If you think the subprime housing mess that was the only linchpin leading up to the 2008 market crash, think again. The subprime loan legal investigation train could be headed into the station of General Motors Company (NYSE:GM) for subprime auto loans.


GM Financial receives subpoena from DoJ

GM’s auto financing unit could be in the cross hairs of the Department of Justice for its practice of placing people in car ownership who had little hope of affording a vehicle.

According to a Reuters report, a recent GM Financial regulatory filing tells the story.

DoJ is reported to be asking GM Financial to produce documents that date back to 2007 that relate to the underwriting criteria used to originate auto loans.  If the criteria was particularly weak it could have resulted in loans being packaged and sold to Wall Street that had little chance of repayment – a similar situation to that of loans for mortgages during the same period.

Investigation is about?

The exact focus of the investigation is at this point unclear. It is not known if GM Financial packaged the loan products in a deceptive manner and sold them to a financial institution as a high quality loan product.  It is a common violation of RICO statutes to deceive a financial institution regarding a transaction.

What is known, according to the CNBC report, is that the DoJ is concidering civil proceedings for a potential violation of the Financial Institutions Reform, Recovery and Enforcement Act of 1989.

The (FIRREA) is a federal law spawned as a result of the savings and loan crisis of the 1980s, when a multitude of savings and loan executives went to jail for their financial crimes.

The law is wide ranging but addresses the bank insurance fund and it increased public oversight of the loan process.

Using this act to prosecute financial criminal issues might be preferred because of the low bar set to convict.

FIRREA grans the government broad powers to bring civil claims and has relaxed requirements for establishing liability than does commercial fraud statutes.  The Act was used in the wake of 2008 to prosecute liability for the crisis and specifically targeted financial institutions that misrepresented the quality of loans to financial institutions who were selling them to financial institutions.