Tricolor Files for Bankruptcy. The Auto Lender Was Once an ESG Favorite.

In addition to 65 auto lots across six states, Tricolor operates a 200,000 square foot vehicle reconditioning facility near Dallas. (Tricolor Holdings)

Tricolor Holdings, a Dallas-based chain of used-auto dealers, filed for Chapter 7 bankruptcy protection on Wednesday. The liquidation plan was filed in U.S. Bankruptcy Court in Dallas. It lists between $1 billion and $10 billion in both assets and liabilities.

Tricolor, which made loans to individuals lacking credit, had been identified as a socially minded investment by BlackRock and other major financial firms. Multiple U.S. banks face exposure to the bankruptcy, including JPMorgan Chase and Fifth Third Bancorp.

Tricolor was the focus of a Barron’s investigation in November 2022 that raised questions about the firm’s lending practices and the quality of vehicles sold on its lots.

The firm said in court documents that its bankruptcy filing came after considering “materials regarding the liabilities, obligations, and liquidity” of the company and its affiliates.

The move follows a regulatory filing from Fifth Third Bancorp late Tuesday, in which the Cincinnati-based bank said it was taking a write-down of up to $200 million tied to what it called fraudulent activity at a commercial borrower. That borrower is Tricolor, a person familiar with the situation told Barron’s on Wednesday.

Tricolor didn’t respond to messages seeking comment.

Tricolor operates 65 auto lots across six states, specializing in sales and loans to undocumented Spanish-speaking buyers. That focus has earned Tricolor certification under the U.S. Treasury as a Community Development Financial Institution, a designation granted to businesses that lend to members of underserved communities.

“No one else is providing meaningful dollar credit to an illegal immigrant,” Tricolor founder and CEO Daniel Chu told Barron’s in 2022.

The company began suspending operations and furloughing workers at its lots on Friday, according to reports on industry blog The Car Dealership Guy and other outlets.

On Wednesday, J.P. Morgan Securities analysts said in a research note that Tricolor was believed to be the company that drove the $170 million to $200 million impairment charge disclosed by Fifth Third.

Fifth Third “recently discovered alleged external fraudulent activity at a commercial borrower,” Fifth Third said in its disclosure, adding that it “is working with the appropriate law enforcement authorities in connection with this matter.”

Other lenders to Tricolor include JPMorgan Chase, which, together with Barclays Bank , had extended $777 million in credit to the dealership chain, about $550 million of which had been used as of April 30, according to a report from Kroll Bond Rating Agency.

JPMorgan’s total exposure to Tricolor is up to $200 million, roughly the same as Fifth Third’s, a person familiar with the matter said.

Ruston, La.-based Origin Bank has about $30 million in loan commitments to the auto chain, Origin said in a regulatory filing Wednesday afternoon.

“The bank is currently evaluating the status and valuation of the collateral and any necessary additional provision for credit losses relating to these loans,” Origin said. The bank “plans to pursue all available remedies to protect the bank’s interests.”

Tricolor’s Chu had been a director at Origin since 2022. The bank said he resigned from the board on Sunday.

Barclays didn’t respond to messages.

Tricolor has bundled more than $2 billion in auto loans into securities for sale to investors since 2018, according to the Kroll report.

Tricolor’s most recent securitization was a $217 million issuance in June. JPMorgan, Barclays, and Fifth Third served as managers in the transaction, Tricolor said in a press release at the time.

Tricolor’s securitizations have been designated as “social bonds” based on its commitment as a CDFI to lend to a target market of Hispanic borrowers.

Financial institutions until recently touted their social bond purchases as part of their commitment to ESG—or environmental, social and governance—principles. BlackRock took a $90 million stake in Tricolor in 2021 as part of its Impact Opportunities Fund focusing on businesses and projects owned, led by, or serving members of minority groups.

A BlackRock spokesperson declined to comment on the bankruptcy filing and the alleged fraud.

In the 2022 investigation, Barron’s found that Tricolor appeared to be selling vehicles for sums well above the averages for similar cars, as it touted its CDFI status, which serves as the government’s social-lending seal of approval. Barron’s based its analysis on Kelly Blue Book value estimates.

Tricolor was a frequent target of fines and violation notices from motor vehicle and financial regulators, Barron’s found. 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 under its limited warranties.

Chu told Barron’s at the time that Tricolor sells cars at lower margins than competing dealership chains, spending generously on presale repairs and reconditioning. Citations from state motor-vehicle and financial regulators are largely due to missteps by outside vendors Tricolor works with, he said.

The Treasury agency that oversees the CDFI program, the CDFI Fund, didn’t respond to a message seeking comment from Barron’s on Wednesday.

Businesses have scaled back or played down their ESG goals under the President Donald Trump’s new administration, which has directed the U.S. Attorney General to identify and block state laws that address climate change and other ESG initiatives.

Separately, under Trump, the CDFI program has faced defunding threats and criticism over its policy of encouraging lending to target groups identified by their racial identities.

Write to Jacob Adelman at jacob.adelman@barrons.com