After the financial crisis of 2008, many big banks abandoned their subprime lending businesses. But now, they are quietly finding another way to profit from these products.
Subprime loans provide financing for borrowers with poor credit histories or lower credit scores. The loans often come with a much higher interest rate because of the higher risk borrowers. The risk of default on these loans is higher. (See also: 4 Early Warning Signs of the Next Financial Crisis.)
But while banks like Wells Fargo & Co. (WFC) and Citigroup Inc. (C) no longer make these loans directly to borrowers, they are providing funding tonon-bank financial firms that do, according to The Wall Street Journal. Those big banks have reportedly helped Irving, Texas-based Exeter Finance LLC make $1.4 billion in subprime auto loans.
The Journal’s analysis showed that banks have increased their loans to non-bank entities like Exeter that make subprime loans six-fold from 2010 to 2017, lending a total of $345 billion last year. While large lenders say that lending to non-bank institutions is safer then lending directly to borrowers, they still have exposure to subprime trends. (See also: Bank Deregulation Could Cause Repeat of 2008 Crisis.)
Exeter’s customers have an average credit score of 570, below the 600 level that is considered subprime. The company, majority owned by Blackstone Group LP (BX), wrote off about 9% of its loans, compared to the 1% in auto loans that Wells Fargo wrote off.
“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.