Tricolor bankruptcy causes lenders to reassess risks

Tricolor Auto Acceptance, LLC (“Tricolor”), founded in 2007, is a “buy here- pay here” (“BHPH”) subprime auto finance company.  This means that it is both an auto dealer and an auto finance company, offering in-house financing directly to its customers.  Tricolor is also a Community Development Financial Institution (“CDFI”).  Tricolor operated over 60 dealerships, the majority of which were located in Texas and California.  Over the past five years, Tricolor has been among the fastest-growing auto lenders in the United States, quadrupling in size.  

Because Tricolor operated as both a BHPH and a CDFI, its auto loan portfolio has features that differ from those of a typical subprime auto finance company.  In 2025, warehouse lenders uncovered alleged fraudulent activity at Tricolor, including double pledging of collateral and data irregularities in loan tapes and audited statements.  Following these revelations, Tricolor filed for Chapter 7 bankruptcy protection on September 10, 2025, in the United States Bankruptcy Court for the Northern District of Texas.  This is an unusual move for a company of its size, resulting in its liquidation rather than a going concern sale or reorganization. The bankruptcy left approximately 10,000 vehicles and 100,000 loan accounts as collateral for hundreds of millions in creditor claims. Lenders, such as Triumph Financial, attempted to secure collateral but were ordered by the bankruptcy trustee to cease actions and allow a third-party servicer (Vervent Inc.) to assume control.  Tricolor’s collapse exposed significant risks in collateral management, data integrity, and servicing continuity for asset-backed lenders and investors.  

Tricolor’s collapse provides key lessons for lenders to BHPH auto finance companies, including:

• Collateral slippage: Unstaffed lots increase theft, vandalism, and condition risk; unclear towing/storage/insurance responsibilities drain recoveries.
• Data integrity: If the loan tape and portfolio data are wrong, underwriting, surveillance, and securitization models are wrong.
• Servicing fragility: Breaks in payment processing and collections quickly compound delinquencies and losses; transfers under duress are costly.
• Double‑pledging and perfection gaps: Weak controls on tangible/electronic chattel paper, possession/control, and cross‑facility reconciliations enable duplicative liens which result in costly lien priority disputes.
• Bankruptcy dynamics: Trustees can challenge unperfected liens, claw back preferences and fraudulent transfers, and constrain unilateral collateral actions; adequate protection fights, and collateral valuation create delay and cost.

What lenders should do to avoid a similar result:

1. Upfront and ongoing due diligence

• Compliance culture and governance: On‑site meetings; review policies and cadence at least semiannual for subprime/BHPH.
• Bank–fintech programs: Scrutinize program agreements, bank oversight of credit policy, marketing, disclosures, and complaint remediation.
• Recognize limits: Repurchase/indemnity are unsecured claims in bankruptcy—do not rely on them as the primary protection.
• Audit and inspection rights: Unannounced visits, risk‑calibrated frequency (especially first 12–18 months), full data and systems access, file‑level pulls, cross‑facility reconciliations, and clear cost‑sharing mechanics.

2. Custody and control of assets

• Third‑party custodian by default for tangible/electronic chattel paper, instruments, and notes.
• Check‑in/exception reporting at onboarding, strict release/return mechanics, and return timelines that preserve perfection by possession/control.
• If e‑chattel paper is permitted, require a system that confers UCC “control,” with authoritative copy governance and tamper‑evident audit trails.
• Title and GPS controls for vehicles; inventory management that scales to multi‑state lots.

3. Control of cash flows

• Tri‑party servicing acknowledgments.
• Daily sweeps to lender‑controlled accounts.
• No borrower control of collections; reconcile lockbox/ACH streams to portfolio receivables daily; monitor exceptions.
• Prohibit offsets and side accounts; require immediate capture of recoveries and proceeds.

4. Data integrity and surveillance

• Independent data audits.
• Reconcile master tape to servicing system of record, bank statements, lockbox, custodian holdings, and trust/tranche reports.
• Monitor anomalies in payment patterns, roll rates, extensions/rewrites, recoveries vs. historical, repossessions vs. lot inventory, and VIN/title status.

5. Collateral monitoring

• Determine upfront who pays for towing, storage, insurance, keys/titles, transport, and lot security, approved vendors and rates.
• Confirm guarding, fencing, and GPS where appropriate.
• Conduct routine lot audits tying units to system inventory and titles.
• Set borrower and facility concentration limits; diversify agents/servicers/custodians.
• Heightened standards for BHPH/CDFI or rapidly growing originators; adjust advance rates, triggers, and pricing for tail‑risk.

6. Take immediate action when necessary

• Freeze additional funding pending verification; initiate exception‑driven collateral/file audits and cross‑facility reconciliations.
• Tighten cash control and daily sweeps; require servicer acknowledgement reaffirmations.
• Confirm custodian positions, authoritative copies, and possession/control; remediate any release gaps immediately.
• Update playbooks with named backup servicer timelines, lot security vendors, and title logistics.
• Re‑underwrite counterparty financials, liquidity, and governance; recalibrate advance rates and triggers.

No single control eliminates fraud or operational failures.  Losses in Tricolor are causing lenders to reassess data integrity, collateral custody, perfection/control, servicing continuity, operational responsibilities, and risk assumptions in structured finance and warehouse lending.  Tighter covenants, increased scrutiny, and higher costs for originators lacking strong controls should be expected.

For more information on this topic, you can reach out to McDonald Hopkins' Strategic Advisory and Restructuring Department Member, Scott Opincar.