With the bankruptcy of one of the largest buy-here pay-here (BHPH) auto dealer groups, Tricolor, and its subsequent fraud case, banks are becoming more cautious in lending to the sector.
Driving the news: In a comprehensive look at the BHPH auto sector released May 8, the Federal Reserve noted that the probability of default on loans to BHPH borrowers increased by “nearly 150%” from the second to the third quarter of 2025.
In its published report, the Federal Reserve analyzed the differences in BHPH operations, including customer transactions with interest rates and repossessions, as well as how dealerships are funded and their performance.
BHPH dealers originate 6% of auto loans.
Loan balances for the sector have grown by 214% since 2018.
The Federal Reserve stated, “the sector has attracted renewed attention since the high-profile bankruptcy of one of the largest BHPH auto dealers, Tricolor, alongside allegations of fraud in 2025.”
Some background: Tricolor, with more than 100,000 accounts and 65 dealerships, filed for bankruptcy in September 2024. Daniel Chu, founder and CEO of Tricolor, was indicted by the United States Attorney for the Southern District of New York, along with the FBI and FDIC, for allegedly defrauding multiple banks and leading a series of fraudulent schemes.
The indictment states:
Tricolor defrauded the banks by double-pledging collateral to multiple lenders and manipulating loan data to make delinquent accounts appear current.
It allegedly pledged $2.2 billion of collateral to lenders but only had $1.4 billion in real collateral, with $800,000 in fraudulent collateral.
The Federal Reserve noted that Fifth Third Bank and JPMorgan Chase both claimed losses of approximately $200 million from Tricolor.
Zooming in: Historically, the Federal Reserve found banks’ loans to BHPH dealers to be lower risk than loans to traditional auto dealers, due to a higher percentage of loans backed by a guarantor (81%) and backed inventory or loan receivables (65%). It was suggested that BHPH dealers’ “more aggressive vehicle repossession process also contributed to better risk ratings for loans.”
But analysis showed that between late 2024 and 2025, loan risk metrics for BHPH dealers moved closer to those of other dealers.
“Our sample of bank-reported metrics for BHPH auto dealers has all worsened, with probabilities of default, loss given default, interest rate spreads, and internal ratings all converging closer to those of traditional auto lenders,” the Federal Reserve noted. “This rapid convergence suggests that banks have become more guarded towards the sector, which could be in direct response to Tricolor and the increased scrutiny regarding BHPH repossessions.”
The latter refers to inquiries into repossessions by Senator Elizabeth Warren, and prompted the Federal Reserve into taking a deep look at the auto recoveries by BHPH dealers.
The Federal Reserve noted that BHPH dealers are 16.63 times more likely to have a loan actively in repossession.
It was found in Q3 2025 that 5% of BHPH balances were in active repossession compared to other dealers.
At that time, 10% of BHPH loans were delinquent.
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By the numbers: The average origination principal balance of BHPH dealers’ subprime customers is $15,402, with a monthly payment of $405. The average interest rate is 25.39% on a 55-month loan.
The Federal Reserve did note that, though 78% of the balances are from subprime borrowers, BHPH dealers have lowered the percentage of deep subprime borrowers from 70% in 2018 to 50% in 2025.
For more context: Kip Cochran, CEO of IDA Stream, LLC, which provides financing and servicing solutions for BHPH dealers, agreed with the Federal Reserve’s findings, which shed light on the changing dynamics in the BHPH sector.
“My general view is that the Fed’s conclusions were directionally accurate, particularly around elevated delinquency and repossession activity within the BHPH sector,” Cochran told CDG. “That said, I also believe the data reinforces how operationally different BHPH is from traditional indirect subprime auto finance and why it should not always be viewed through the same lens.”
Cochran’s POV: “Over the past 12–18 months, I do think institutional capital, lenders, and investors have become more sensitive to deep-subprime auto exposure overall, particularly as affordability pressures. Vehicle prices and consumer stress levels have increased. However, I also believe the stronger operators are responding by becoming more disciplined around servicing, collections, portfolio management, and liquidity structure rather than simply pulling back from the space entirely…In many ways, the industry is evolving from a pure origination model into more of a lifecycle risk management model.”
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