Independent car dealers, which typically sell used cars, account for less than 10% of the 11,000 companies through which Wells Fargo provides auto loans.
However, the officials have clarified that the bank will continue working with selected dealerships with whom it has long-standing relationships.
Although a portion of the decision seems to be influenced by the volatility of the auto market which is currently facing a lot of heat owing to the ongoing COVID-19 pandemic, there are other factors at play as well.
The bank's spokesperson Ruben Pulido clarified that this sudden decision is due to the obligation to review business practices in light of the current economic uncertainty.
He further mentioned that this is a measure similar to what other lenders have taken across the country to help borrowers tackle the economic impact of the ongoing crisis.
Wells Fargo's shift in strategy is driven by rising concerns about credit quality — and not just a desire to stay under the Federal Reserve-mandated asset cap of $1.95 trillion which was set in 2018.
It is in sync with the bank’s overall attempt to scale back riskier lending during the current pandemic.
The auto loan segment of the bank has grown steadily since 2018 and it shouldn’t worry the investors as it’s common for banks and other institutions to scale back lending during uncertain times.
Why Is This Happening?
The primary reason the bank has suspended applications from individual dealers is because it wishes to avoid any risk of defaults.
The economic situation is uncertain and the total outstanding debt is increasing at an alarming rate across areas.
As per the recent stats released by the New York Federal Reserve Bank, total household debt in the US increased by 1.1% in the first quarter of 2020 to almost $15 trillion.
Moreover, the delinquency rate for auto loans stood at 2.4%.
Considering these facts, it can be said that Wells Fargo has done the right thing by scaling back its auto loan business.
Before Covid-19
Wells Fargo had been growing its auto lending business before the pandemic started.
The company restructured its unit in 2018 after paying a $1 billion fine to the Consumer Financial Protection Bureau for selling unnecessary auto insurance to customers.
The bank also has a Federal Reserve-imposed asset cap of $1.95 trillion because of the fake-account scandal that transpired back in 2018.
Keeping all of these factors in consideration, it can be rightly said that the bank has bounced back from the problems.
It held a portfolio of $48.6 billion worth of auto loans by the end of March 2020 - that’s almost 5% of the bank’s total loan portfolio.
In addition, Wells Fargo's auto loan originations amounted to almost $6.5 billion during the first quarter of 2020, an increase of 19% year-over-year.
Conclusion
The move from Wells Fargo comes as a bit of a surprise for most because the bank had a robust auto loan portfolio by the end of the first quarter of 2020.
Although shuttering lending for a mere 10% of the independent dealers won’t make much of a dent on the bank’s aggregated auto loan portfolio, it is a sign that banks are increasingly limiting their operations when it comes to high-risk lending portfolios.
