The U.S. auto sector is showing growing signs of strain. Tariff-related disruptions are affecting supply chains, while consumers face mounting financial stress, with auto loan delinquency rates reaching a 15-year high. The sector’s challenges are also evident in corporate failures: Tricolor Holdings, a subprime auto lender, collapsed, and more recently, First Brands Group, a major auto-parts manufacturer, filed for bankruptcy protection, disclosing over $10 billion in liabilities — one of the largest debt market failures in recent years.
These developments raise questions about broader systemic risk. Could we be witnessing a “New Century” moment? New Century, a subprime mortgage lender, filed for bankruptcy in April 2007, roughly 18 months before the onset of the Global Financial Crisis (GFC). In hindsight, it was the canary in the coal mine for the most severe financial crisis since the Great Depression. The 2008 GFC froze the financial system. Banks pulled back credit, households cut spending and companies laid off workers. It was a frightening time for everyone, and an extraordinarily difficult period for the financial services industry.
In the years since, non-bank lenders have significantly expanded into the consumer credit space. With ultra-low interest rates prevailing until 2022, auto finance — particular subprime auto lending — grew rapidly, creating a sector now facing vulnerabilities. First Brands’ bankruptcy illustrates some of these pressures.
The company had received invoice financing from hedge fund UBS O’Connor and a hedge fund affiliated with Jefferies, a global investment bank. According to the Financial Times, First Brands shelved a $6 billion loan deal after potential investors raised concerns about the company’s financial disclosures. The proposed loan would have been in addition to the company’s existing $5 billion in outstanding debt.
First Brands was also active in supply-chain financing. Under this arrangement, it would pay suppliers upfront and later collect the funds from its customers, effectively creating an off-balance-sheet transaction. Retailers such as AutoZone and Advanced Auto Parts made heavy use of this facility.
These financial practices exposed the company to significant risk. Hedge fund Apollo Global Management has taken a short position against First Brands’ debt through a bespoke credit default swap (CDS) contract. If the company defaults, Apollo stands to profit. Over the past year, Apollo has been paying a premium to maintain this short position.
A similar strategy was used during the Global Financial Crisis: investors shorted the housing market through credit default swaps or the AB-XHE index, which tracks the performance of U.S. subprime mortgage-backed securities. These trades initially carried a cost but ultimately became highly profitable as U.S. home prices fell sharply.
The recent collapse of Tricolor, a subprime auto lender, further highlights risks on the corporate side of the U.S. auto sector. The company filed for Chapter 7 bankruptcy in September amid ongoing fraud investigations. The collapse rattled investors and left thousands of borrowers stranded.
Tricolor relied on warehouse lines from banks and then securitized its loans. Concerns have emerged that the company may have been double-pledging — using the same loan portfolios as collateral for multiple warehouse credit lines with different banks. Each bank assumed it had exclusive claim to the portfolio’s cash flows or value, unaware that other banks had been promised the same assets.
In a bond deal earlier this year, Tricolor disclosed that 68 per cent of its borrowers had no credit score, and over half did not hold a driver’s licence. While these factors reflect the high-risk nature of its lending, the primary driver for Tricolor’s collapse appears to be the alleged fraud.
Vervent, a San Diego-based firm specializing in capital markets and loan servicing, is listed as the backup servicer on Tricolor’s loans, according to S&P Global. However, transitioning servicing for billions in outstanding loans will be a complex and challenging process.
Tricolors’ bankruptcy is unlikely to trigger significant disruption in the subprime auto securitization market. Tricolor, a ‘buy-here, pay-here’ retailer and subprime auto lender, primarily serviced its own loans and participated as a programmatic issuer in the auto asset-backed (ABS) securitization market. By contrast, First Brands is an auto-parts supplier with some questionable accounting practices. While U.S. subprime consumers are financially stretched, these developments do not indicate a risk of widespread contagion in financial markets comparable to the Great Financial Crisis.
But are similar risks present in Canada? The country’s subprime auto sector is relatively small and concentrated among a handful of lenders, including iA Auto Finance, Lendcare, Eden Park, Canadian Title Loan Corporation, and banks such as Santander (which acquired Edmonton-based Carfinco for $269 million), Scotiabank, and TD.
Bank participation in this sector is heavily regulated by OSFI, providing an additional layer of oversight and risk management.
The subprime share of the auto loan market has been declining: less than 6 per cent of auto loan borrowers were classified as subprime or deep subprime in the first quarter of 2024, down from roughly 24 per cent in 2018. This trend led firms such as Rifco to temporarily exit the market.
With a smaller lending base and broader income support for low-income borrowers, it is unlikely Canada will see major problems emerge in this credit segment. Overall, the Canadian subprime auto loan market appears more contained and resilient compared with its U.S. counterpart.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
Housing affordability improved in Q2 2025, supported by lower house prices, falling 5-year mortgage rates, and rising household incomes. Looking ahead, national affordability is likely to see only modest gains over the next six months, as trends in the bond market limit further relief.
Read our latest Housing Affordability Watch for a complete near-term outlook: Housing Affordability – The Near-Term Outlook
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