Wells Fargo withdraws auto loans to reduce risk

Wells Fargo is slowing its auto loan business by ceasing to accept loan applications from most independent car dealerships — which typically sell used cars, as opposed to franchise dealerships which focus on new vehicles — confirmed a Wells Fargo spokesperson to CNBC.

Wells Fargo

REUTERS/Mario Anzuoni

She went on to note that the bank has “an obligation to review our business practices in light of the economic uncertainty presented by COVID-19,” but stressed that Wells Fargo would continue to do business with independent resellers who were long-time Bank customers. For context, Wells Fargo only issues auto loans through car dealerships.

As recently as the first quarter of 2020, Wells Fargo was actually expanding its auto lending business. The bank revamped its auto lending business in 2018 after it was fined $1 billion by the Consumer Financial Protection Bureau for selling customers unnecessarily

car insurance

by CNBC.

But since then, the segment has been on the rise: Wells Fargo held $48.6 billion in auto loans at the end of March, making it its second largest category of consumer loans after mortgages. Additionally, Wells Fargo auto loan issuance reached $6.5 billion in the first quarter of 2020, a 19% year-over-year growth that the bank says reflects a renewed focus on auto loan growth after restructuring the segment.

But the recently curtailed auto loan activity is in line with the bank’s overall attempts to limit risk during the economic uncertainty caused by the coronavirus pandemic. In addition to setting aside $4 billion in loan loss reserves in the first quarter to prepare for possible defaults, according to Bloomberg, Wells Fargo also followed in Chase’s footsteps by suspending its line of credit offering. on home equity (HELOC) last month.

We predicted that things would not stop there and that growing apprehension would lead banks to continue to shy away from riskier types of lending. Clearly in line with that strategy, Wells Fargo is pulling out of auto loans due to concerns about the credit quality of loans made by independent dealerships, according to a person with knowledge of the bank’s operations cited by CNBC. It should be noted that this is a relatively minor measure, as independent dealerships represent less than 10% of the 11,000 dealerships through which the bank sells auto loans – but it still serves to highlight how Wells Fargo views risk management as the fallout from the pandemic continues. .

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