiliates’ origination and securitization of subprime automobile loan contracts since 2007.”
That timeframe starts before GM bought AmeriCredit, a subprime auto loan specialist in Fort Worth, Texas, in 2010 and renamed it GM Financial.
Since then, GM has been turning GM Financial into a full-service captive finance company, providing prime-risk loans and leases, subprime loans and leases, and commercial loans for dealers.
In an asset-backed securities transaction, an auto lender sells off the income from a bundle of loans to investors. The lender gets more money with which to make new loans, and the investors get paid back as consumers repay the loans. The risk to investors is considered low, in part because so many loans are bundled together in a single transaction -- often $1 billion worth or more for larger lenders. That spreads out the risk over many borrowers in many markets, even if individual borrowers are considered higher risk.
AmeriCredit, now GM Financial, is one of the biggest players in securities backed by subprime auto loans, according to Standard & Poor’s Ratings Services. S&P said last month that for the first half of 2014, the top three issuers of subprime auto asset-backed securities -- Santander Consumer USA, at $4.75 billion; GM Financial, still doing business for this purpose as AmeriCredit, at $2.15 billion; and Exeter Finance Corp., at $1.15 billion -- accounted for 70 percent of dollar volume for the whole market.
According to Standard & Poor’s, issuance of subprime auto loan asset-backed securities was $11.4 billion in the first half of 2014, up from $9.9 billion in the first half of 2013. For all of 2013, volume was $17.6 billion, down from a recent peak of $18.4 billion in 2012.
The subprime auto asset-backed securities market bottomed out at less than $1.2 billion in 2009, when lenders couldn’t get credit. However, unlike during previous recessions, no subprime auto lenders that had relied primarily on the ABS markets to fund loans went bankrupt, and no investors lost money, S&P said.
Important questions remain from GM Financial’s disclosure of the Justice Department’s subpoena for information.
A written statement from GM Financial seemed to suggest other companies may also be under investigation. “Our understanding is that the request is focused on the subprime auto finance space in general,” the company said.
The Justice Department refused to comment or even to confirm the existence of the GM Financial subpoena.
It’s also unclear what the Justice Department may accuse GM Financial of doing. “There are no allegations set forth in the subpoena,” the company said.
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