CARY, N.C. -

No less than five finance companies — Ally Financial, Consumer Portfolio Services, Credit Acceptance, General Motors Financial and Santander Consumer USA — have been subpoenaed by the U.S. Department of Justice, which is investigating practices in connection with subprime auto financing. Perhaps the industry-wide figure is even larger since this quintet includes publicly traded companies that disclosed the subpoenas during the past six months through filings with the Securities and Exchange Commission.

In an attempt to gain some clarity about what this wave of DOJ investigations might mean, SubPrime Auto Finance News recently reached out to Terry O’Loughlin, who now is the director of compliance at Reynolds and Reynolds after spending 16 years with the Florida attorney general’s office. While O’Loughlin acknowledged his direct interaction with the Department of Justice has been limited, he explained in broad terms how the subpoena process unfolds and what the overall impact to the auto finance industry might be.

O’Loughlin pointed out there has been “a long-standing belief” in the federal regulatory arena and the consumer advocacy sphere that often feeds agencies with potential investigative leads that auto financing is similar to mortgage lending. And with the negative connotation that subprime mortgages have within the public psyche because of them being a trigger of the “Great Recession,” O’Loughlin suspected it was inevitable for the government’s top investigative arm to dissect the auto space, targeting companies that specialize in vehicle financing for consumers with soft credit histories.

The Reynolds legal expert actually was on the panel session during the SubPrime Forum at Used Car Week back in November titled, “The Next Big Thing.” While revisiting some of what was touched on at that event in Las Vegas, O’Loughlin shared during a recent phone conversation that federal authorities are considering that, “If the economy starts to head back into recession, will a lot of these retail installment contracts and their obligations result in a lot of default? Is there a way to thwart that?”

He added that regulators might be asking, “With all of this money starting to pour into the automobile world to finance vehicles to consumers in the second and third tier of credit, will they be financially imperiled by spending more than they should be?”

O’Loughlin also mentioned that the Department of Justice and other federal agencies such as the Federal Trade Commission and the Consumer Financial Protection Bureau often are on the hunt for practices such as “steering” and “targeting.”

These activities, according to O’Loughlin, focus on the “idea that even for consumers who may have better credit, they’re still getting a higher interest rate than they deserve. Let’s say someone who does have Tier 1 credit might be paying 12 percent where he could qualify for 4 percent.”

And if these activities are happening to a point that disturbs officials from the DOJ, the FTC or the CFPB, O’Loughlin noted regulators might be looking to see if “subprime financing is creating a potential problem that the bureau has to address now through rulemaking to deter F&I managers and indirect lenders.”

That relationship between dealership F&I managers and indirect finance companies also has drawn plenty of negative attention from regulators and consumer advocates, according to O’Loughlin. Often the cause of their concern is dealer participation, what O’Loughlin said some zealots describe as a “kick-back.”

O’Loughlin added some extreme advocates believe consumers should be able to enter a vehicle retail installment contract at the buy rate.

“That’s just not true. It’s wholesale and retail. You don’t buy things at the wholesale value. You buy things at retail,” O’Loughlin said.

And it’s that misconception that often triggers confusion about how mortgage financing and auto financing unfold.

“In the mortgage world, you had negative amortization of interest and principle. Now you don’t,” O’Loughlin said. “Automobile lending, it’s a depreciating asset as opposed to a house that’s an appreciating asset in many cases. You don’t have negative amortization of any type. The financing sources, they’re looking at good data on how to underwrite and how the retail or lease contract is going to perform.

“Every conference I’ve gone to, the conversation is always about default rates,” he continued. “Obviously there could be a problem going beyond 72 months, but cars are better now than they were then. What, the average car is 11 years old? The dynamics are such that they’re not going to find the problem. There’s no bubble it seems to me in the automobile world.

“But that won’t prevent the regulators from trying to feed upon some of these other issues and how they can somehow try to prevent them,” O’Loughlin went on to say. “They don’t like that there is a reserve. They don’t like arbitration. They hate targeting and steering.”

The DOJ is already is several months into a potential investigation, having sent a subpoena to GM Financial back in July and delivering one to CPS last month. O’Loughlin indicated the legal counsel for these finance companies likely responded quickly in order to give their clients as much time as possible to deliver all of the information investigators are seeking.

“Certain government units have investigatory powers and subpoena power. In other words, they don’t have to go to a court to get a judge to stamp his approval on the subpoena. They can initiate them if they have any kind of belief that there is a problem that needs to be reviewed,” O’Loughlin said.

“The Department of Justice, they’ve always been the big dog with criminal powers and all that. That’s the attorney general’s office. That’s a pretty serious issue,” he continued.

All five of these public traded auto finance companies stated in their SEC disclosures that they are cooperating fully with investigators. O’Loughlin suspects that the DOJ is seeking “tremendous amounts of documentation.”

And when federal officials receive all of this material, what’s next?

“The investigative unit, whoever is going to look this stuff over, they’re going to spend some time doing this. Even if the target is expeditious in producing the requested materials, the investigative agency is probably going to spend some time reviewing and seeing where it leads,” O’Loughlin said.

So when might the industry expect these subpoenaed institutions to acknowledge any kind of enforcement actions?

“Six months, if I had to be optimistic,” O’Loughlin said. “I might be wrong, but six months seems realistic to me.”