For years now, Wells Fargo has been one of the largest providers of subprime auto loans. It appears, however, that the financial giant is trying to distance itself from the very market that brought it so much business over the years. This move is sending shockwaves that are being felt all throughout the entire auto lending industry.
Wells Fargo, with headquarters in San Francisco, is known for its distinctive stagecoach logo and consistently pulling in big profits. They have also been on the forefront of the boom in offering loans to people who have less-than-perfect credit scores. As they have been doing this, Wall Street has been bundling and selling these types of loans as securities to their investors. This has allowed Wall Street to pull in huge profits. All the while, millions of financially strapped people have been given an opportunity to purchase cars.
Now, however, it looks like the subprime auto lending market is getting a bit too hot to handle. Wells Fargo has, for the first time, put a cap in place on the amount of money that it will lend to subprime borrowers. The banks has restricted their lending volume to subprime auto originations to just 10 percent of the total auto loans that they provided. This amounted to a total of nearly $30 billion just last year.
A recent series of interviews with the top executives from Wells Fargo helped to provide more information on this topic. The lender, along with other big auto lenders, has helped to initiate what has to be a sobering moment for the still-popular subprime auto lending industry. It is almost certain that other big lenders will follow Wells Fargo’s lead in the near future. The lender was able to avoid many of the problems associated with recent mortgage losses during the financial crisis. This proves that they know what to do when the going gets tough, and their competitors may very well copy their penchant for making the right moves at the right time to manage financial risk.
Auto loans made to subprime borrowers – people with credit scores of 640 or less – have doubled since the beginning of the most recent financial crisis. In fact, one in four of new auto loans provided have been going to subprime borrowers. Back in the second quarter of 2014, the total number of auto loans were at the highest level ever since prior to the financial crisis. During that quarter, lenders originated over $20 billion in bad credit auto loans. That is nearly twice as much as during the same quarter back in 2010.
There are two main factors that contributed to this surge: Larger banks were experiencing a slow down with other types of loans, so they increased their auto lending market share. Investors were also searching to get higher returns, so they are now buying billions of dollars in investments that happen to be backed by subprime loans as security. This growth has caused Wells Fargo to be concerned that there is too much competition and longer repayment terms, in addition to increased auto loan balances.
With all of this in mind, however, we have to remember that this is America. If the big lenders fail to provide car loans for people with low credit scores, the smaller lending companies will surely rise to the occasion. For better or worse, this is a country filled with people who depend on owning cars. If the big lenders won’t help people to get the cars they need, alternative lending companies may very well experience a huge surge in the very near future.