Smaller subprime auto lenders are folding as losses pile up

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Summit Financial Corp., a Plantation, Florida-based subprime car finance company, filed for bankruptcy late last month after lenders including Bank of America Corp. said it had misreported losses from soured loans. And a creditor to Spring Tree Lending, an Atlanta-based subprime auto lender, filed to force the company into bankruptcy last week, after a separate group of investors accused the company of fraud. Private equity-backed Pelican Auto Finance, which specialized in "deep subprime" borrowers, finished winding down last month after seeing its profit margins shrink.

The pain among smaller lenders has parallels with the subprime mortgage crisis last decade, when the demise of finance companies like Ownit Mortgage and Sebring Capital Partners were a harbinger that bigger losses for the financial system were coming. In both cases, rising interest rates helped trigger more loan losses.

"There's been a lot of generosity and not a lot of discretion on the part of lenders and investors," said Chris Gillock, a banker at Colonnade Advisors, which advises companies on subprime auto investments. "There's going to be more capitulation."

Representatives for Spring Leaf didn't respond to requests for comment. A lawyer for Summit said "restructuring in a Chapter 11 bankruptcy proceeding is the best strategy to ensure its long term success" and the company is working with its vendors and lenders to meet its obligations.