As Market Cools And Risk Overhaul Kicks In, Wells Fargo Trims Auto Loans

In response to growing stress in the market, as well as a bank-wide push for more centralized risk controls, Wells Fargo & Co is scaling back and remolding its auto lending business.

According to a May 11 company presentation, over the nine months leading into March 31, quarterly originations by nearly 30 percent have already been cut by Wells, which was the No. 2 U.S. provider of auto loans less than a year ago. After a new head of auto finance took the reins in April, in a move that people familiar with the business say could eliminate hundreds of jobs, it has also begun consolidating the collections operation.

In attempts to reducing exposure to the rapidly cooling U.S. auto market, Wells Fargo joins other lenders in the country. After being fueled for years by low interest rates and easy financing terms, the auto loan market could overheat, bankers, auto industry executives, analysts and regulators have been warning since 2014.

Borrowers with shaky credit were being embraced by some lenders, including Wells Fargo, while chasing growth. According to data compiled by Cox Automotive, in late 2015, some lenders were prompted to tighten standards and edge away from the market as auto default rates began creeping above other types of consumer debt.

Beginning last year, its auto exposure had been started to be curtailed by Wells Fargo. According to a company presentation, from over 11 percent a year earlier, it cut the share of subprime loans in the auto portfolio to over 8 percent in the first quarter.

When Wells Fargo reports results on Friday, analysts expect to see higher delinquency and default rates.

“The general view, which they’ve been pretty clear about, is that loan growth will be negative for next two to three quarters,” said Brian Foran, an analyst at Autonomous Research.

Acknowledgement that tightening of standards comes at a price have come from the bank’s executives.

“Wells Fargo is willing to give up volume and share in order to protect its balance sheet from credit risk,” Franklin Codel, the bank’s head of consumer lending, told the bank’s investor day in May.

Auto loans as the business with the biggest potential for a “negative credit event”, were singled out by Chief Executive Officer Tim Sloan at the same event.

According to Experian Automotive, it has slipped to No. 7 from No. 2 among top U.S. auto lenders as Wells Fargo’s auto loan originations have dropped.

And as part of a broad overhaul following a sales scandal that has roiled the third-largest U.S. bank by assets, the bank also began a revamp of its auto business early this year.

Months after her predecessor, Dawn Martin Harp, announced plans to leave, Laura Schupbach took over management of the auto business in April.

And according to an internal memo, collections staff from 57 locations across the country to three central hubs in Raleigh, North Carolina, Irving, Texas and Chandler, Arizona were started to be shifted by the bank weeks later.

hundreds of positions will likely be eliminated, say people with knowledge of the business.

(Adapted from Reuters)


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