GM (GM) Served With Subpoena by DOJ for Subprime Auto Loans

Shares of The General Motors Company (GM) closed up +0.17 or +0.51 percent to $33.61 on light volume in Monday's regular trading session. The company announced late yesterday that it had been issued a subpoena by the U.S. Justice Department in relation to an investigation currently being conducted over possible civil violations on subprime auto loans the company has made since 2007.

Detroit, Michigan based General Motors Company is one of the largest car manufacturers in the world, producing and distributing vehicles in 37 countries.
The company markets vehicles under 10 major brands and led global vehicle sales for 77 consecutive years from 1931 to 2007. General Motors filed for Chapter 11 bankruptcy in 2009 and was subsequently bailed out by the U.S. government, making an initial public offering in 2010. The IPO was one of the largest to date and returned the company to profitability.

The subpoena, which was served on GM on July 28th, is for the disclosure of documents relating to possible violations of civil fraud law in the underwriting criteria of the General Motors Financial Company for subprime auto loans the company has been making since 2007. Federal prosecutors are investigating the representations made by the company before making the loans and then pooling them into securities through a process called "securitization .

The Justice Department can take action against GM through the Financial Institutions Reform, Recovery and Enforcement Act or FIRREA, which allows the federal agency to sue for fraud affecting any federally insured financial institution.

GM Financial Executive Vice President and treasurer, Susan Sheffield said in an email that, "Our understanding is that the request is focused on the subprime auto finance space in general. There are no allegations set forth in the subpoena and GMF is cooperating with the request.

GM Financial was originally a Texas based subprime lender called AmeriCredit Co., which GM purchased in October of 2010 in a deal worth $3.5 billion. GM bought the lender in large part to extend loans to buyers with low credit scores and to make more leasing options available.

GM Financial issued $2.15 billion in subprime auto loan backed securities in the first half of this year. The division is responsible for 30 percent of all subprime loans to GM dealers and is the nation's second largest sub-prime auto lender.

Last December, GM's former financial division, Ally Financial Inc. agreed to pay $98 million for the resolution of claims by the U.S. Consumer Financial Protection Bureau and the Justice Department that the company was charging minority borrowers a higher interest rate than white borrowers.

GM stock is trading at the lower end of its yearly range. The company has had a number of legal setbacks this year, which have put considerable pressure on GM's stock price, including a $35 million fine to the NHTSA for an ignition defect which involved the deaths of 13 people. With ongoing litigation and lower than expected sales last month, GM stock could continue under pressure in the near and medium terms.

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Published on Aug 5, 2014
By Jay Hawk
Jay Hawk
Jay Hawk enjoyed a 12-year professional financial markets career incorporating extensive first hand futures and options experience obtained by trading in the stock, commodity and forex markets on U.S. exchanges. Since retiring as a full-time financial market professional, he has been actively trading stock, commodities, forex and options for his own account and managing funds for others, as well as writing financial market commentary and educational articles.

Copyrighted 2020. Content published with author's permission.

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