Big Banks Stealthily Back Subprime Loans

Despite tough new regulations aimed at lowering risk for banks, large financial institutions continue to find a way to finance subprime loans.  Big Wall Street banks funnel money to high-risk borrowers by lending to other institutions who make the so-called subprime loans.

Wells Fargo, Citigroup and others pushed $345 billion to nonbank lenders, sometimes called “shadow banks,” from 2010 to 2017, according to a recent Wall Street Journal analysis.

Since the financial crisis, banks have gotten out of the subprime business as regulators have pushed for institutions to lower their risk profiles. One way to continue in the business has been by serving as a third party to the loans.

Banks insist that the loans are safer than direct subprime transactions. Wall Street was burned during the crisis when a wave of high-risk borrowers defaulted and caused securities that bundled the loans together to collapse.

Direct lending to high-risk borrowers has dropped sharply over the years. In the fourth quarter of 2017, mortgages to borrowers with credit scores of less than 620 amounted to $20.4 billion, according to Federal Reserve data. At the peak of the crisis in the first quarter of 2007, that total was $114.6 billion.

By 2016, loans to nonbanks grew to the fourth-largest category of bank lending to companies, up from the 11th 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 bank executives, lending to nonbanks limits their exposure. One of the large recipients of these funds, Exeter Finance, services customers with an average credit score of 570.  Exeter CEO Jason Grubb said that the firm’s clients have “consistently strong credit performance” and that “banks are well protected” from risk.  The company received a $1.4 billion credit line from Wells, Citigroup, Barclays and Deutsche Bank.

Source:  Wall Street Journal/CNBC