Shareholders of Ally Financial Inc. have entered into a class action lawsuit through Robbins Arroyo LLP, which alleges, among other things, that Ally knew about the severity of rising subprime delinquency rates prior to its April 11, 2014 initial public offering.
The claim also alleges that the company deployed “deficient underwriting measures” in the origination of subprime loans, and that it used “aggressive tactics” on low-income borrowers in order to raise $2.37 billion for the company’s public offering.
Overall, these kinds of litigations are fairly common and have a lot of money at stake for the plaintiffs, said David Gemperle, partner and Nisen and Elliott’s Auto Finance Group.
“I wouldn’t think it would impact their normal business practices,” Gemperle told Auto Finance News. However, when similar suites are successful for the defendants, that can often deter future misconduct at other institutions, he added. “Obviously there is only one IPO for Ally, but the next company doing an IPO would most likely look closely at how Robbins Arroyo was successful or not successful with this litigation,” Gemperle said.
Ally told AFN it does not comment on pending litigation.
The claim specifically cites news articles from mid 2016 reporting increased delinquencies among subprime borrowers, which Auto Finance News has also reported in recent months. However, the suit claims Ally knew about these deficiencies at least two years earlier.
While there were reports of rising delinquencies in the second quarter of 2014 according to Experian, those rates have remained relatively flat going forward, even as Experian has expanded its definition of subprime to a Fico range of 501 to 600, instead of 550 to 619.
Total market 30-day delinquencies sat at 2.38% in Q3 2016 compared to 2.39% in Q2 2014. Delinquencies after 60 days have grown more significantly in that time to 0.74% up from 0.62%.
Looking at subprime delinquencies specifically, which is the main point of contention for the plaintiffs, there was a more significant rise in rates, according to the New York Fed. The agency posted a blog post through Liberty Street Economics in August 2014 — after Ally’s IPO — noting the rise in subprime lending and higher delinquency rates among financial institutions such as Ally, when compared to other banks.
Fast forward to 2016, and the New York Fed is again raising concerns about the subprime auto loan space but this time citing a rise in delinquency rates, even finding “notable deterioration in the performance of subprime auto loans.”
There are few, if any, reports about rising subprime delinquencies in the lead up to Ally’s IPO.