Big Banks Using Non-Bank Middlemen to Lend to Subprime Borrowers

Big banks have found a new way to access subprime borrowers without directly lending them money. As The Wall Street Journal reports, large banks are using non-bank lenders as middlemen for auto loan agreements.

If a borrower has a low credit score and needs a loan for a $12,000 vehicle, this would not be of interest to a large bank such as Wells Fargo. But it would be an option for a non-bank lender like Exeter Finance. Exeter would screen the applicant and approve the loan at their discretion. Then, Wells Fargo would extend a loan to Exeter. The bank is still profiting from a sub-prime loan, but they are giving the money to another lender.

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This does not eliminate risk on Wells Fargo’s end. However, it does push the burden onto the non-bank lender, according to The Wall Street Journal. They are now responsible for determining which applicants can be trusted with their loans and how much risk they are willing to take.

Banks still make a profit from these loans because they charge non-bank lenders a small interest rate. The non-banks charge a higher interest rate to their customers to cover the cost and still yield a return. Non-bank lenders typically have a higher charge-off rate than big banks, but they make up for that with increased interest rates.

Other big banks still choose to work directly with subprime borrowers. This may occur through a subsidiary company. RoadLoans.com is an online lender and auto loan refinancer for consumers with “less than perfect credit.” They are a subsidiary of Santander Consumer USA. RoadLoans handles the screening and Santander funds the loans, but the process occurs entirely within the same company.