Overview of Part 1
In Part 1 of “The Invisible Subprime Lenders”, we discussed sub-prime lending and its consequences on the overall economy. We also discussed how the exposure to the sub-prime lending market created major losses for the largest banks, helping to create “The Great Recession of 2008”. Ten years later, those same banks are again massively invested in sub-prime lending; they are just not doing it in a public manner the way they did 10 years ago. In fact, one of the only ways to uncover these banks’ exposure to the sub-prime market today is to dig through hundreds of pages of SEC filings. But when you do this, you can uncover the often hidden, secret world that is today’s sub-prime lending market.
The Increase of Loans and Credits
According to the Wall Street Journal, loans from major banks such as Wells Fargo and Citigroup to Exeter and to other non-bank financial firms has increased six fold between 2010 and 2017 to a record high of $345 billion. The loans to non-bank finance companies are just an illusion created to make the major banks appear safer than they really are.
“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.
However, 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.
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 non-bank 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 non-banks grew to the fourth-largest category of bank lending to companies, up from the 11th category 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.
What It All Means
Their conclusion: when Exeter’s charge-offs impedes its ability to repay the major banks, those loans will be charged off just as though they had been made by the major banks themselves. In other words, nothing has changed. The financial and systemic risk to the economy and the financial system is still there just as it was in 2008. The banks are just trying to pretend it is not.
Don Lawson is the Office Manager of the Bond & Botes Law Offices location in Knoxville, Tennessee. He holds degrees in both Accounting and Finance that he’s put to use analyzing complex business bankruptcy cases for the firm. Read his full bio here.