Another cockroach! The subprime lending market is in turmoil again, PrimaLend files for bankruptcy

On Wednesday local time, PrimaLend Capital Partners, based in Plano, Texas, filed for bankruptcy after months of negotiations with creditors and failing to make timely interest payments, becoming the latest sign of stress in the U.S. economy targeting low-income consumers.

PrimaLend Capital Partners focuses on serving subprime borrowers and providing financing to car dealers. The company's main clients are car dealers who "sell cars while lending," primarily targeting low-income borrowers. According to its website, the company's products include accounts receivable, real estate, and auto inventory financing.

According to documents filed with the U.S. Bankruptcy Court for the Northern District of Texas, PrimaLend disclosed assets and liabilities of less than $500 million. Sources revealed that creditors include Canadian Imperial Bank of Commerce (CIBC) and Amarillo National Bank. Both institutions declined to comment.

PrimaLend stated that it has sought to sell its business in bankruptcy court and will continue to provide loans and services to its borrowers during the bankruptcy process. The company also mentioned that it has received bankruptcy financing commitments from existing lenders.

PrimaLend CEO Mark Jensen said in a press release:

This process will not result in any debts being demanded for immediate repayment or accelerated maturity. We highly value our relationships with dealer borrowers and look forward to continuing to serve in the "sell cars while lending" industry.

According to information on the company's website, PrimaLend has marketed itself as a lending institution that says "yes" when others say "no" since its establishment in 2007.

PrimaLend's bankruptcy filing comes just weeks after another "sell cars while lending" dealer, Tricolor Holdings, filed for bankruptcy. Meanwhile, the auto loan default rate among low-income Americans has reached its highest level in decades.

The sudden liquidation of Tricolor previously shocked investors. While the company is currently under investigation by the court for potential fraud and misconduct, this bankruptcy, along with the collapse of auto parts supplier First Brands Group and the write-offs of fraud-related loans by regional banks Zions Bancorp and Western Alliance, has raised concerns:

After years of loose credit, there may still be other risks lurking. Some investors have begun to scrutinize their portfolios for other potential hazards.

JPMorgan Chase CEO Jamie Dimon warned last week that more problems could arise in the credit sector, citing an old saying: "When you see one cockroach, there are usually more."

Financial blog Zerohedge commented that there are more dominoes yet to fall in this sector (or more cockroaches yet to be discovered). The question is, will it spread? Even Bank of England Governor Andrew Bailey issued a warning this week, cautioning that the collapse of First Brands (and similar companies like Tricolor) could signal "greater financial problems" ahead Donald Clarke, President of Asset Based Lending Consultants, stated that this consumer dilemma means that lenders in the subprime financing sector must be extra cautious:

"Stay alert and don't fall asleep. You need to obtain the borrower's financial statements now, tomorrow, and every month, rather than discovering months later that they have defaulted on a large scale."

Many lenders have become too complacent about their financing targets and subjects; they are eager to deploy funds while ignoring the risks. I advised a client back in 2022 not to invest in First Brands, when multiple warning signs that investors are discussing today, including insufficient disclosure of information, had already emerged.

You want to lend over a hundred million dollars, yet you don't even take a look at the company's books? Is money that easy to lend? Unless we remain rational in the face of risks and deepen our due diligence, we will remain vulnerable