Wells Fargo caps subprime car loans to 'responsibly' manage risk

Worries over a new boom in subprime lending were raised on Monday when Wells Fargo, the country’s fourth-biggest bank, announced plans to cap car loans to people with poor credit history – a booming moneyspinning area for Wall Street.

Wells Fargo, which avoided many of the worst subprime loans that sparked the 2008 financial crisis, said on Monday that it would cap subprime car loans at 10% of its loan book.

Subprime car loans, extended to people with bad credit or low incomes, have been a booming business for Wall Street banks in recent years with a quarter of new car loans going to subprime borrowers. Financial products made by splicing and dicing the loans increased by 300% to $20bn between 2010 and 2014, according to Thomson Reuters IFR Markets.

“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 on Monday. “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 bank’s decision to introduce the cap was first reported by the New York Times.

Banking regulator the Office of the Comptroller of the Currency (OCC) last week warned that banks are often making loans for far more than the car’s sale value. Lax lending standards and loans that soon became worth more than the homes they were buying were key elements of the subprime mortgage crisis.

“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 risk management speech. “Lenders also are making loans with higher loan-to-value ratios and to borrowers with lower overall credit scores.

“Let that sink in for a moment. 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.

“That means if the family bought a used car on these terms when their daughter celebrates her ninth birthday, they will still be paying for it when she takes it for her first drive on her 16th birthday.”

• The headline on this article was amended on 3 March 2015. An earlier version implied that the cap on subprime loans was a result of the regulator’s warning.