Former Evanston subprime auto lender indicted in alleged $55 million bank fraud scheme
The former CEO of an Evanston subprime auto lender has been indicted on federal fraud charges for allegedly submitting false reports on the status of thousands of loans, which were bundled to back a $100 million bond offering for investors in 2016.
James Collins, who cofounded the now-defunct Honor Finance, allegedly engaged in a multiyear accounting scheme by overstating the health of poorly performing and delinquent loans to maintain bank funding and withdraw cash from the securitized portfolio.
Honor Finance collapsed in 2018, and the alleged scheme caused an unnamed bank that provided a line of credit to the company to lose $54.5 million, according to the May indictment, which was unsealed this week.
“Allegations are not proof,” Terence Campbell, an attorney representing Collins, said in an email Thursday. “Mr. Collins acted appropriately in his dealings with the bank and we look forward to confronting these claims in court.”
Launched in 2000, Honor Finance acquired and serviced subprime auto loans on used vehicles. The company secured a $200 million line of credit from the unnamed bank in 2015 to use in its lending operations, according to the federal indictment.
In 2016, Honor Finance securitized thousands of loans and sold them as bonds to investors, with an unnamed underwriter and the same bank serving as custodian of the bonds.
To market the bonds, Honor created a Delaware trust that issued $100 million in notes, backed by a pool of subprime auto loans, according to an ongoing Securities and Exchange Commission civil lawsuit filed last year against Collins and Robert DiMeo, co-founder and former COO of Honor Finance.
The terms of the trust required Honor to regularly report on the status of the loan portfolio to the bank, ratings agencies and the bondholders, since the loan portfolio provided the collateral for the bonds. The lawsuit alleges Collins and an unnamed “co-schemer” provided certain borrowers with an extension to repay overdue loans under the accounting entry “allowable delinquency,” while other borrowers were credited with an “honor payment” to keep the loan current.
By doing so, Collins knowingly submitted “false information” to maintain the line of credit with the bank and increase the amount of funding they received from the trust, according to the indictment.
The bank sustained a loss of about $50.2 million in connection with the line of credit, and another $4.3 million from its role in the trust, according to the indictment.
At the time of the bond offering, Chicago private equity firm CIVC Partners was the primary owner of Honor Finance, after acquiring the majority of the loan portfolio in 2011, according to federal indictments.
The “house of cards” was revealed in December 2017, after an underwriter discovered the “improper and reckless” loan modification and servicing practices, which had obscured millions in unrecognized loan losses, according to the SEC lawsuit. When Honor’s private equity owners learned of the accounting issues, Collins was fired.
An outside consultant was brought in and DiMeo was fired in May 2018 after he was confronted about the accounting practices and responded, “This is how we’ve always done it,” and that “Jim (Collins) wanted it this way,” according to the SEC suit.
Honor shut down operations in August 2018. As losses mounted, a new servicer bought the remaining bonds from investors, who would have lost millions on the notes without intervention, according to the SEC suit.
In 2020, Collins and DiMeo were indicted in an ongoing federal case for allegedly diverting $5.3 million from Honor to another company they owned that sold GPS devices used to repossess the vehicles. In August, DiMeo pleaded guilty to one count of mail fraud in that case and agreed to cooperate with the U.S. attorney’s office in Chicago in “any criminal, civil, or administrative proceeding,” according to court filings. His sentencing is postponed until the conclusion of his cooperation.
DiMeo was not named in the latest federal indictment, which charges Collins, 53, with 15 counts of bank fraud and two counts of securities fraud. Each count of bank fraud is punishable by up to 30 years in federal prison, while each securities fraud count carries a maximum sentence of 20 years.
The lawsuit is also seeking the forfeiture of $54.5 million by Collins.
