The Real Deal New York

Big banks expose themselves to subprime loans through other lenders

Wells Fargo, Citigroup and other large financial institutions have extended $345B in credit to lenders specializing in subprime loans
April 10, 2018 04:45PM

A Wells Fargo bank and Stephen Schwarzman (Credit: Wikipedia Commons)

Most of America’s big banks have moved away from direct loans to subprime borrowers after the financial crisis, but many are handing out billions to nonbank lenders that specialize in those high-risk loans.

Banks including Wells Fargo, Citigroup Inc. and Bank of America have a collective $345 billion out to nonbank lenders that make their money loaning to subprime borrowers at high interest rates, according to a Wall Street Journal report. That’s six times more than the amount they had out with those lenders in 2010.

Wells Fargo leads the pack with $81 billion out to nonbank lenders such as the Blackstone-owned lender Exeter Finance LLC, which provides auto loans at rates like 15 percent to subprime borrowers. Exeter pays back the banks by packaging them into securities and selling them to private investors.

Exeter CEO Jason Grubb told the Journal that the banks are well protected by how they structure their loans to his company, which he said had a “consistently strong credit performance.”

Nonbank mortgage lenders have filled a void left by traditional bank lenders in the wake of the financial crisis when regulators cracked down on the subprime lending that spurred the downturn. Exeter focuses on auto loans, but some banks have extended credit to subprime mortgage lenders too, the Journal reported. [WSJ] — Dennis Lynch