Double pledging after Tricolor: Stop treating collateral like a suggestion

The uncomfortable truth

Asset-backed finance (ABF) is having a trust crisis. The alleged double pledging at Tricolor — and parallel disputes in other sectors — didn’t happen because we lack covenants. It happened because we still run collateral integrity on emails, paper, PDFs, and delayed UCC filings, while borrowers juggle multiple facilities faster than lenders can reconcile them. That’s negligence disguised as “market practice”.

Double pledging is not an exotic edge case. It’s a systemic blind spot. In auto asset-backed securities (ABS), paper titles, chattel paper, and siloed custody chains create duplicability. In receivables finance,‑ invoices that can be copied and pasted as well as fragmented special purpose vehicles (SPVs) make it trivial to pledge the same cashflows twice. Recent collapses and case studies confirm losses in hundreds of millions — and they were discoverable with cross facility data checks that most market participants still don’t run.

If parts of the industry keep treating “possession” of PDFs as ownership, the same assets may be funded multiple times. The market must move from legal attestation after the fact to real-time verification at the moment of pledge.

What Tricolor exposed (and why it matters beyond autos)

• Custody ≠ control - Even perfected interests can be undermined when UCC releases, chattel paper possession, and lien recording don’t align across warehouse lines and securitizations. The chain of title breaks where process meets speed.
• Sampling audits are obsolete - Spot checks don’t catch duplicated vehicle identification numbers (VINs) or recycled receivables across parallel facilities. Only cross-lender, asset-level deduplication can catch it.
• Paper is a liability - “Original” documents are fiction when copies can be presented as unique. Digital authoritative copies, with immutable control records, are the minimum viable safeguard.

Investors: Change your risk standard — now

1. Make “collateral uniqueness” a condition of precedent.
   Require a third-party or shared-registry certification that every asset (e.g., VIN, invoice ID, account number) appears in only one active facility before each advance. Don’t fund on borrower attestations alone. Tools now exist to run programmatic cross-lender checks, including a process to check lien filings and lien perfection; use them or mandate equivalents.
2. Replace sampling with 100 percent asset-level matching.
   Run deterministic joins between the borrower’s master data tape and all facility-level reports (e.g., warehouse, ABS trusts, whole-loan sales). Weekly reconciliations caught a $100 million double pledge before further losses in one case study; make that cadence table stakes.
3. Upgrade covenants from reactive to preventative.
   Add real-time reporting covenants:
   1. Continuous asset-level feeds
   2. Event-based notifications on lien filings and releases
   3. Automated triggers that suspend advances if uniqueness or cash-application mismatches appear; Contract language should require independent verification, not just representations and warranties (R&Ws)
4. Recentralize custody and cash control.
   Insist on independent custodians or trustees with auditable control of chattel paper and electronic chattel paper, as well as lockbox flows. Fragmented custody is where duplications hide.
5. Penalize opacity.
   Price opacity. Charge higher spreads or reduce advance rates where borrowers refuse shared-registry participation or authoritative digital copies. If they won’t verify uniqueness, they shouldn’t get prime capital.

Fintechs and originators: Build verifiability into your stack

1. Issue authoritative digital assets — not PDFs.
   Adopt systems that create a single enforceable, authoritative electronic copy for chattel paper or receivables, with tamper-evident control logs and transfer-of-control mechanics, and additional approvers built into the process, adding more checks and balances of moving collateral. It’s the only scalable way to prevent duplicate pledges of “the same” document.
2. Join or help create shared collateral registries.
   A distributed ledger technology (DLT)-backed registry that marks an asset as encumbered across lenders at pledge time is no longer optional. This pattern is already used in trade finance (e.g., electronic bills of lading (eBL) and warehouse-receipt verification) to stop repetitive pledges; port it to consumer and commercial receivables and VINs.
3. Automate cross-facility deduplication.
   Programmatically check for collisions (i.e., VIN, invoice number, obligor ID) across all facilities before submitting borrowing-base certificates. If uniqueness fails, block submission. Solutions launched post-Tricolor show the market’s direction, where building your own controls earns trust and cheaper capital.
4. Instrument cashflows end-to-end.
   Match actual collections to reported assets continuously. If a payment on Asset X flows to Facility A while Asset X is reported in Facility B, you’ve discovered a duplicate pledge or reporting error. Pause advances automatically.
5. Embrace independent data validation.
   Invite lenders’ advisors to run periodic double-pledge tests across data tapes. Early detection protected a bank’s multibillion-dollar exposure in a leasing case and should be standard in ABF.

Policy and market infrastructure: What we should demand together

• From trustees and rating agencies: Make collateral-uniqueness certifications and continuous asset-level surveillance part of rating criteria and trustee instructions. Post-mortem controls don’t deserve investment-grade treatment.
• From regulators and department of motor vehicles (DMVs)/secretaries of state (SoS) offices: Modernize lien systems (e.g., vehicle titles, UCC filings) for near real-time API access and require machine-readable filings. The latency of public records is a fraud vector.
• From industry consortia: Standardize asset identifiers and pledge events across ABF (e.g., autos, equipment, consumer receivables, trade) and run a neutral, privacy-preserving match network. The trade-finance community has already shown this is feasible with eBL/warehouse-receipt pilots.

The POV: We must go from trust-and-verify to verify-then-trust

After Tricolor, continuing to fund on borrower attestations and paper custody is a choice —not an inevitability. The technology, playbooks, and precedents exist to make duplicate pledges computationally hard and contractually impossible. Investors who insist on verifiable uniqueness will outperform; fintechs who can prove uniqueness will win cheaper funding and resilient partnerships.