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ABA
October 06, 2017  

Trustees Build Cases Against Auto Lenders

Issuers of subprime auto-loan securities could soon face a string of lawsuits from their deals’ trustees.

The actions would focus on instances in which the values or performance of loans securitized in recent years have deteriorated because originators didn’t adhere to stated standards. The first could come as soon as January.

There’s no word on which trustees are pursuing the actions. The most active banks in the sector in recent years have included BNY Mellon, Citigroup, Deutsche Bank, Wilmington Trust and Wells Fargo, according to Asset-Backed Alert’s ABS Database.

Also unclear is who might be named as defendants, although sources said virtually any issuer in the asset class could be a target. That list encompasses Ally Bank, Consumer Portfolio Services, Exeter Financial, First Investors, Flagship Credit, General Motors Financial, Santander Consumer USA, Security National Automotive Acceptance, Skopos Financial, United Auto Credit and Westlake Financial.

The potential lawsuits in some ways would mirror actions that trustees have taken against mortgage-bond issuers, and in fact would incorporate tactics the banks developed during those cases. In those complaints, the focus was on bondholder losses resulting from poorly performing collateral loans that didn’t meet the lenders’ representations and warranties.

“Where problems have been revealed in underwriting, such as low income verification, or poorer-than-expected loan performance, a trustee could start a suit before investors incur losses by claiming material increase risk of loss,” Joseph Cioffi of law firm Davis & Gilbert said. “Once a suit is filed, the trustee could through discovery uncover issues in loan underwriting and servicing, such as rampant extensions, that may shed light on further claims and potential defendants.”

In building their cases, the trustees are taking a closer look at government actions against several lenders. In April, for example, Santander agreed to pay $25.9 million to settle accusations from the attorneys general in Delaware and Massachusetts that it had saddled borrowers with unaffordable loans.

For the lenders’ parts, high credit-enhancement levels have prevented any losses for investors in subprime auto-loan securities — even as collateral defaults mounted as a result of weak underwriting standards that prevailed around 2015. As such, it’s uncertain what specific damages the trustees might claim. “We’ve been hearing about the lawsuits for a few weeks now,” one issuer said. “But there haven’t been any bond losses so we don’t know what they’re trying to prove.”

One possible answer: The trustees want to act early out of concern that bondholders could blame them for failing to take initiative if loan performance deteriorates to the point where cashflows are diverted to senior classes. Indeed, Fitch warned in September that recent increases in losses and delinquencies are likely to continue into 2018.