Daniel Chu was in Italy, a world away from the sweltering Texas car lots he had built his fortune on, when his phone lit up.
It was a banker at JPMorgan Chase, the firm that had lent hundreds of millions of dollars to his used-car business, Tricolor Holdings, helping transform it into a sprawling empire across the US southwest.
There’s a problem, the voice on the line said, a big problem. It’s the collateral backing the loans, the banker explained, there are red flags everywhere, and we need to talk, face to face.
Chu caught a flight to New York and rushed over to JPMorgan’s midtown headquarters in Manhattan, setting in motion a whirlwind series of events that would culminate, three weeks later, in Tricolor’s collapse on Sept. 10. When another debt-laden company, First Brands Group, quickly fell into bankruptcy, followed by revelations that a pair of regional banks were hit by alleged loan-fraud schemes similar to the one suspected at Tricolor, tremors rippled through the $25 trillion US credit market. For a time, investors dumped risky debt — a prelude, some say, to the bigger market reckoning that looms — as Jamie Dimon, the CEO at JPMorgan, warned that they’d likely soon uncover more ‘cockroaches’ in their portfolios.
Chu, the son of Chinese immigrants who had founded Tricolor two decades ago with a lofty vision of providing credit to the undocumented communities ignored by banks, was defiant until the very end. He told JPMorgan bankers that he knew nothing about the fraud, hunted for emergency financing and pushed to keep the company alive, according to people familiar with the matter.
Ultimately, though, the hole in Tricolor’s finances was far too large to patch up. No one on Wall Street — certainly not Dimon — was interested in dangling Chu a rescue line. The remains of his empire — an array of dealerships and warehouses, some 70,000 auto loans, and a fleet of old, often repossessed and dilapidated Chevy Malibus, Ford Escapes and Nissan Altimas — would be sold off to pay creditors back at least a fraction of the more than $2 billion they’re owed.
“Markets shudder when entities start to fail,” said Kathleen Engel, a law professor at Suffolk University in Boston. She said she anticipates “more subprime auto finance dealerships will go belly up” as banks lend the industry “less money, charge higher interest rates, and engage in more conservative underwriting.”
The exact extent to which President Donald Trump’s deportation push accelerated Tricolor’s collapse is still unknown. And yet there is a certain symbolism in the fact that arguably the most spectacular corporate bankruptcy, so far, of Trump’s second term is in a business that catered almost exclusively to undocumented immigrants.
Chu, 62, declined to comment through his attorneys, as did a representative for JPMorgan. Lawyers for the trustee overseeing Tricolor’s liquidation didn’t respond to requests for comment.
This story is based on interviews with dozens of people who either worked at Tricolor or did business with the company. Most asked to not be identified so that they could speak candidly about internal matters.
Early in life, long before all the boom-and-bust business ventures that’d mark his career, Daniel Chu displayed a willingness to take risks. Raised in Dallas, he fell in love with basketball and managed to parlay his small-time college career — he played at Washington University in St. Louis — into an assistant’s job at the University of Miami and then, in 1990, the top job at a Division III program in Tennessee called Sewanee. The team struggled under Chu, posting a record of 12 wins and 38 losses in two years before he was dismissed, according to reports at the time, for violating NCAA rules by directing an assistant coach to give money to an athlete’s parent.
Chu soon pivoted to business, co-founding PAACO Automotive Group in 1992, a used-car dealership targeting Hispanic borrowers with limited credit. The company expanded rapidly and was scooped up several years later by a larger rival. Chu would step down in 1999, the same year that accounting irregularities were discovered at the company, according to regulatory filings. He then tried his hand as a tech entrepreneur, raising money for a startup that eventually led to a lawsuit from fellow investors who accused him of misusing their funds, court records show.
Chu, once again, found himself in need of a comeback.
He went back to his PAACO business model and in 2007 founded Tricolor, a play on the nickname that Mexicans have for their national flag and soccer team. Years later, speaking on a podcast, Chu would talk about the higher-calling aspect of it all. “The Hispanic market was highly underserved,” he said in the 2019 interview, “and I think that opportunity led to really the notion that if we could figure out a way to address that segment, it was a differentiated enough segment where there truly was a purpose to providing a better product and a better service.”
His timing couldn’t have been better. Private equity was pouring cash into subprime auto lending, filling the void left by traditional banks in the wake of the global financial crisis, and securitizations of riskier car loans still attracted yield-starved Wall Street investors.
Just as the business was ramping up, Chu, again quickly sold. In 2010, private equity firm Serent Capital bought an 85% stake and acquired another 10% four years later. But loan delinquencies and losses piled up, according to credit rating reports, and in 2015, federal regulators found Tricolor had failed to implement policies ensuring the accuracy of the credit information it reported. The company agreed to pay some $83,000 in civil penalties while neither admitting nor denying the allegations. Serent exited the next year, leaving Chu back in control. Serent didn’t respond to requests for comment.
The boom
Private equity could only take Tricolor so far, Chu ultimately decided. To turn his regional used-car chain into a national player, he needed the help of Wall Street’s biggest firms.
In 2018, Tricolor secured a $133 million warehouse facility — essentially a revolving credit line that allowed it to make auto loans — from Credit Suisse Group AG. It also issued $101 million of asset-backed securities, its first rated deal and a milestone that opened the door to institutional money.
Two years later came an even bigger breakthrough. JPMorgan agreed to provide as much as $100 million in warehouse financing, according to court records, and soon took the lead in arranging Tricolor’s asset-backed bond sales.
The business boomed. Between 2018 and 2021, Tricolor grew its dealership network by nearly 50%, spreading across Texas and California to become the third-largest dealership in both states and, then, into Nevada and Arizona.
JPMorgan’s warehouse line would swell to roughly $770 million, with backing from Barclays Plc, AllianceBernstein, and Waterfall Asset Management, people familiar with the matter said. All three declined to comment. JPMorgan also was instrumental in the company’s sale of some $2.7 billion of asset-backed bonds. It helped arrange more than three-quarters of those deals, according to data compiled by Bloomberg.
More financiers kept lining up. This was around the pandemic and benchmark rates were pegged near zero, fueling a surge in appetite for anything that offered a decent yield. In 2021, BlackRock Inc. invested $90 million in convertible preferred equity — including through one of its environmental, social and governance funds. The minority stake raised eyebrows among some investors, according to a person with knowledge of the matter, as they questioned the optics of putting ESG capital into subprime auto lending, an industry long criticized for predatory practices. The deal went ahead anyway.
BlackRock declined to comment.
By 2022, Tricolor was floating a valuation of around $1 billion to potential investors, people familiar said. Executives were weighing going public, the ultimate test of whether investors would buy into its growth story, and had begun working on a potential deal with JPMorgan bankers.
Publicly, Chu tried to position the company as a socially responsible lender, just as he had done with BlackRock. He was using data and technology, he said, to help overlooked borrowers build credit, and would often tout the company’s Treasury Department certification as a Community Development Financial Institution.
But many of its practices mirrored those of the broader subprime auto industry.
Customers described aggressive sales tactics, confusion over loan documents, and long delays in receiving car titles. Some said Tricolor called repeatedly when payments were late, often numerous times a day and deep into the night. Many vehicles were worn-out, poorly maintained and had high mileage, according to car buyers and former employees.
Raquel Ramirez says her used GMC Yukon SUV has done nothing but give her trouble since she bought it in 2023 — it constantly jerks when she drives even after repeated repairs — and yet Tricolor staff would hound her when she fell behind on the $35,000 loan she took out. “If I missed a day of a payment, they would call until 10 at night asking for the payment,” Ramirez says.
Around the time the company was exploring going public, executives were looking at ways to expand Tricolor’s borrower base beyond undocumented immigrants, wary of the political and reputational risks such a focus could pose.
In internal meetings, senior leaders agreed to tighten lending standards, according to a person with knowledge of the matter. Borrowers now had to show proof of at least four years at the same address, a checking account, and stable employment — requirements that many of Tricolor’s longtime customers simply couldn’t meet.
Sales teams were pushed to maintain the pace of growth anyway. At least one manager warned executives that the company wasn’t doing enough to verify whether new customers truly met those stricter criteria.
Soon another problem emerged. During a 2022 audit, employees at accounting firm Crowe grew concerned that Tricolor wasn’t accurately valuing its assets, according to people with knowledge of the situation.
The company later hired Grant Thornton to vet its 2023 and 2024 accounts, which turned up no issues.
Still, among the questions raised in the 2022 audit was Chu’s personal spending, the people said. It included things like luxury home furnishing and trips on private jets and topped $1 million that year — money he was eventually instructed to pay back.
Crowe and Grant Thornton declined to comment.
‘Business Was Great’
The IPO push stalled.
One former employee said Tricolor was hit with several lawsuits — from ex-workers, borrowers trying to reclaim repossessed cars, and others — that further complicated the effort.
By 2023, Tricolor, and much of the auto-finance industry, were feeling the squeeze of high inflation and soaring car prices. The average monthly car payment climbed to roughly $600 that January, up from about $470 three years earlier, Federal Reserve data show. A year later, the 60-day delinquency rate on subprime auto loans reached 6.39%, the highest since Fitch Ratings began tracking the data in the early 1990s.
Inside Tricolor, the stress was mounting. Cash was running short, and by this summer, Chu’s team had stopped paying some vendors and contractors, according to people familiar with the matter. The company also fell behind on handing over the sales tax receipts they collected from buyers, people said.
To employees and customers, though, it was business as usual almost until the end. Kelly Green, who ran Tricolor’s repossessed-vehicle supply chain, remembers sitting through a meeting in early August — just a month before the bankruptcy filing would drop — where managers discussed expansion plans. “Business was great,” Green recalls people saying. “They were selling. They were breaking records.”
Then came the phone call.
It was a junior analyst at Waterfall who first detected the issues with the loan data that would prompt JPMorgan’s bankers to track Chu down in Italy. The same collateral had been allegedly pledged to multiple lenders.
The bank, which had done more to power Tricolor’s rise than any other institution, pulled the plug on its warehouse line. Fifth Third Bancorp, another lender, followed, stating that the company’s loan files that list key information like credit scores and vehicle types seemed to have been “corrupted.” (Similar allegations of fraud would eventually be lobbed at First Brands, too; it denies wrongdoing.) Fifth Third declined to comment.
When the news broke, the asset-backed bonds cratered, with the riskiest tranches tumbling to as low as 12 cents on the dollar.
Laura Mayfield, a portfolio manager at Fort Washington Investment Advisors watched on in amazement. She calls it the biggest scandal she’s seen in the 15 years she’s been investing in the asset-backed bond market. “The fact this happened tells us someone is asleep at the wheel and cutting corners with regard to old-school disciplined underwriting processes.”
Chu moved quickly to assemble a crisis team. The company hired Sidley Austin as legal counsel, Houlihan Lokey as financial adviser, and Alvarez & Marsal for restructuring support — top-tier firms known for their work on some of the toughest restructuring battles. Houlihan Lokey declined to comment, while Sidley Austin and Alvarez & Marsal didn’t respond to requests for comment.
Chu insisted the damage could be contained, people familiar said. He just needed to somehow raise enough cash to steer Tricolor through Chapter 11 and emerge reorganized. He approached existing investors for debtor-in-possession financing, the standard lifeline for companies in distress and tried reaching out to other lenders.
They were hesitant to cut him a check, though, especially because his crisis managers couldn’t deliver a basic demand they had: the installation of a new board to oversee the company’s operations. The problem was coming up with the liability insurance that would protect those new board members if things went wrong, people familiar with the situation said. It’s a standard request in such situations but the fraud allegations were scaring away insurance companies. Fearing they’d get saddled with big payouts, none of them would agree to provide the coverage.
Then, the decisive blow: Advisers realized that the liabilities were greater than they first believed, and that the company’s cash reserves were nearly exhausted, the people said. There just wasn’t enough money to cover payroll through bankruptcy.
Lawyers from Sidley Austin delivered the news Chu had been dreading. There would be no Chapter 11 restructuring. Instead, a Chapter 7 and an end to the business.
On the morning of Sept. 10, lawyers presented the paperwork to a bankruptcy court in Dallas. The end came so suddenly that scores of cars owned by Tricolor customers, with coffees still in cupholders and kids’ backpacks strewn in the backseats, were left stranded at the company’s repair shops.
The liquidators moved into Tricolor’s headquarters a week later, and lawyers, bankers and advisers handed over their findings to the Manhattan US attorney’s office, which continues to investigate.
— By Isabella Farr, Scott Carpenter, Paige Smith and Josyana Joshua (Bloomberg)
