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Compass Point Cites Industry Iceberg As Feds Probe Subprime Auto Lenders

John Seward

Federal prosecutors' recent request that General Motors' (NYSE: GM) finance unit hand over documents concerning its subprime lending practices could be the tip of a regulatory iceberg for the industry.

Players at risk may include Credit Acceptance Corp. (NASDAQ: CACC), Consumer Portfolio Services (NASDAQ: CPSS) and Santander Consumer USA Holdings

Suggesting shades of the 2008 mortgage debacle, the GM investigation focuses on whether it sold the loans as secularized packages to investors without disclosing borrowers' creditworthiness.

"It suggests other subprime lenders could receive subpoenas as well," Compass Point Research's Isaac Boltansky said in a note Monday.

A wider investigation "could prove a regulatory headwind for the industry in the months ahead," Boltansky added.

Prosecutors have recently used provisions of the Financial Institutions Reform, Recovery, and Enforcement Act, known as FIRREA, to exact sizable penalties from banking companies including JP Morgan, Citigroup and Bank of America.

Those successes "have emboldened the DOJ to more broadly pursue investigations" under the law, Boltanksky said.

A further headwind may blow from efforts of the federal Consumer Finance Protection Board's latest rule-making agenda, which aims to extend its authority to non-bank lenders while identifying so-called larger participants in the auto lending industry.

"The rule-making parameters will cast a wide net," Boltansky said.

The New York Times reported recently that subprime auto loan volume grew 15 percent, to $145.6 billion, in the first three months of this year while total auto loan securitizations have increased since 2009 by 150 percent, to $17.6 billion last year.

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