By Peter Rudegeair, Rachel Louise Ensign and Coulter Jones
These days, Wells Fargo & Co. and Citigroup Inc. are
unlikely to make a $14,000 auto loan to a borrower with a subprime
credit score. That is now the domain of direct lenders such as
Exeter Finance LLC, based in Irving, Texas.
But where does Exeter get the money to make subprime auto loans?
From Wells Fargo and Citigroup. They have helped lend Exeter $1.4
billion for that very purpose.
Bank loans to Exeter and other nonbank financial firms have
increased sixfold between 2010 and 2017 to a record high of nearly
$345 billion, according to a Wall Street Journal analysis of
regulatory filings. They are now one of the largest categories of
bank loans to companies.
Banks say their new approach of lending to the nonbank lenders
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.
Loans to nonbank lenders got several banks into trouble during
the crisis. Montgomery, Ala.-based Colonial Bank, for instance,
became one of the largest bank failures of the era after a nonbank
mortgage lender misappropriated more than $1.4 billion from its
credit facility with the bank, according to the Justice
Department.
During the housing boom, banks thought they had unloaded the
risk of subprime mortgages to other institutions through
collateralized debt obligations or vehicles known as conduits. Yet
in the stress of the crisis, they found the risk landed back with
them.
"It's very easy for people to deceive themselves over whether
risk has migrated," said Marcus Stanley, policy director at
Americans for Financial Reform, a nonprofit organization that
advocates for tougher financial regulation.
Banks say that this time around they have figured out how to
structure the credits to avoid problems.
The money still ends up with people with poor credit. The
typical Exeter customer, for example, has a FICO score of around
570 on a range of 300 to 850. (Anything below 600 is usually
considered subprime.) Exeter, which is majority owned by
private-equity firm Blackstone Group LP, 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.
Exeter Chief Executive Jason Grubb said his firm has had
"consistently strong credit performance" and that the structure of
the loan to his firm means "the banks are well protected."
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 bank makes money on that 3% loan
because it is funded by deposits, on which it pays almost
nothing.
Exeter has tapped the $1.4 billion line of credit to extend
billions of dollars of loans since its 2006 founding. Barclays PLC
and Deutsche Bank AG joined Wells Fargo and Citigroup to provide
the facility. It eventually bundles its loans into securities and
sells them to private investors, using the proceeds to pay back the
banks, in addition to paying them fees.
Years ago, the typical subprime-auto customer might have been
able to get a loan directly from Wells Fargo or Citigroup. Wells
Fargo closed its subprime-lending subsidiary in 2010 and dialed
back from auto lending more broadly in 2016. Citigroup sold much of
its auto lending unit.
Wells Fargo, however, has continued to extend more credit to
nonbank financial firms -- it counted $81 billion of these loans at
the end of 2017, the largest of any bank, compared with $14 billion
at the end of 2010.
By 2016, loans to nonbanks grew to the fourth-largest category
of bank lending to companies, up from the 11th in 2012. Around that
time, officials from the Office of the Comptroller of the Currency
reviewed the exposure at more than a dozen banks, according to a
person familiar with the matter.
The regulators looked at the types of nonbanks the banks were
lending to, whether those loans were properly secured by collateral
and whether there were any concentrations of risk, the person said.
At the time, the OCC found the exposure manageable.
Typically, banks require the nonbanks to commit the loans they
make as collateral for the bank loan. And they will only lend the
nonbanks an amount equivalent to a portion of the collateral --
meaning a much higher-than-expected share of the loans would have
to go bad for the bank to lose money.
Still, no loans are risk-free. About two years ago, for
instance, falling energy prices forced banks to put aside billions
of dollars in reserves in case loans to oil-and-gas companies went
bad, even though they were largely well secured. Eventually, energy
prices rose and banks faced fewer losses than expected. But banks
had to pull back from lending to the sector.
For now, bank credit is even flowing to areas where it collapsed
after the financial crisis, such as loans to mortgage lenders. In
2016, for the first time in more than 30 years, nonbank lenders
accounted for the majority of mortgage dollars extended to
borrowers.
Mortgage lender loanDepot Inc. said in a 2015 regulatory filing
that its business prospects were bright because "banks and other
traditional market participants continue to be ineffective in
adequately addressing consumer needs."
But loanDepot also disclosed in its filing that it was flush
with money to make new loans, in part because it had a $250 million
line of credit from Bank of America Corp. It has also opened credit
facilities with regional and foreign banks.
A Bank of America spokesman said that the bank limits its
subprime exposure in line with its approach to responsible
growth.
"It is the lifeblood of how we fund our customers," said Bryan
Sullivan, loanDepot's finance chief.
Write to Peter Rudegeair at Peter.Rudegeair@wsj.com, Rachel
Louise Ensign at rachel.ensign@wsj.com and Coulter Jones at
Coulter.Jones@wsj.com
(END) Dow Jones Newswires
April 10, 2018 19:33 ET (23:33 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
Wells Fargo (NYSE:WFC)
Historical Stock Chart
From Mar 2024 to Apr 2024
Wells Fargo (NYSE:WFC)
Historical Stock Chart
From Apr 2023 to Apr 2024