The US Justice Department has opened an investigation into allegations of fraud at Tricolor Holdings, a subprime auto lender that recently collapsed into bankruptcy, leaving banks and investors facing steep losses.
According to people familiar with the matter, authorities are examining whether Tricolor used the same collateral to secure multiple loans, a move that could amount to large-scale financial misconduct. The investigation follows warnings from JPMorgan, one of the first lenders to raise concerns and notify federal officials earlier this year.
JPMorgan and Fifth Third Bank each have around $200 million at risk, while Barclays has also been named as a secured lender in Tricolor’s Texas bankruptcy filings. In addition, BlackRock funds invested $90 million in the company in 2021 as part of an initiative to support lending to underserved communities.
Tricolor specialized in buying and selling cars while offering financing to lower-income Hispanic customers, many of whom had little or no credit history. Banks provided financing that was bundled into asset-backed securities and sold to investors, with proceeds used to repay lenders.
The collapse has triggered significant fallout. Fifth Third Bank’s chief executive Tim Spence confirmed the bank had recently uncovered “fraudulent activity” tied to a corporate client, later identified by sources as Tricolor. The bank said it would write down most of its $200 million loan exposure.
Tricolor managed a loan portfolio of roughly $1.4 billion as of March, according to ratings firm Kroll. Its bankruptcy filing listed assets and liabilities between $1 billion and $10 billion, with at least 25,000 creditors.
The company had initially sought to restructure under Chapter 11 with the help of law firm Sidley Austin. However, advisers ultimately shifted course toward Chapter 7 liquidation after the court appointed a trustee to oversee the case.
Both JPMorgan and Fifth Third have brought in advisers to manage the financial fallout. Tricolor, along with its former legal counsel, has declined to comment on the ongoing investigation.
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