The subprime auto loan market has grown so fast since the financial crisis that many are warning of a new bubble that could hamper an economic recovery.
Wells Fargo, one of the largest subprime car lenders, is not waiting for such a scenario to unfold. The San Francisco-based banking giant is pulling back from this market, a move that is having repercussions throughout the auto industry.
Wells Fargo has set a ceiling for the first time on the amount of loans it will extend to subprime borrowers. Record sales in auto and light trucks have unleashed a surge in subprime auto financing, loans for borrowers with below-average credit scores. The bank is limiting the dollar volume of its subprime auto originations to 10 percent of overall auto loan originations, The New York Times reports. Last year, Wells Fargo’s originated a total of $29.9 billion in auto loans.
Some credit analysts foresee other lenders following the lead of Wells Fargo.
Experian Automotive reports that outstanding auto loan balances reached a record-breaking $870 billion in the third quarter of this 2014, an increase of 9.9 percent and 24.5 percent over the same periods in 2013 and 2012.
Over all, auto loans to subprime borrowers — normally with credit scores at or below 640 — have more than doubled since the financial crisis. One in four new auto loans are issued to subprime borrowers. Concerns have intensified that the growing competition for subprime auto loans is encouraging lax lending practices, and whether car dealers are inflating borrowers’ income on loan applications — a practice that helped fuel the subprime mortgage crisis.
“After successfully sidestepping many of the catastrophic mortgage losses that hit its competitors during the financial crisis, the bank (Wells Fargo) has developed a reputation for deftly managing risk,” The New York Times wrote.
A a recent review by the Wall Street Journal found that nearly four in every 10 loans for cars, credit cards and personal borrowing in the U.S. went to subprime customers in the first 11 months of 2014. Lenders are originating more to subprime borrowers partly because low interest rates cut into their profits.
Wells Fargo has been rejecting more loans that auto dealers expected would be approved, The New York Times reported.