Experts are still trying to project how the dramatic bankruptcy filing by Tricolor Holdings is going to impact subprime auto finance for the remainder of the year and beyond.

Legal practitioners from Davis+Gilbert and McDonald Hopkins each recently offered perspectives, touching on subjects like fraud and potential lessons the entire industry can learn.

Joseph Cioffi is a partner at Davis+Gilbert in New York where he is chair of the bankruptcy, creditors’ rights + finance practice group, a multidisciplinary practice spanning corporate, insolvency and litigation. Cioffi has a unique perspective afforded by his experience in all stages of credit and market cycles, including in subprime lending investments, operations and litigation.

Nicole Zatserkovniy is an associate Davis+Gilbert, working with lenders, financial institutions, creditors, and businesses across a wide range of industries, assisting with complex bankruptcy, litigation, and transactional matters.

“Whether the practices at Tricolor are an anomaly or an example of more widespread problems or irregularities at other lenders, the truth is out there — and it’s likely to be found,” Cioffi and Zatserkovniy wrote in a recent post for the firm’s Credit Chronometer.

“Weak markets, like the current auto market, have a tendency to expose unsustainable results and questionable business models,” Cioffi and Zatserkovniy continued. “Similarly, abrupt policy changes can shine a light on risky practices and vulnerabilities. Given the high stakes, going forward there will be a premium placed on the ability to trust issuers and counterparties. Disclosures of practices, loan characteristics and borrower attributes, and the veracity of those disclosures, will determine the market’s trajectory.”

Vervent confirmed in a Sept. 22 news release that it has been authorized to step in as a successor servicer in response to the Chapter 7 bankruptcy filing by Tricolor Holdings.

Previously designated as backup servicer, Vervent said it has been given authority to assume servicing for the majority of Tricolor’s approximate 100,000 subprime auto loans, “ensuring continued support for impacted borrowers.”

As successor servicer, Vervent’s responsibilities include:

—Managing loan payments and account servicing

—Securing and transferring funds

—Handling vehicle inventory such as titles and keys

—Assisting customers with loan payoffs, payment plans and insurance claims

—Working with regulatory agencies to ensure compliance with all laws, rules, and regulations

“Proud of the Vervent team for stepping in seamlessly as successor servicer — difficult situations like this highlight the importance of readiness, data integrity, and disciplined execution,” Vervent CEO David Johnson said via social media on Tuesday.

“Our focus remains protecting investors and ensuring continuity for borrowers while upholding the highest standards in compliance and transparency. Strong work by everyone involved,” Johnson added.

Upholding high standards is one of the questions being raised amid the Tricolor bankruptcy, which reportedly includes federal investigations of fraud connected with its securitizations.

Cioffi and Zatserkovniy recollected that when a similar situation unfolded with Honor Finance in 2018, “it was considered a one-off due to misconduct.” They said credit enhancements have generally been more than adequate to keep ABS investors safe

“Downgrades of subprime auto ABS have been few and far between,” Cioffi and Zatserkovniy wrote. “In fact, any talk of a widespread collapse has usually been met with, at best, a skeptical stare, and at worst, an exposition on the differences between subprime auto and subprime RMBS. Those differences, including short maturity dates and significant overcollateralization, have supported sellers making generally fewer loan-level representations than in the pre-financial crisis subprime RMBS deals. But representations serve two purposes: one is to support recourse against the seller or collateral for misrepresentations, and the other, just as important, is the disclosure of facts so that buyers and investors know that a matter has been considered and can make informed decisions.

“The looming question now is which other subprime lenders or maker participants could be headed in the same direction as Tricolor,” Cioffi and Zatserkovniy continued. “Even lenders that differ in strategy or structure may now need to take precautionary steps to avoid investor and counterparty scrutiny. Regulators, warehouse lenders, and ABS investors, now more than ever, will seek comfort that the sellers are who they say they are and do what they say they do. They will increasingly focus on verifying that collateral, borrower status, and the business structure can withstand stress conditions.”

Scott Opincar is a member of the strategic advisory and restructuring department at the Cleveland office of McDonald Hopkins. Opincar concentrates his practice in the areas of bankruptcy (primarily Chapter 11 reorganizations), business counseling and strategic advisory services, commercial law and creditors’ rights, workouts, Uniform Commercial Code transactions, distressed mergers and acquisition, receiverships (both state and federal), and assignments for the benefit of creditors.

Opincar noted in a post on the firm’s website that multiple lessons can be learned by other lenders and creditors from the Tricolor developments, including:

—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.

“No single control eliminates fraud or operational failures,” Opincar wrote. “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,” he added.