Tricolor’s bankruptcy: A wake-up call for investment oversight

Tricolor Holdings’ Chapter 7 bankruptcy filing in September 2025 has shone a light on the importance of investment oversight for the auto specialty finance sector.

Numerous banks were “bracing for potentially hundreds of millions of dollars in combined losses from loans tied to subprime auto lender Tricolor Holdings,” Bloomberg reported on Sept. 10. “The lenders are looking into whether collateral for warehouse lines was double-pledged,” the article said.

The company’s collapse is a stark lesson that robust monitoring and control validation are not optional but essential in asset-based lending. For specialty finance lenders, the case underscores several takeaways to apply when structuring and managing similar deals.

Here are some foundational ways lenders can strengthen their systems and future lending arrangements:

• Bake in independent oversight from day 1: When extending credit, lenders should require field exams and/or third-party validations in their loan agreements. Going forward, we anticipate that warehouse lines to specialty finance companies will come with tighter covenants such as quarterly field examination mandates, borrowing base certifications by an independent party, or even continuous monitoring. These measures won’t scare off honest issuers; rather, they signal a partnership approach to maintaining a healthy facility.
• Trust, but verify—continuously: It’s not enough to do one initial round of due diligence and then assume all will remain well. Rather, ongoing monitoring should be foundational for lenders. This includes recomputing reports, tracking covenant compliance in real time, and periodically reevaluating the issuer’s financial health and controls. If a business is growing fast or operating in a high-risk niche (like subprime auto loans), those are signals to increase the frequency of checks.
• Insist that the issuer maintains strong internal controls: Proper lending oversight isn’t just about the lender’s actions; it’s also about making sure the issuer has appropriate internal controls to help prevent fraud. Lenders should inquire about and even test their issuer’s control environment. For instance, does the issuer reconcile its loan portfolio across all funding sources monthly? Is there segregation of duties so one rogue employee can’t fabricate collateral without others noticing? Lenders can and should set expectations in the term sheet that the issuer maintain certain control standards.
• Be prepared to act on red flags: Perhaps one of the hardest parts of oversight is understanding what to do when you suspect something is wrong. Up front in lending agreements, lenders should establish the rights to get more information if a third-party validation detects anomalies or discrepancies. In extreme cases, the lender may need to freeze funding or accelerate repayment if fraud is confirmed. Such decisions can be difficult to make, but having clear trigger points and rights defined helps. The goal of early detection and using available tools (such as stop-lending triggers or additional audits, for instance) is to enable intervention when there’s still money to be saved or corrective steps to take.