By Dietrich Knauth

NEW YORK, Nov 19 (Reuters) - A U.S. bankruptcy judge on Wednesday ordered an independent investigation into auto parts maker First Brands, allocating a $7 million budget to probe allegations of fraud involving the company's use of third-party financing for customer invoices.

U.S. Bankruptcy Judge Christopher Lopez in Houston, who is overseeing the bankruptcy, did not decide who would conduct the investigation, instead directing the U.S. Department of Justice's bankruptcy watchdog to make an appointment.

First Brands' filing for bankruptcy protection has raised concerns about opaque financing in the private credit market and cast a spotlight on the potential losses for top financial institutions like Jefferies JEF.N and UBS UBSG.S exposed to the company.

Lopez did not set an exact timeline for the publication of the examiner's report, but he previously said he preferred a "targeted" investigation that could be completed quickly.

"Showing up four months later with a report is not helpful to anybody," Lopez said at a November 6 court hearing.

The company reported over $10 billion in liabilities and has accused its founder and former CEO Patrick James of misappropriating "hundreds of millions (if not billions) of dollars" from the company in a lawsuit. James denies the allegations.

First Brands is investigating the fraud allegations, but several participants in the bankruptcy said that an independent probe was also needed.

Lopez agreed, appointing an examiner to investigate the company's use of invoice factoring, a process that it has used to generate short-term cash flow.

First Brands sold customer invoices to third-party financial institutions, allowing the company to collect funds before a customer actually paid. The examiner will look into allegations that First Brands double-sold some invoices to more than one buyer, and whether First Brands held on to some customer payments that should have been turned over to the purchaser of an invoice.

The examiner will also investigate whether money was transferred out of First Brands to its affiliates or related companies.

(Reporting by Dietrich Knauth, Editing by Alexia Garamfalvi and Sonali Paul)

((Dietrich.Knauth@thomsonreuters.com;))