After Fifth Third takes credit hit, borrower goes bankrupt

• Key Insight: Tricolor Holdings specialized in subprime auto loans to undocumented immigrants in the South and Southwest.
• Supporting Data: The rise in subprime auto loan delinquency rates has been especially pronounced at auto finance companies.
• Forward Look: Fifth Third is reviewing its risk management protocols to see if it can catch future instances of fraud sooner.

Subprime auto lender Tricolor Holdings filed for bankruptcy Wednesday, hours after Fifth Third Bancorp said it is taking a roughly $200 million credit loss on an asset-backed finance loan due to “significant fraud.”

The Fifth Third borrower that sparked the major loss was Tricolor, said a person with knowledge of the matter. Tricolor, a Dallas-based subprime auto lender that focused on Hispanic borrowers, filed for Chapter 7 bankruptcy in the Northern District of Texas. Chapter 7 bankruptcy provides for the liquidation of assets.

At an industry conference on Wednesday morning, Fifth Third Chairman and CEO Tim Spence said the Cincinnati-based bank learned last week of the issue that led to the large credit loss. Fifth Third has reviewed its warehouse business and deemed the loss a “one-off, an isolated incident in that portfolio,” Spence said. He did not name Tricolor.

Tricolor had made a name for itself as a community development financial institution, lending largely to undocumented immigrants who were purchasing used vehicles. Instead of requiring the use of Social Security numbers, the company accepted individual taxpayer identification numbers — a strategy that certain financial companies have used to expand their borrower bases.

Since January, the Trump administration has sought to increase deportations of undocumented immigrants, including by putting pressure on employers. In April, the Internal Revenue Service agreed to give U.S. Immigration and Customs Enforcement the names and addresses of certain taxpayers with ITINs to pursue immigration enforcement cases.

Tricolor operated as both an auto lender and an auto dealer. It ran dealerships in New Mexico, Arizona, Nevada and Illinois, but primarily in Texas, where it had more than 25 locations.

In the first five months of President Donald Trump’s second term, Texas reported more than 26,000 arrests, or nearly a quarter of all ICE arrests nationally, according to a Los Angeles Times analysis of ICE data from the Deportation Data Project.

On top of the changes in immigration enforcement, the subprime auto lending market has had its ups and downs. While subprime origination volume was largely stable from 2022 through 2024, delinquency rates climbed from mid-2021 through 2024, per data from the Federal Reserve Bank of New York. The worsening of delinquency rates has been especially pronounced within auto finance company debt, where problem loans have risen above pre-pandemic highs.

Tricolor, which landed a $90 million investment from BlackRock in 2021, relied on banks to fund its loans, including Fifth Third, JPMorganChase and Barclays.

The auto lender completed 17 asset-backed securities transactions over the course of several years, most recently announcing a $328 million issuance in June. In September 2022, Tricolor announced that it had closed a $100 million warehouse facility with Fifth Third, secured by loans Tricolor originated. It isn’t clear which, nor how many, of Tricolor’s total transactions involved alleged fraud.

Auto Finance News reported in April that at the time, about 55% of Tricolor’s portfolio was made up of non-FICO borrowers, but the company was tightening its approach to underwriting in an effort to move its average score up.

Barclays declined to comment on Wednesday. JPMorgan did not immediately respond to a request for comment.

Daniel Chu, founder and CEO of Tricolor, said in prepared statements earlier this year that amid macroeconomic volatility, his company had a differentiated strategy from other subprime auto lenders and a “conviction that our differentiated approach enables us to deliver consistent, predictable and positive outcomes.”

“It requires time for ABS investors to digest our model and recognize that our strategy generates more consistent, predictable and favorable outcomes,” Chu said at the time.

Chu did not respond Wednesday to a request for comment. Univision reported last week that an unidentified bank had taken control of Tricolor’s locations, and nearly all of the company’s employees had been furloughed.

Spence said Wednesday at the industry conference that according to Fifth Third’s review, the data used to back the loans as collateral was “corrupted.” There are also irregularities in Tricolor’s audited financial statements, Spence said.

He added that there will be “a fair amount” of litigation on this issue, but declined to provide more detail. The bank has also engaged with law enforcement authorities, per a company filing.

Going forward, Spence said the Ohio bank will evaluate its processes to assess if it could have caught the problem earlier.

“That’s really the work that is to come here,” Spence said. “But as it relates to the existing portfolio, we’re confident that there isn’t another one of these.”

Fifth Third estimates that the charge associated with the loan will be between $170 million to $200 million, and will be logged in the third quarter of 2025.

Aside from the loss provision, Fifth Third’s credit trends, per its Wednesday presentation, were looking better than analysts had expected. Piper Sandler analyst Scott Siefers called the fraud loss an “unfortunate incident that colors what was otherwise an improving credit story.”

The $210 billion-asset bank also upped its guidance for noninterest income growth — from a 1% to 4% range to a 5% to 7% range — due to stronger fee income.

Late Tuesday, Fifth Third announced that it has won a five-year contract with the Treasury Department’s Bureau of Fiscal Service to be the next financial agent for the U.S. government’s Direct Express prepaid debit card program. The Treasury bureau announced late last year that the contract was going to the Bank of New York Mellon Corp., but later reversed that decision and selected Fifth Third.

Fifth Third’s stock price was relatively flat on Wednesday.