We anticipate warehouse lines to specialty finance companies will come with tighter covenants.
Key takeaways
Institutions that lean into stronger oversight will be able to attract more stable financing.
Robust monitoring and control validation are not optional but essential in asset-based lending
Tricolor Holdings’ Chapter 7 bankruptcy filing in September 2025 has shone a light on the importance of investment oversight for the auto specialty finance sector.
Numerous banks were “bracing for potentially hundreds of millions of dollars in combined losses from loans tied to subprime auto lender Tricolor Holdings,” Bloomberg reported on Sept. 10. “The lenders are looking into whether collateral for warehouse lines was double-pledged,” the article said.
The company’s collapse is a stark lesson that robust monitoring and control validation are not optional but essential in asset-based lending. For specialty finance lenders, the case underscores several takeaways to apply when structuring and managing similar deals.
Here are some foundational ways lenders can strengthen their systems and future lending arrangements:
- Bake in independent oversight from day 1: When extending credit, lenders should require field exams and/or third-party validations in their loan agreements. Going forward, we anticipate that warehouse lines to specialty finance companies will come with tighter covenants such as quarterly field examination mandates, borrowing base certifications by an independent party, or even continuous monitoring. These measures won’t scare off honest issuers; rather, they signal a partnership approach to maintaining a healthy facility.
- Trust, but verify—continuously: It’s not enough to do one initial round of due diligence and then assume all will remain well. Rather, ongoing monitoring should be foundational for lenders. This includes recomputing reports, tracking covenant compliance in real time, and periodically reevaluating the issuer’s financial health and controls. If a business is growing fast or operating in a high-risk niche (like subprime auto loans), those are signals to increase the frequency of checks.
- Insist that the issuer maintains strong internal controls: Proper lending oversight isn’t just about the lender’s actions; it’s also about making sure the issuer has appropriate internal controls to help prevent fraud. Lenders should inquire about and even test their issuer’s control environment. For instance, does the issuer reconcile its loan portfolio across all funding sources monthly? Is there segregation of duties so one rogue employee can’t fabricate collateral without others noticing? Lenders can and should set expectations in the term sheet that the issuer maintain certain control standards.
- Be prepared to act on red flags: Perhaps one of the hardest parts of oversight is understanding what to do when you suspect something is wrong. Up front in lending agreements, lenders should establish the rights to get more information if a third-party validation detects anomalies or discrepancies. In extreme cases, the lender may need to freeze funding or accelerate repayment if fraud is confirmed. Such decisions can be difficult to make, but having clear trigger points and rights defined helps. The goal of early detection and using available tools (such as stop-lending triggers or additional audits, for instance) is to enable intervention when there’s still money to be saved or corrective steps to take.
Looking ahead
The subprime auto finance industry and other specialty lending sectors will undoubtedly incorporate the lessons of Tricolor. Institutions that lean into stronger oversight will position themselves to attract more stable financing and achieve lower costs of capital, because they’ll be deemed safer counterparts. Conversely, those that resist may find capital more expensive or scarce. In a post-Tricolor world, opacity is a risk few will be willing to take.
A third-party advisor can help lenders and issuers navigate what we expect to be an era of heightened scrutiny, whether that involves conducting routine field exams, setting up comprehensive ongoing monitoring programs or enabling other safeguards.
To prevent future failures, lenders must embed proactive oversight into every lending arrangement.
RSM offers three key solutions to put proper controls in place:
- Lender diligence field exams: Comprehensive reviews of the issuer’s compliance with lending facility requirements—which include loan-level testing that validates documentation—detect duplicate pledging, policies, controls, systems and other critical risks related to compliance with lending agreements.
- Monthly Servicer Report (MSR) validation services: Independent recalculations or confirmations of monthly reports can catch misstatements early.
- RSM Sentry: This continuous monitoring platform tracks risk indicators, loan-level reporting compliance and other anomalies in real time.
It’s important to remember that oversight is not only about catching bad actors but also about early detection of problems, including credit deterioration. Even absent fraud, robust monitoring helps manage credit risk. (Identifying that a portfolio is weakening, for instance, enables lenders to adjust advance rates or covenants in time).
The Tricolor case underscores that rigorous lender due diligence and continuous monitoring are indispensable throughout the life of a deal. By implementing proper controls, engaging a third-party advisor and leveraging technology for ongoing oversight, lenders can shift from being reactive to being proactive and significantly mitigate a variety of risks.
RSM contributors
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Louis MustoPrincipal
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