After probe of Santander, GM Financial, who's next among subprime auto lenders?

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Other subprime auto lenders that issue asset-backed securities are wondering whether they’re next after Santander Consumer USA followed General Motors Financial Co. as the subject of a subpoena from the U.S. Department of Justice.

The Justice Department is looking into the underwriting and securitization of subprime auto loans. Securitization is the financial practice in which a lender sells off a bundle of loans to investors. In effect, the lender borrows money from the investors with which to make new loans. The investors then get repaid, with interest, as the loans get repaid.

Santander Consumer USA, of Dallas, disclosed in its quarterly report filed with the Securities and Exchange Commission on Thursday that it had received the subpoena.

Santander Consumer USA said the Justice Department was “requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime auto loans since 2007. We are cooperating with this request.”

Subprime

“We recently received a civil subpoena from the U.S. Department of Justice (DOJ) under FIRREA,” the company said. FIRREA is the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which grew out of 1980s scandals involving savings and loan institutions.

Laurie Kight, a spokeswoman for Santander Consumer USA, said today the company had no additional comment.

The reference to FIRREA -- a law that was aimed at financial institutions that were especially active in mortgages -- along with a recent story in The New York Times has lenders speculating that the Justice Department could be trying to apply lessons learned from the subprime mortgage crisis to subprime auto loans.

The Justice Department has refused to comment.

‘Earth and Mars’

“It’s like Earth and Mars,” said the CEO of one subprime auto lender, of the differences between subprime auto lending and subprime mortgages.

He asked not to be named for fear of provoking regulators. “I think it is just a massive, massive fact-finding mission to see if there’s correlations between this and the mortgage sector,” he said. “I think some of this is driven by headlines in The New York Times and others.”

The newspaper story drew parallels between recent growth in subprime auto loans and the subprime mortgage bubble that helped bring about the Great Recession.

Captive finance company GM Financial, of Fort Worth, Texas, said on Monday, Aug. 4, that it had received a Justice Department subpoena on July 28. GM Financial cited the same law, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, in explaining tersely what the Justice Department wanted.

‘Since 2007’

GM Financial said the Justice Department wanted GM Financial “to produce certain documents relating to its and its subsidiaries’ and affiliates’ origination and securitization of subprime automobile loan contracts since 2007.”

Parent company General Motors bought AmeriCredit, then a subprime lending specialist, in 2010 and renamed it GM Financial. Since then, GM has been turning GM Financial into a full-service captive finance company, with prime loans and leases, subprime loans and leases, and commercial loans for dealers.

GM Financial and Santander Consumer USA are the biggest issuers of asset-backed 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, Santander Consumer USA issued $4.75 billion worth of subprime-tied automotive asset-backed securities, while GM Financial, still doing business for this purpose as AmeriCredit, issued $2.15 billion. The financial industry as a whole issued $11.4 billion worth of subprime-tied automotive asset-backed securities, up from $9.9 billion in the first half of 2013.

Top 3 dominate

Exeter Finance Corp. was No. 3 in the first half of 2014, at $1.15 billion. S&P said the Top 3 issuers accounted for 70 percent of those securities’ dollar volume in the first half.

So far, Santander Consumer USA and GM Financial seem to stand alone. No other company that issues subprime auto asset-backed securities appears to have publicly disclosed a Justice Department subpoena. Four companies, including Exeter Finance, told Automotive News that they had not received one. Many of the companies are privately owned.

Charles Bradley Jr., CEO of Consumer Portfolio Services, of Irvine, Calif., said today that his company had not received a subpoena. Executives for two other issuers said their companies had not received subpoenas, but they asked that their companies not be named.

Other players

Standard & Poor’s says other issuers of subprime auto asset-backed securities include Prestige Financial Services Inc., of Salt Lake City; Credit Acceptance Corp., of suburban Detroit; DriveTime Car Sales Co., of Phoenix; United Auto Credit Corp., of Newport Beach, Calif.; First Investors Financial Services Inc., of Houston; and other, smaller concerns.

Credit Acceptance, which is publicly traded, had not disclosed a subpoena as of today.

You can reach Jim Henry at autonews@crain.com.

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