Wells Fargo Opening Additional Auto Loan Branches

Wells Fargo is in the process of building additional branches devoted to car loans and financing for auto dealers in an effort to expand its auto lending business without taking bad credit risk, according to a report from Reuters.

The auto lending business is heating up in the U.S., so making smart credit decisions is becoming more and more critical. According to data from the New York Federal Reserve, American consumers have approximately $1 trillion of outstanding auto loans, which is up from about $700 billion in the first quarter of 2010. These numbers illustrate a much steeper growth than credit card loans, which have remained basically flat.

Wells Fargo already has 56 branches devoted to car and dealer financing, including one that it recently opened in Cherry Hill, New Jersey. Dawn Martin Harp, head of dealer services, explained to Reuters the branches, which are called “regional business centers,” serve auto dealers exclusively. The bank plans to add more offices in the near future, including one in the Southwest by the end of this year, but it doesn’t have a specific target in mind for the number of branches that it will open.

Martin Harp explained the branches are not simply sales offices, but that they also include credit officers who approve or deny loans. By using credit officers who are in the regions where they are lending, the bank can ensure that they better understand their customers’ needs. “It’s a differentiator for us,” said Martin Harp.

Car sales in the U.S. are currently in overdrive, so the move by Wells Fargo to open additional offices to serve auto dealers makes perfect sense. Car dealerships are enjoying robust sales these days overall, with U.S. car sales in July totaling more than 1.5 million, up 5.3 percent from one year ago, according to a report from The New York Times. Therefore, on a seasonally adjusted annualized basis, auto sales were up by more than 1 million cars in July.

“Autos, in spite of the heat in that market and our public posture of wanting to maintain our credit discipline, still are providing a big opportunity because so many cars are being sold,” Wells Fargo CEO John Stumpf said on the bank’s second-quarter earnings call, according to a SeekingAlpha transcript.

When discussing Wells Fargo’s auto lending on the second-quarter earnings call, Wells CFO John Shrewsberry said, “Auto loans were up $3.7 billion, or 7 percent, from last year. New originations reflected the strong auto market and were up 5 percent from a year ago.”

However, the cautionary bells are starting to ring. The auto lending business was the subject of a front page New York Times story this year, over concerns that more aggressive lending might make the financings the next subprime lending problem. Wells Fargo is a major player in subprime auto loans, and the bank started pulling back on that business earlier this year, as Stumpf deeply understands the risk of auto loans going bad since he started his banking career repossessing cars.

John Shrewsberry said on the bank’s first-quarter earnings call in April that auto lending has “gotten to be a more competitive market,” adding, “we’ve picked our spots, I think, a little bit more delicately.”

The Office of the Comptroller of the Currency, one of the major U.S. banking regulators, said in a report earlier this year that it is closely watching auto lending, noting that “extended rapid growth is difficult to maintain and can sometimes mask early signs of weakening credit quality.”

Although competitors such as Ally Financial Inc. and JPMorgan Chase & Co. have chosen to centralize their auto lending operations in an effort to cut costs, Wells Fargo is clearly taking a different path.