Consumer Finance Insights (CFI)

The Department of Justice is investigating whether to bring civil claims under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) against GM Financial Company, Inc. for its origination and securitization of subprime auto loans.  GM Financial revealed the investigation in a recent SEC 8-K filing, stating that the subpoena “direct[ed] it to produce certain documents relating to its and its subsidiaries’ and affiliates’ origination and securitization of subprime automobile loan contracts since 2007.”  Among other things, the DOJ seeks “information relating to the underwriting criteria” that GM used to originate the loans as well as information about “the representations and warranties relating to those underwriting criteria that were made in connection with the securitization of the automobile loan contracts.”

The investigation purportedly concerns whether GM Financial adequately revealed to investors the credit worthiness of the borrowers of subprime loans.  In comments GM Financial made through media outlets, it stated that the subpoena contains no specific allegations of wrongdoing, and that the DOJ has indicated the subpoena is part of an industry-wide investigation.  The subpoena was issued by the office of Preet Bharra, the United States Attorney for the Southern District of New York, which recently obtained a civil judgment against a large mortgage lender under the FIRREA statute for allegedly selling defective mortgage loans to Fannie Mae and Freddie Mac during the onset of the recession.  The investigation of GM Financial is significant because it reinforces DOJ’s increasing use of the FIRREA statute, which until recently was a rarely used by-product of the savings and loans crisis in the 1980s.  The investigation also suggests that while the DOJ is continuing to focus on recession-era issues, it may be shifting its focus into the lending practices of the auto-lending industry and other asset-backed securities after years of investigations, lawsuits, and settlements with the mortgage industry.  Indeed, late last year the DOJ reached a settlement with Ally Financial, Inc., concerning its practices involving auto loans made to minority borrowers.  Lenders of other consumer loan products, like auto and student loans, should be mindful of both trends (the government’s shifting focus away from mortgages and its steadily increasing use of FIRREA).