On first blush, two of the biggest headlines in finance—subprime auto lender Tricolor and auto parts giant First Brands—appear to be disparate stories. Yet, they shared a single, fatal flaw: a complete lack of visibility into the collateral pledged against loans they secured from lenders.
Tricolor allegedly double-pledged the same vehicles (via duplicated VINs) to secure multiple loans. First Brands reportedly “stacked” its invoices, using the same accounts receivable to secure financing from different lenders. The ability for borrowers to pledge collateral multiple times exposes a systemic vulnerability to which traditional finance has been slow to respond.
This core problem—the financial blind spot around existing liens—is exactly what modern FinTech is built to eliminate. The solution to preventing future credit challenges like these lies in creating a singular, immutable, digital record of every pledged asset.
The Failure Of Fragmented Records
Traditional credit oversight fails when collateral information is fragmented. Despite the modernization of financial systems, data still remains the critical point of failure.
Typically, each lender maintains its own records, or siloed database. There is an inherent level of trust placed in the borrower to disclose all existing liens.
Often, the only public record for liens on assets like vehicles or corporate receivables is the Uniform Commercial Code (UCC) filing system, which is state-by-state, manual, and often delayed. By the time a UCC filing is publicly searchable, the fraudulent pledging may have already been completed.
Leveraging technologies like Artificial Intelligence (AI) and Distributed Ledger Technology (DLT) (the backbone of blockchain), could provide the necessary solution: a real-time, shared collateral registry.
Collateral Guardians: Ending The Double-Pledging Loophole
DLT creates a permanent, shared, and immutable digital record that can be viewed by all parties simultaneously.
In the case of Tricolor, vehicles and their corresponding Vehicle Identification Number (VIN) were logged internally by each lender, allowing duplication. If, however, a Digital VIN Registry were in place, every new loan origination would automatically register the VIN on the DLT. If a VIN is already flagged with an active lien, the system instantly denies or flags the application as a duplicate.
First Brands’ case involves the alleged pledging of accounts receivable (detailed on invoices) that could have been presented to multiple lenders. If, however, each invoice was assigned a unique digital “token.” Once that token was pledged for funding, it would instantly and permanently be marked as encumbered on the DLT network, making re-pledging impossible.
The core benefit gained by lenders is immutability. Since the DLT record is cryptographically secured, no single party—borrower, lender, or otherwise—can unilaterally alter the record to conceal a prior lien.
Predictive Risk With AI And Big Data
While DLT fixes the collateral fraud problem, AI-powered Early Warning Systems (EWS) could address broader financial health issues.
Today, AI models ingest thousands of data points—from market prices and shipping manifests to social media sentiment—to create continuous, predictive risk scores. Whether they be consumer or enterprise solutions, many fintech companies are testing the validity and correlations provided by their alternative data solutions.
In the case of First Brands, AI could have flagged the unusual complexity of its debt structures and supply chain financing. For Tricolor, it would have instantly detected the discrepancy between reported high recovery rates and actual market conditions.
DLT/Blockchain For Collateral Management
While the exact system needed for mass-market assets like used cars and small-business invoices is still in the process of full regulatory integration (the UCC challenge), the core technologies are already being deployed by major financial institutions.
The concept of a shared, immutable collateral registry is most advanced in the institutional financial market, where collateral is typically high-value securities (like bonds or cash).
One of the most prominent examples of a working DLT solution for collateral is HQLAX (High Quality Liquid Assets Exchange), HQLAX uses a distributed ledger to create Digital Collateral Records (DCRs)—digital representations of securities held at various custodians (like a token for an invoice or a VIN).
HQLAX allows ownership of collateral to be instantly and atomically transferred between two parties without physically moving the underlying asset between custodial accounts. Once the DCR is transferred on the HQLAX DLT, it is instantly marked as encumbered for all participants, making it impossible to use the same asset simultaneously in another transaction.
This platform proves the concept of a shared, single-source-of-truth registry that eliminates the collateral blind spot. Scaling and adapting this system to consumer/corporate assets (like VINs and Accounts Receivable), however, may prove challenging as a lack of standards among states and jurisdictions creates hurdles outside of the technology.
Digital Asset Initiatives By Major Market Infrastructure
Major financial institutions and clearing houses are also moving quickly to digitize collateral and improve lien tracking.
The DTCC is actively exploring and building DLT solutions for collateral management, including its Collateral AppChain solution. Their experiments demonstrate how tokenized assets can be used as collateral instantly, streamlining the process and reducing counterparty risk—the very friction that allows double-pledging to occur.
Large banks like J.P. Morgan are developing their own platforms to issue and utilize tokenized assets (like tokenized cash and securities) for secured financing (repos). The technology focuses on atomic settlement, meaning the exchange of cash and the transfer of collateral ownership happen simultaneously on the DLT, giving all parties real-time transparency into the lien status.
AI And Real-Time Risk Monitoring
API-First Loan Management Systems (e.g., LoanPro, Solifi) have been designed to seamlessly integrate hundreds of data sources—from credit reports and bank statements to more granular collateral-specific data.
For a commercial lender, an Asset-Based Lending (ABL) platform like Solifi can automate the ingestion of borrower Accounts Receivable reports and instantly calculate ineligibles (invoices already pledged or deemed too risky), flagging anomalies far faster and more accurately than human analysts.
FinTech solutions specifically focused on subprime and auto lending are increasingly employing AI to look for the precise anomalies Tricolor allegedly exhibited, such as using public market data (auction houses, vehicle valuation services) to instantly cross-reference a loan’s reported collateral value against its actual market value, automatically flagging inflated VINs.
The Missing Link: Regulatory Integration
While the technology is proven, the solution still lacks the legal and regulatory glue needed for mass adoption in areas governed by the UCC.
The legal community is preparing, however: the 2022 Amendments to the Uniform Commercial Code (UCC) explicitly introduced the concept of the Controllable Electronic Record (CER) to provide a legal framework for digital assets like the tokenized invoices or VINs we discussed. Once states broadly adopt these amendments, it clears the legal path for FinTech DLT registries to become the legally recognized source of truth, finally merging the technological solution with the necessary regulatory authority.
The Regulatory & Standardization Hurdle: Connecting The 50 States
The technological capability to solve collateral fraud exists today, but implementation faces a critical real-world challenge in the U.S.: The fragmented nature of the UCC filing system.
For a DLT collateral solution to be effective and legally sound, it would require integration across all 50 states’ UCC filing systems. The real-time digital record must be recognized as the authoritative legal source of truth.
This is where the private sector and regulators must collaborate. Establishing a National Digital Collateral Registry would not just prevent the next Tricolor or First Brands crisis, but fundamentally secure asset-backed lending and restore faith in the system’s integrity.
Conclusion: FinTech As The Only Way Forward
The simultaneous failures at Tricolor and First Brands were most likely caused by the same structural flaw: the inability of traditional systems to track pledged assets efficiently. Future instances of these crises are preventable. By adopting FinTech’s transparency tools—specifically DLT for an immutable collateral record—the financial industry can finally eliminate the collateral blind spot and move from reacting to crises to proactively securing the future of lending.