by Wolf Richter
Wells Fargo, which originated $30 billion in auto loans last year, has for the first time put a cap on subprime auto loans, limiting the dollar volume of subprime loan originations to 10% of its total auto loan originations. The New York Times reported that the bank, “according to people briefed on the matter who were not authorized to speak publicly,” has been “increasingly rejecting loans that dealers expected would be approved.”
And Wells Fargo’s subprime cap of 10% of loan volume is setting the tone for the rest of the industry, where the national average has been 27.4%.
Regulators are not only worried about the banks but also about the structured securities auto lending has spawned.
If subprime auto loans go bad in large numbers, as they’re likely to do, the structured securities based on them will take a hit, and investors will get to lick their wounds once again in their chase for yield. Banks and specialized subprime lenders will take a hit too. Megabanks like Wells Fargo might see their earnings get dented, but the amounts aren’t big enough to topple them. Smaller lenders that have specialized in subprime might not be so lucky. But the auto loan subprime bubble, when it implodes, won’t sink the US financial system as a whole; it’s just not big enough.
Yet if these lenders are cutting back on subprime lending in a drastic manner, all heck will break lose in the auto industry.
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