Wells Fargo to limit subprime exposure

Wells Fargo has announced it will be introducing a limit to the number of auto loans it makes to people with poor credit history, over concerns about a bubble developing in the subprime lending market, which is currently showing continued strong growth.

According to the New York Times newspaper, Wells Fargo, which avoided many of the worst subprime loans that sparked the 2008 financial crisis, has said it will cap subprime car loans at 10% of its loan book.

“We are firmly committed to responsibly offering access to credit to a wide spectrum of customers during all economic cycles,” a Wells Fargo spokeswoman said.

“The percentage of originations we consider subprime based on our customised scorecard has remained generally stable at around 10% for more than a decade.”

“In the fourth quarter, we formalised our existing risk management philosophy to manage overall subprime auto originations at 10%. This continues to ensure we’re responsibly managing risk while also tailoring our approach by local market,” the spokeswoman added.

The paper reports that last year, Wells Fargo underwrote nearly $30 billion in new and used car loans. It cites concerns in the market that used vehicle values will begin to drop as the high number of new cars sold or leased over the past several years return to the market.

Independently, banking regulator the Office of the Comptroller of the Currency (OCC) has signalled its worries that some banks are making loans for far more than the car’s sale value, and on terms which could store up problems for hard-pressed buyers.

“Lenders are now extending repayment periods up to 84 months on new and used vehicles, compared with the 60 months we have seen traditionally,” Darrin Benhart, deputy comptroller for supervision risk at the OCC, said in a speech at the annual conference of the Global Association of Risk Professionals in New York.

“Lenders also are making loans with higher loan-to-value ratios and to borrowers with lower overall credit scores. That means it is not uncommon today for a family with subprime credit to take a loan at 110% of a used car’s value that they will be paying off for seven years,” he pointed out.