It’s still anybody’s guess what, exactly, the U.S. Department of Justice, the Securities and Exchange Commission and potentially other regulators are looking for, in ongoing investigations into subprime auto loans sold as asset-backed securities, analysts said.
“They have not been forthcoming at all, what they’re looking for,” said Matthew Beagle, vice president and senior credit analyst for Hartford Investment Management Co.
Beagle said the potential impact on the rest of the auto finance industry could be limited, if regulators find “isolated” violations. It could be more serious if regulators decide problems are “systemic,” he said at the American Financial Services Association Credit Summit for Fixed Income Investors in New York on May 27.
Last year GM Financial Inc., Santander Consumer USA and Ally Financial Inc. disclosed regulators were investigating subprime auto loans resold as asset-backed securities.
Companies that were subpoenaed said the DOJ cited the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which grew out of the savings and loan scandals of the 1980s.
FIRREA delves into “representations” made to investors. That has analysts guessing that maybe regulators are looking into representations dealerships make to customers, or representations lenders make to investors buying asset-backed securities, or both.
“There are two avenues there,” said Brian Jacoby, managing director, credit research for Goldman Sachs & Co.
Jason Grohotolski, vice president and senior analyst for the Financial Institutions Group at Moody’s Investors Service, said that from an investor point of view, automotive asset-backed securities performed well in the last recession. He said, “investors didn’t take losses on those pools.”