Wells Fargo Slashes Originations 45% in 2Q

Wells Fargo Dealer Services Inc. nearly halved its originations in the second quarter, compared with the prior-year quarter, reflecting tighter underwriting standards, the company reported in its earnings today.

The bank originated $4.5 billion worth of auto loans — a 45% decline year over year — as well as a 5% decline in its auto outstandings to $56 billion. Deterioration is expected continue throughout the second half of 2017 until it stabilizes sometime in the first half of next year, Tim Sloan, chief executive and president of Wells Fargo and Co., said on the company’s earnings call.  

“A year ago, we looked at the market and what we saw was the following — and remember the majority of our originations are used-car loans — we became concerned about underlying values of the collateral because of production levels by the industry, the number of cars coming off-lease, and we got concerned about the risk returned in terms of  pricing as well as term,” Sloan said. “We took that all into consideration in terms of ramping down our origination and improving the underlying quality. In the short term, we gave up loan growth so the metrics aren’t as good, and we gave up maybe some short-term revenue, but over the long term this is how we think about credit.”

The company said borrowers’ credit quality is improving, citing an average Fico score at origination of 719, up from 696 during the same quarter a year ago. However, delinquencies and losses continue to rise.

Wells Fargo had $1.4 billion worth of indirect loans 30 days or more past due in its portfolio, up 18.7% compared with 2Q16. Delinquent accounts makeup 2.5% of the company’s auto portfolio, compared with 2.03% the year prior.

More starkly, indirect net charge-offs rose 40% in the second quarter to $122 million, compared with $87 million last year.

The company’s pullback in auto is accompanied by a consolidation of its servicing centers from more than 50 regional offices to a handful of larger centers, Auto Finance News first reported back in May.

“While that [consolidation] is going on we’ve reduced the risk profile of the portfolio and what’s rolling into it so we can work through that reorganization with less inherent risk in the loan book,” John Shrewsberry, senior executive vice president and chief financial officer for Wells Fargo and Co., said on the call. “That’s helpful, it’s idiosyncratic to Wells Fargo when you’re thinking about what this means for auto loans in general.”