U.S. Banks Missed Warning Signs on Tricolor. Now, Their Losses Are Adding Up.
In June, Daniel Chu seemed securely in the driver’s seat. The Dallas-based auto business he had co-founded 18 years earlier was growing steadily and had just cleared a new financial milestone.
Chu’s Tricolor Auto Group had recently opened a 258,000-square-foot maintenance center outside Phoenix to repair and recondition the used vehicles it sold to its core market of Spanish-speaking immigrants. The facility—its second, after one in Texas—was to anchor a western-state expansion.
Rating firms had just graded Tricolor’s latest round of securities backed by its auto loans, pushing the total volume of its rated bonds past $2 billion. S&P Global Ratings gave the biggest slice of the security an AA rating, its second-highest ranking.
Previous baskets of Tricolor auto loans were bought by Wall Street giants JPMorgan Chase, Pimco, and AllianceBernstein. Among Tricolor’s backers was BlackRock, the world’s largest asset manager, which had cast the chain’s focus on the Hispanic community as consistent with its social-investing goals. JPMorgan and Barclays had provided the company with a line of credit.
“We have conviction that our differentiated approach enables us to deliver consistent, predictable and positive outcomes,” Chu said in a June 11 statement announcing the Barclays-led securitization.
Less than three months later, his auto empire lay in shambles. On Sept. 5, Tricolor abruptly closed its 65 lots across six states before filing for liquidation under Chapter 7 of the U.S. bankruptcy code. S&P put its auto-loan-backed securities on watch for downgrades before suspending its ratings entirely, and some of the company’s lenders have flagged their exposure in regulatory filings.
As Tricolor benefited from Wall Street’s largess, U.S. banks and ratings firms appear to have missed or overlooked warning signs. So too may have the U.S. government, which awarded Tricolor a special U.S. Treasury certification in 2019.
In 2022, Barron’s found Tricolor was selling cars well above market averages while touting its designation from the U.S. Treasury as a Community Development Financial Institution—a government seal of approval for social lenders.
Tricolor was also repeatedly cited by state motor-vehicle and financial regulators, Barron’s found, for lapses that included delayed title transfers, improper use of temporary license plates, and selling cars for which the company didn’t hold title.
Fifth Third Bank recently disclosed it faced up to $200 million in losses tied to what it said was alleged fraudulent activity at a commercial borrower, which a person familiar with the matter identified as Tricolor. Fifth Third hasn’t disclosed any details of the alleged fraud.
“When you have a fraud, it’s ultimately a client selection issue,” Fifth Third CEO Timothy Spence said at a Sept. 10 banking conference. “We’re not in the business of doing business with people who commit fraud.”
One of Tricolor’s co-founders, Texas businessman Ken Weaver, had served prison time for selling stolen cars, then failed to disclose that history when seeking to run a Texas utility that racked up customer complaints under his watch, according to local news reports.
In a 2022 interview, Chu told Barron’s he forced Weaver out after learning of his past. Barron’s was unable to locate Weaver for comment.
Chu’s own record includes allegations of financial mismanagement and self dealing.
Before co-founding Tricolor, Chu resigned from his role as president at another used-car company after accounting irregularities surfaced, according to a regulatory filing with the Securities and Exchange Commission. Chu said he wasn’t involved with the firm’s accounting.
Chu was also sued by partners in a tech business for allegedly giving away their stake in the venture to settle a personal debt, a transaction for which Chu later disclaimed responsibility.
JP Morgan, Barclays, Fifth Third, BlackRock, Pimco, AllianceBernstein, S&P, and the Treasury’s Community Development Financial Institution Fund either declined to comment about Tricolor’s history and Chu’s background or didn’t respond to requests.
Chu didn’t respond to requests for comment and has made no public remarks in the weeks since Tricolor’s apparent collapse, but Barron’s spoke to him over multiple conversations lasting several hours for its 2022 report.
At the time, Chu said Tricolor sold cars at lower margins than competing dealership chains, spending generously on presale repairs and reconditioning. Citations from state motor-vehicle and financial regulators were largely due to missteps by outside vendors Tricolor works with, he said. Chu said he believed himself to have been exonerated in the claim by the tech-company investors and had committed no wrongdoing.
“My life as an entrepreneur hasn’t been this easy path,” he said. “There have been a lot of unscripted, unconventional turns.”
Chu, 61, grew up in Dallas, where he attended the St. Mark’s School of Texas, an elite boys’ prep academy. He earned a degree in electrical engineering from Washington University in St. Louis, then studied athletic administration at the University of Miami before becoming head basketball coach at the University of the South in Sewanee, Tenn.
Chu told Barron’s that his coaching career ended when he joined a family friend to launch Paaco, a Dallas used-car chain that, like Tricolor, catered to Hispanic buyers.
The Associated Press reported at the time that he had been fired from the coaching job for violations involving payouts to student athletes, which led to the University of the South athletics program being placed on probation. Chu didn’t respond to questions about this account.
His time at Paaco, where he was president, likewise ended amid controversy. A year after the chain’s 1998 sale to the Crown Group, a publicly traded holding company whose businesses are now part of America’s Car-Mart, Crown disclosed “accounting errors and irregularities” at Paaco. Crown said it “has taken certain steps to ensure the integrity of Paaco’s accounting and reporting procedures” and announced Chu’s retirement.
Chu told Barron’s that he had no role in the firm’s accounting during the period in question and viewed the episode as an opportunity to step away. “Frankly,” he said, “I was ready to get out of the business at that point anyway.”
After Paaco, Chu drew partners into a tech venture that eventually sold for $161 million. Those partners later sued Chu, according to a 2012 court filing, alleging that he diverted their stake to settle a personal debt. In courtroom testimony reviewed by Barron’s, he appeared to acknowledge having made the transfer.
A lawyer for the investor group told Barron’s that Chu was dropped as a defendant in exchange for that testimony. Chu said he was cleared because the transfer was directed by others.
By the mid-2000s, Chu was back in the used-car business as co-president of Ole Auto Group, another Texas chain that catered to Hispanic buyers.
His tenure at Ole coincided with a financial scandal involving Philadelphia mob associates who conspired to seize control of the auto seller’s parent, FirstPlus Financial, and siphon off its assets, according to reporting by The Wall Street Journal and other outlets. The conspirators later received decadeslong prison sentences for racketeering and fraud.
Chu was dismissed from Ole soon after the mob takeover. He sued FirstPlus’s new leadership in an effort to regain his job but abandoned the case after Weaver, the Texas businessman, invited him to start a new business aimed at the same low-income, Spanish-speaking market, he said. Weaver founded the company in August 2007, with Chu becoming CEO soon after.
Chu said he had been unaware of Weaver’s criminal background, which was exposed by the Dallas Morning News in 2009. Weaver had served prison sentences for crimes including stealing and reselling cars, the paper reported. Weaver omitted that information in his subsequent state application to operate an electric-utility provider for low-income Texans called Freedom Power, which was later cited for consumer protection violations.
Chu said in 2022 that he immediately pushed Weaver out of Tricolor, by recruiting an outside investor to buy out his stake.
In late 2020 and early 2021, Tricolor added several high-profile names to its board: Antonio Garza, former U.S. ambassador to Mexico under George W. Bush; Kathryn Petralia, co-founder of financial-technology firm Kabbage, now part of American Express; and Beth Brooke, a former Ernst & Young executive and Treasury official in the Clinton administration who also sits on the board of the New York Times.
Garza, Peralta, and Brooke didn’t respond to messages seeking comment.
Chu, meanwhile, in 2022 joined the board of Louisiana’s Origin Bank, which has made $30 million in loan commitments to the auto chain, records show.
The bank also extended at least $17.4 million in mortgage loans to Chu for properties in Dallas County’s Highland Park, the Hollywood Hills, and the Four Seasons Residences at the Surf Club in Surfside, near Miami, according to property records.
Chu resigned from Origin’s board on the day Tricolor filed for bankruptcy.
An Origin spokesperson said the bank “fully complies with all laws and regulations regarding lending.”
Chu told Barron’s in 2022 that he launched Tricolor after seeing the challenges Hispanic immigrants faced in buying cars. Tricolor was also pursuing a social mission, he said, helping low-income customers get to work and build credit histories.
He cast the company as a do-good version of the controversial used-car sales format known as “buy here, pay here.” Such businesses offer in-house financing to customers who don’t have the savings, income, or credit scores to qualify for conventional loans.
In 2019, Tricolor was certified as a Community Development Financial Institution under the U.S. Treasury based on its lending to a target market of low-income Hispanic borrowers.
The program promotes lending in disadvantaged communities by granting CDFI status to qualifying lenders. Most certified entities are nonprofit lenders, community banks, or credit unions, though some for-profit banks and investment firms have also been approved.
Despite the special status, Tricolor used some of the tactics practiced by traditional “buy here, pay here” lenders, such as selling used cars at steep markups, then cycling those vehicles back into their inventories if borrowers defaulted, Barron’s reported in 2022.
Barron’s found that Tricolor had also been the target of more fines and violation notices from state motor vehicle and financial regulators than big, national used-car companies that sell far more vehicles. Some Tricolor customers said in interviews and state complaint filings that they encountered mechanical troubles with recently bought cars that the company couldn’t or wouldn’t fix.
Tricolor had also agreed to pay $83,000 in 2015 to the Federal Trade Commission to settle charges that its loan servicing arm lacked procedures to ensure accurate reporting to credit bureaus and failed to conduct required investigations of borrower complaints.
Chu said the credit-reporting lapses occurred under Tricolor’s then-private equity owners and caused no direct harm to customers.
Tricolor’s CDFI label became a big part of its appeal to Wall Street in an era of sustainable investment initiatives. BlackRock, for one, cited the social-lending designation in its decision to invest in the company through its Impact Opportunities Fund in May 2022.
The fund was created to raise $1 billion for businesses and projects owned, led by, or serving members of minority groups. BlackRock directed some $90 million to Tricolor.