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Wells Fargo to Cap Subprime Auto Lending | DrivingSales News

Wells Fargo to Cap Subprime Auto Lending

March 3, 2015 0 Comments

Subprime auto loans have been the source of a lot of debate during the past year. Specifically, the debate has raged on about whether or not there is a subprime loan bubble, and if that bubble is going to burst, sending financial markets into the sort of chaos that ensued when the mortgage-housing crisis erupted in the mid 2000s.

However, auto lending of late hasn’t look cautious. In fact, as we reported recently, it’s actually a sector that’s been taking off. There was the case of Jeffrey Brown, the new CEO of Ally bank, who arrived, surveyed the scene and determined that more subprime auto lending needs to happen. Speaking about subprime auto lending, Brown was quoted as saying, “I think that we’ve underachieved here.”

There was also Santander Consumer USA, which in September of 2014 put out a $1.35 billion dollar bond offering on some of their consumer subprime auto loan accounts. They hit the number, and had to turn back $1 billion in demand. As the Santander Consumer offering suggests, investors looking for high returns may be turning to the ABS market. According to the New York Times, subprime auto lending securitizations in the U.S. have gone from a $4 billion per year business in 2010 to $20 billion in 2014. Darrin Benhart, Deputy Controller for Supervision risk at the Office of the Controller of the Currently spoke out on February 25th in a speech about what how he feels that longer auto loans are a bad thing. Benhart said in part, “Lenders are now extending repayment periods up to 84 months on new and used vehicles, compared with the 60 months we have seen traditionally.” However, with all of the demand for the subprime auto lending market, there is one lender that has decided to draw a line: Wells Fargo.

The large bank lender has decided to limit their subprime auto lending to 10 percent of its total overall auto loan originations. According to a statement in Fortune attributed to Wells Fargo, the bank is making the change as part of a responsible business approach. The statement reads in part, “The percentage of originations we consider subprime based on our customized scorecard has remained generally stable at around 10 percent for more than a decade. In the fourth quarter, we formalized our existing risk management philosophy to manage overall subprime auto originations at 10 percent. This continues to ensure we’re responsibly managing risk while also tailoring our approach by local market.” Some analysts believe that other institutions will follow Wells Fargo’s lead.

About the Author:

The DrivingSales News team is dedicated to breaking the relevant and the tough stories affecting car dealers. Have questions for DrivingSales News? Reach the team at news@drivingsales.com.

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