Tricolor Auto Acceptance was a Dallas based subprime auto lender focused on Hispanic borrowers across Texas. At its peak it carried over 800 million dollars in warehouse lending capacity, substantial for a mid sized specialty lender. In 2024 that line was called. The company entered liquidation shortly after, leaving thousands of active borrower relationships to be wound down or transferred.
The covenant sequence that led to the collapse is the part worth studying. Warehouse credit agreements in subprime auto typically carry three types of performance triggers. A net charge off rate cap, often set at 8 to 12 percent annualised. A 90+ day delinquency concentration limit, often 4 to 6 percent of the pool. A minimum weighted average FICO floor, typically 560 to 590. Breach any one and the warehouse lender has the contractual right to stop advancing against new loans, sweep the borrowing base, or call the line in its entirety.
The metric was fine. The slope was not.
Tricolor reported sub eight percent 90+ DPD in the quarter before liquidation. The covenant cap was around ten. By the conventional snapshot metric the book was inside the line. The CFO could honestly report compliance to the board. Internal monthly reports showed a portfolio operating within covenant tolerance.
What the warehouse bank was tracking was the second derivative. Vintage cohorts originated in late 2022 and early 2023 were not just running above expectations on cumulative net loss. They were running above expectations with an accelerating slope. The terminal velocity of the 60 to 90 day roll rate had been climbing for six consecutive months. Plotted as a runway calculation, the book hit covenant in month nine. Plotted as a snapshot, the book looked fine.
Why warehouse banks now act faster.
Post Tricolor, warehouse lenders across the subprime auto space have materially tightened monitoring cadence and covenant enforcement. Lines that were reviewed quarterly are now reviewed monthly. Breaches that previously triggered a cure period conversation now trigger line restriction. The implicit tolerance that existed in 2021 and 2022, when nearly every subprime portfolio was performing well due to stimulus effects, has been fully withdrawn.
The bank does not need to wait for a hard covenant breach to act. A demonstrated trajectory toward breach is increasingly enough for an aggressive review. Lenders who have not updated their covenant monitoring infrastructure to match this enforcement environment are operating with an outdated risk model.
What to do about it.
Build the runway view yourself. Take your current net charge off rate. Add your monthly rate of change. Project both numbers forward 18 months. Compare against your covenant cap. The month the projected number crosses the cap is your runway. Do the same for 90+ DPD and weighted average FICO.
If your runway on any metric is under 12 months, your warehouse bank already knows that. They are already modeling it. The strongest position you can be in is the one where you walk into a covenant conversation with your own runway calculation, your own corrective plan, and your own dealer level analysis of where the deterioration is concentrated. The weakest position is the one where you find out about it from them.
The math is not complicated. The discipline of running it every month, against every covenant, on every cohort, is what separates the lenders who get blindsided from the lenders who get ahead of the call.