Risk & Compliance

Subprime Auto Securitization Was a ‘House of Cards’

The former principals of Honor Finance misrepresented the quality of loans that they packaged into a $100 million securities offering, the SEC says.
Matthew HellerSeptember 24, 2021

The two former principals of subprime auto lender Honor Finance have been charged with defrauding investors by misrepresenting the quality of loans that they packaged into a $100 million securities offering.

The U.S. Securities and Exchange Commission said CEO James Collins and Chief Operating Officer Robert DiMeo misled investors in the Honor Automobile Trust Securitization 2016-1 (HATS) deal by failing to disclose that they improperly modified loans to hide credit weaknesses in the thousands of auto loans underlying the deal.

“Unbeknownst to investors, defendants filled HATS with poorly-performing and delinquent loans they disguised to look like better-performing (i.e., more likely to continue to pay rather than default) loans than they really were,” the SEC alleged in a civil complaint.

After the HATS deal closed in December 2016, the underlying portfolio reported significant losses and the offering became the first subprime automobile deal to be downgraded by the rating agencies since the 2008 financial crisis.

“We charge Collins and DiMeo with intentionally misleading investors, the underwriter, and rating agencies in order to securitize loans that should not have been included in HATS and hide Honor’s improper servicing practices,” Jennifer Leete, associate director of the SEC’s division of enforcement, said in a news release.

Collins and DiMeo were previously indicted in May 2020 on criminal charges for allegedly misappropriating at least $5.3 million in Honor funds.

According to the SEC, they perpetrated the HATS fraud by applying essentially fake payments to delinquent loans to make it appear as though borrowers had made payments when they in fact had not and by unilaterally extending the payment due dates of otherwise delinquent loans to disguise how far behind the borrowers were on payments.

In offering materials, Honor Finance allegedly stated it granted payment modifications to borrowers no more often than once every three months when, in reality, it provided modifications of one kind or another more than once every three months nearly 24,000 times to more than 5,600 unique loans, representing 38% of the loan pool.

HATS was a “house of cards which was doomed to fail, and it predictably collapsed when [the] scheme unraveled,” the SEC said.