Amid signs the market is overheating, Wells Fargo is scaling back on issuing car loans to borrowers with damaged credit scores.
The San Francisco-based bank said it will limit the dollar volume of its subprime auto originations to 10 percent over its overall auto loan originations, which last year totaled $29.9 billion, the New York Times reported Sunday.
Other lenders may opt to follow the lead of Wells Fargo, one of the country’s largest subprime car lenders. The number of auto loans to subprime borrowers -- people with credit scores at or below 640 -- has more than doubled since the financial crisis, the New York Times reported. Loans to subprime borrowers now account for one in four new auto loans.
The category’s growth has given rise to concern that lending practices, including longer repayment periods and increased loan balances, have become more relaxed. And though the subprime car loan market is a fraction of the subprime mortgage loan market at its peak, its crash could have a widespread ripple effect on the market.
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Big banks started ramping up auto lending after experiencing a post-crisis slowdown in other types of loans like mortgages, according to the New York Times. Meanwhile, Wall Street has been bundling and selling subprime loans as securities to investors, reaping the benefits as millions of financially unstable people borrow to buy cars.
An analysis by the Wall Street Journal recently showed that almost four in every 10 loans for cars, credit cards and personal borrowing in the U.S. went to subprime customers in the first 11 months of 2014. Lenders’ interest in subprime borrowers stems in part from their desire to take more risks at a time when low interest rates cut into their profits.
Jeffrey Brown, the Charlotte-based CEO at Ally Financial, told Reuters recently that in addition to doing more used car lending, he also plans to increase the company’s subprime auto lending.