Round II: Mitsubishi XR-PHEV II Concept Previews Next Outlander Sport

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MTM’s Audi S8 “Talladega” Packs Southern Charm—to the Tune of 750 hp

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Wells Fargo Places Cap On Subprime Loans

Wells Fargo will reign in its subprime lending business, limiting subprime car loans to 10 percent of auto loans it originates. According to the New York Times, the move comes amid concerns that the market for subprime car loans is expanding too quickly.

While the paper's Dealbook section notes that Wells Fargo has a strong reputation for managing risk, the move to limit subprime auto loans also sends a signal that the subprime auto loan market has become too risky. Concerns have previously been raised regarding lax underwriting practices and increasingly long loan terms driven by a demand in securities backed by subprime auto loans.

According to Dealbook, the 10 percent figure is in line with how many subprime loans are originated by Wells Fargo compared to prime loans. But the move comes as increasingly longer terms become the norm in the subprime space, since even repossessing a car and re-selling it is often insufficient to recoup the losses on a loan with a term of 84 months.

The recent jump in new car sales is also cited as another factor behind the decision. During the recession of 2008, new car sales plummeted, leading to a diminished supply of used vehicles in 2012 and beyond. The result was a significant spike in prices of used cars, which enabled lenders to reap higher profits when originating used car loans. But the record sales of new cars in 2013 and 2014 will inevitably lead to a glut of used cars, which should further depress used car prices (or return them to an appropriate level, depending on one's perspective). The first crop of cars from this time period should enter the market next year, and Wells Fargo's move could be seen as a pre-emptive move to hedge against this event.

Another theory that hasn't been explored yet is the 7th anniversary of the Great Financial Crisis. This is a significant milestone, since it will allow the first crop of individuals who suffered bankruptcies or other black marks on their credit report to get a fresh start and have those blemishes erased from their files. That means that subprime financing will no longer be absolutely necessary for them. A new car dealer may be willing to give them a loan at a lower interest rate for something new and shiny. If that happens, then expect to see demand for subprime loans on used vehicles wither, as America's insatiable desire for new vehicles is fueled even further.

The post Wells Fargo Places Cap On Subprime Loans appeared first on The Truth About Cars.

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