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Wells Fargo Just Pumped the Brakes on Auto Lending

By Matthew Frankel, CFP® – Jun 3, 2020 at 3:36PM

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It's the big bank's latest step to reduce risk in its loan portfolio as the pandemic's economic impact evolves.

In its latest move to reduce lending risk, Wells Fargo (WFC -0.69%) will no longer make auto loans through most independent car dealerships. This shift comes on the heels of the bank's announcement in May that it had stopped accepting applications for new home equity lines of credit (HELOCs). The bank did not say how long that suspension would last.

Salesman handing customer keys to a car.

Image source: Getty Images.

Reducing risk is a prudent move in uncertain times

Prior to the COVID-19 pandemic, auto lending was a strong point of Wells Fargo's business -- it grew 19% year over year in the first quarter. However, auto lending -- particularly loans for used vehicles, which are mainly what independent dealerships sell -- can be rather risky in weak economies.

At the end of 2019, 4.9% of all U.S. auto loan balances were 90 days or more past due, according to Federal Reserve data. Meanwhile, back in April, the Fed projected that if the U.S. unemployment rate were to rise to 20% (which is about where it is now), the auto loan default rate would approach 14%.

Should investors be worried?

This move shouldn't necessarily worry Wells Fargo investors, as it's quite common for banks to scale back riskier forms of lending in uncertain times. For example, most banks dramatically tightened their credit standards for mortgage customers after the financial crisis.

With roughly $48 billion of auto loans on its books as of March 31 (accounting for roughly 5% of Wells Fargo's total loan portfolio), it is fair to say that the bank may simply feel it has enough exposure to that credit category -- at least until the current economic troubles start to fade.

If anything, this should be a welcome development for Wells Fargo shareholders. Despite its flaws, the bank does have a solid history of responsible lending relative to its peers. Its current auto loan charge-off rate of just 0.68%, and the fact that just 0.2% of its auto loan portfolio is delinquent show that this is still the case. Proactive moves like this could help maintain that conservative profile.

Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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