Federal prosecutors have begun a civil investigation into the booming business of subprime auto lending, focusing on the packaging and selling of questionable loans to investors, the New York Times reported today. The inquiry is being undertaken amid worries among some regulators that checks and standards are being neglected as the subprime auto loan market surges, in a small, yet disturbing, echo of the subprime mortgage crisis. General Motors’ finance subsidiary disclosed in a securities filing yesterday that it had received a Justice Department subpoena for documents on the origination and the securitization of subprime loan contracts since 2007. The subpoena asks for the underwriting criteria and how the loans were represented to those who were pooling them and assembling securities to be sold to investors. U.S. attorney Preet Bharara is reviewing whether the lender sold questionable auto-loan investments to investors, and is focusing on whether the lender fully disclosed to investors the credit-worthiness of the borrowers whose loans made up the complex securities. In the inquiry, federal prosecutors are looking for potential violations of the Financial Institutions Reform, Recovery, and Enforcement Act. The law, known as Firrea, was passed after the savings and loan scandals in the late 1980s, and has been used recently by the government in investigations of the big banks’ sale of shoddy mortgage-backed securities before the financial crisis.
