Texas-based car dealer and lender Tricolor Holdings has filed for Chapter 7 bankruptcy, raising concerns about the health of the US economy. The company, which focused on selling cars and loans to low-income and undocumented Hispanic immigrants, faced collapse after one of its key lenders, Fifth Third, uncovered “fraudulent activity” and wrote down a substantial $US200 million loan. Tricolor’s business model involved offering loans with high interest rates, often exceeding 16 per cent, to borrowers with limited or no credit history.
Tricolor’s bankruptcy has triggered a Department of Justice investigation following allegations of fraud. Despite the subprime car-loan market’s growth, Tricolor’s demise highlights the vulnerability of borrowers. The company managed a loan portfolio of approximately $US1.4 billion. There are now questions around whether the collapse serves as an important signal about the broader state of the US economy that some investors may be ignoring.
While Tricolor’s situation is not comparable to the 2008 subprime mortgage crisis, it does draw parallels to early warning signs that were missed before that crisis. Subprime car borrowers are facing significant challenges, with delinquency rates at their highest levels since 1994. Amid a strong bull run in the stock market, Tricolor’s collapse is a reminder of the uneven nature of the US economy, where wealthy households are driving spending while lower-income households struggle with inflation. The question remains whether investors are adequately considering these underlying weaknesses.
