Fraud Cases Lead Banking Giants to Tighten Oversight

Banks are reportedly tightening security following a series of fraud allegations involving corporate borrowers.

That’s according to a report late Monday (Nov. 3) from the Wall Street Journal (WSJ), which says the collapse of companies such as First Brands and Tricolor Holdings has bankers and investors rushing to stop similar incidents.

According to the report, that means greater due diligence and a demand for more extensive financial histories from companies. Some lenders are requiring borrowers to allow them to more frequent checkups before signing off on a loan. 

While the alleged frauds haven’t led to widespread economic trouble, they have caused turmoil for both regional banks and Wall Street titans such as J.P. Morgan Chase. 

“When you see one cockroach, there are probably more,” J.P. Morgan’s CEO Jamie Dimon said on his bank’s earnings call last month.

He was referring to two recent bankruptcies tied to the auto sector: car parts company First Brands and the now defunct subprime lender Tricolor Holdings.

“These are early signs there might be some excess out there because of it,” Dimon said. “If we ever have a downturn, you’re going to see quite a bit more credit issues.”

The troubles first cropped up in September, when First Brands filed for bankruptcy. As the WSJ notes, that bankruptcy accompanied questions over whether the company had pledged the same accounts receivable to different lenders. 

“While certain observers have characterized First Brands as a largely idiosyncratic failure whose lessons may not generalize across the direct lending or private credit universe, concentration and complexity risk are coming back in focus,” PYMNTS wrote last month.

“One immediate area likely to see scrutiny is the recyclable nature of invoices: how many times can an invoice be leveraged or hypothecated through chains of ownership or special purpose vehicles?” that report added.

Around the same time, Tricolor Holdings also filed to liquidate in bankruptcy, facing similar claims that it fabricated or double-pledged auto loans.

Investors are “being cautious around Tricolor, kind of taking a step back, thinking about could this happen to other issuers, and then there’s concern about consumer credit,” Theresa O’Neill, an asset-backed securities strategist at Bank of America, told the WSJ.

As covered here last month, the collapses of both companies have increased focus on automation and artificial intelligence (AI)-driven verification. 

Research by PYMNTS Intelligence found that 63% of CFOs point to delays from manual AP workflows as an ongoing concern, but AI and automation are increasingly helping to close that gap by spotting anomalies and streamlining approval routes.

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