Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Prime Problem Bankers Forget a Lesson on High-Risk Lending

Newspaper article Pittsburgh Post-Gazette (Pittsburgh, PA)

Prime Problem Bankers Forget a Lesson on High-Risk Lending

Article excerpt

"Bad credit? No problem," say the ads, but, in fact, subprime car loans are a problem, not only for the consumers who take them out, but for the banks that allow them.

Wells Fargo admitted as much when the San Francisco mega bank said this month it would cap loans made to buyers with credit scores of 640 or lower. Such loans have doubled since 2008 and now make up a quarter of new auto deals.

Along the way, they've attracted scrutiny from federal investigators who are looking into whether lenders falsified information on applications as they did in the lead-up to the housing bubble a decade ago. Of course, a "car bubble" wouldn't pop as catastrophically; Americans have $900 billion in car loans, as opposed to $8 trillion in mortgages before the recession began.

But subprime loans are risky business. If lenders won't curb them, the Consumer Financial Protection Bureau and the Federal Trade Commission should.

For investors, subprime loans are alluring because they promise high rates of return given their high risk, and bundles of loans are selling quickly in the bond market, despite escalating levels of default. …

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