Federal and state regulators are growing more concerned about the risk involved in big warehouse lending facilities and other credit lines that are extended from institutional banks to subprime auto finance companies.
A report this weekend from Reuters said U.S. regulators are asking banks for more detail on their auto financing exposure, as rapid growth in lending has prompted officials to seek to better assess and understand the risks.
Citing a person familiar with the matter, Reuters said banking regulators fear that reckless lending may be at least helping to fuel that growth.
This past July, an official at the Office of the Comptroller of the Currency told Auto Finance News that the regulator wanted to better understand warehouse lending in auto finance.
The director of the OCC’s retail credit risk unit, Bob Piepergerdes, said that as part of an effort to assess growth in auto lending among OCC-regulated institutions, his office was looking to more fully understand the patterns around warehouse lending by banks to auto finance companies.
Piepergerdes shared those thoughts when asked about the case of Condor Capital, a subprime lender now under indictment by the New York State Financial Services Department, which stands accused of bilking its customers out of refund money. Also named as an “intervenor” in the Condor case is Wells Fargo Bank, which means that Wells is legally “united” with Condor as a defendant in the case. Wells Fargo provided Condor with a $256 million line of credit that Condor used to make its loans.
In the AFN July report, Piepergerdes said he was unaware of the specifics surrounding the Condor case although he was well aware that warehouse lending is common in auto. Banks provide capital to small finance companies, especially subprime lenders. But he told AFN that regulators were uncertain how widespread it was, and how much money gets lent out remains murky to OCC — hence the increased regulatory interest noted in the Reuters report.
The Reuters story cited Wells Fargo specifically, saying since 2011 Wells Fargo has extended more than $1.5 billion of credit lines to some of the nation’s largest subprime car lenders through its Wells Fargo Preferred Capital Inc., according to merger advisory firm Colonnade Advisors LLC.
But Wells Fargo isn’t alone.
The money big banks like Wells Fargo lends to subprime auto companies is very important to the market, according to legal and finance experts recently consulted by Auto Finance News. Smaller and mid-sized subprime lenders rely heavily on the larger institutional lenders, they said.
The reason why banks are not providing or financing subprime product to consumers themselves is that it is too expensive for them to maintain those loans on their books from a risk-based regulatory standpoint.
Essentially, they say, the big banks are required to hold substantial amounts of capital for each riskier asset, such as subprime auto loans.
The Condor case raises some interesting questions, the legal experts said.
As AFN has reported, the Condor case appears to have involved some sloppy, even fraudulent compliance efforts.
It’s nothing short of surprising that the sort of sloppy behavior alleged by the New York State DFS would get past an institutional lender such as Wells Fargo, according to the legal experts. Theoretically at least, it seem that Wells Fargo would have done its due diligence and made sure the compliance efforts at Condor were all up to snuff.
A Dallas attorney told AFN that he knew of a subprime auto finance company client that has a facility through Wells. He said bank officials come out, perform site visits, and interview top management, all the department heads, the head of servicing and others.
The state of affairs at Condor appears to indicate the same attention was not shown there.
And, he said if Condor can’t repurchase its assets it might not be able to act to make Wells Fargo whole again. Despite Condor’s current default status with Wells, there is an ongoing battle in court in which a court-appointed receiver is looking at a sale of Condor’s paper. Theoretically, there should be enough collateral in the assets that could be used to make Wells whole again. Wells Fargo is arguing in court that it has first dibs on Condor’s cash and assets.
But what happens if the state levies a large fine against Condor that depletes a great deal of Condor’s assets — who pays Wells back then?
Wells Fargo declined repeated requests for comment on the Condor case and the role it plays in financing the subprime auto finance industry in general.