NEW YORK–The nation’s big banks have found a “back door” into making high-interest-rate subprime loans.
In an analysis of lending to the subprime segment, the Wall Street Journal noted that big banks such as Wells Fargo and Citibank are unlikely to make loans to subprime borrowers. Instead, lenders such as Exeter Finance Co. in Irving, Texas make those loans.
“But where does Exeter get the money to make subprime auto loans?” asked the Journal, before answering, “From Wells Fargo and Citigroup. They have helped lend Exeter $1.4 billion for that very purpose.”
According to the Journal analysis of regulatory filings, bank loans to Exeter and other nonbank financial firms have increased six-fold between 2010 and 2017 to a record high of nearly $345 billion. “They are now one of the largest categories of bank loans to companies,” the Journal reported.
The banks told the Journal the new approach toward lending is safer than dealing directly with consumers with bad credit and companies with shaky balance sheets. “Yet the relationships mean that banks are still deeply intertwined with the riskier loans they say they swore off after the financial crisis,” the Journal report noted.
“It’s very easy for people to deceive themselves over whether risk has migrated,” Marcus Stanley, policy director at Americans for Financial Reform, a nonprofit organization that advocates for tougher financial regulation, told the Wall Street Journal.
But the banks told the Journal in response that this time around they have figured out how to structure the credits to avoid problems. The report stated the typical Exeter customer has a FICO score of around 570. Exeter, which is majority owned by private-equity firm Blackstone Group, charged off about 9% of its loans as of September 2017, according to S&P Global, compared with 1% for Wells Fargo’s auto loans.
“The nonbanks turn a profit by charging borrowers a higher rate—say, 15% on a subprime auto loan—than what they pay to the bank, which might be 3%,” the Journal noted. “The bank makes money on that 3% loan because it is funded by deposits, on which it pays almost nothing.”