Loans to consumers with low credit scores have reached the
highest level since the start of the financial crisis, driven by a boom in car
lending and a new crop of companies extending credit. Almost four of every 10
loans for autos, credit cards and personal borrowing in the U.S. went to
subprime customers during the first 11 months of 2014, according to data
compiled for The Wall Street Journal by credit-reporting firm Equifax.
That amounted to more than 50 million consumer loans and
cards totaling more than $189 billion, the highest levels since 2007, when
subprime loans represented 41% of consumer lending outside of home mortgages.
Equifax defines subprime borrowers as those with a credit score below 640 on a
scale that tops out at 850.
Lenders’ interest in customers who were the hardest hit by
the financial crisis reflects both the relative health of the U.S. economy and
firms’ desires to take more risks at time when ultralow interest rates are
depressing profits. Meanwhile, a number of new nonbank lenders are rolling out
personal loans and other types of financing geared toward subprime borrowers.
Such lenders face far less regulatory scrutiny than do big banks.
Borrowers with a FICO credit score of less than 650 owed
roughly $48,000 on average across all debt obligations, including mortgages, as
of October 2014, according to San Jose, Calif.-based Fair Isaac Corp., whose
FICO credit scores, which range from 300 to 850, are used in most
consumer-lending decisions.
One exception to the rise in new subprime loans has been
mortgages, which were the epicenter of the financial crisis. Mortgage lenders
remain focused on borrowers with solid credit, according to industry data. Some
$4 billion of subprime mortgages have been given out annually since 2009, down
from a peak of $625 billion in 2005, according to trade publication Inside
Mortgage Finance.
The push into subprime loans could have broad implications
for the U.S. economy. Easy financing has already helped fuel U.S. auto sales,
which totaled 16.5 million cars and trucks last year, an increase of 5.9% from
2013 and up 59% from 2009, according to automotive website Edmunds.com. Others
are more concerned. Subprime borrowers, who pay much higher interest rates on
loans than customers with good credit scores, are more prone to missing
payments in periods of economic distress, said Mr. Sufi.
One potential check on the growth of subprime lending could
come from the U.S. government. The Consumer Financial Protection Bureau is
working on a requirement for some short-term lenders to consider borrowers’
ability to repay loans, out of concern that some are being saddled with loans
they can’t afford.
Many lenders said they are making loans only to borrowers at
the top end of the subprime credit-score range, and they are reviewing borrower
history such as bank-account transactions and income. This type of due
diligence wasn’t as thorough with some lenders in the past. Car loans account
for most of the increase in overall subprime lending. Subprime car-loan
originations totaled $129.5 billion during the first 11 months of 2014, or 68%
of consumer subprime-loan volume, according to Equifax.
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