GM Financial Subpoenaed By DOJ In Subprime Lending Review
While the parent company goes through the federal ringer over product safety, GM Financial is under the gun after receiving a subpoena from the U.S. Department of Justice regarding potential deceptive practices in subprime lending.
The Detroit News reports the subpoena is part of a review “to determine if banks were misled into buying some auto loans,” according to General Motors. The subpoena was served July 28, requesting documents linked to the lending arm’s and affiliates’ subprime originations and securitizations going back to 2007.
The review in question is the DOJ’s investigation into potential violations of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, particularly around the underwriting criteria of said originations and “the representations and warranties relating to those underwriting criteria that were made in connection with the securitization of the automobile loan contracts.” The findings of the review could open the door to civil suits.
For GM Financial’s part, executive vice president and treasurer Susan Sheffield claimed the subpoena only focused on subprime lending issues in general, and not on the lender specifically. GM Financial represents 30 percent of all subprime lending to the parent company’s dealership network, and holds the title of second-largest subprime lender with $2 billion issued to-date in 2014.
Representatives for Chrysler Capital and Ford Credit both said their employers have not received a subpoena thus far.
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Another mortgage/loan crisis is coming. I'm just not sure how deep it will be. Or perhaps, I should say that we still haven't gotten out of the 2008 recession. Mortgages have been more than 75% refinances/modifications- fewer than 25% new purchases since 2008. The banks can't give out loans for 30 years if they can't trust you'll have a job for the next 5.
A nothing burger: 1. This goes back to 2007. Americredit was not purchased by GM until 2011, so the first half of the subpoena has nothing to do with GM. 2. Subprime auto has done extremely well with very low default rates since the 2008 vintages. The investment grade tranches are still investment grade and buyers of the asset backed securities will get all their principle and interest. Not much basis for civil suits. If investors are paid in full -- what are they going to sue for? 3. "“We have never downgraded a subprime auto ABS bond for credit reasons since we started covering the sector in 1991,” Risi said. “We’re comfortable with the stress scenarios we impose, as well as our loss expectations, the structural protections on the current deals, and especially the fact that credit enhancement grows as the transaction amortizes.” David Risi, S&P Director of Asset Backed Securities. http://securitize.blogspot.com/2013/04/normal-0-false-false-false.html Credit enhancement includes over collaterization -- Like starting with 105% of the value of the securities. And non rated speculative tranches which take the first losses. And, using excess interest payments to strengthen the over collaterization. That is, the difference between the 11% they charge the borrower and the 3% they pay out on the securities is used to pay for defaults with the balance added to the credit enhancement. 4. S&P discussion of results: http://www.standardandpoors.com/spf/upload/Ratings_US/US_AutoLoan_ABS_Tracker_June_2013.pdf Lots of good info. If anyone really cares about the performance history of non standard securitized loans. 5. Here is Americredit's latest prospectus for 2014-2: http://www.gmfinancial.com/Investors/Prospectus/AMCAR/2014-2/2014-2.pdf
The issue is how subprime auto loans were packaged with respect to risk disclosed. Same as for RE subprime mortgage debt. The issue is disclosure to buyers of auto loan debt and not to buyers or sellers of autos.