How Big Banks Fall Back on Subprime Lending

After the financial crisis of 2008, many major banks gave up their subprime lending business. But now they are quietly finding another way to benefit from these products.

Subprime loans provide financing for borrowers with bad credit histories or lower credit ratings. The loans often come with a much higher interest rate due to the riskier borrowers. The default risk of these loans is higher. (See also: 4 Early Warning Signs of the Next Financial Crisis.)

But while banks like Wells Fargo and Co. (WFC) and Citigroup Inc. (C) no longer make these loans directly to borrowers, they do provide financing to non-bank financial firms, according to The Wall Street Journal. These big banks have reportedly helped Irving, Texas-based Exeter Finance LLC originate $1.4 billion in subprime auto loans.


The Journal’s analysis showed that banks increased their lending to subprime lending non-banks like Exeter six-fold from 2010 to 2017, lending a total of $345 billion last year. Although large lenders say lending to non-banks is safer than lending directly to borrowers, they are still subject to subprime trends. (See also: Bank deregulation could cause a repeat of the 2008 crisis.)

Exeters customers have an average credit score of 570, which is below the 600 level that is considered subprime. The company, which is majority-owned by Blackstone Group LP (BX), has written off about 9% of its loans, compared to 1% of the auto loans that Wells Fargo wrote off.

It’s very easy for people to fool themselves about whether risk has migrated, said Marcus Stanley, policy director at Americans for Financial Reform, a nonprofit that advocates for stricter financial regulation.


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