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Banks Return to Subprime Borrowers for Lending

This sure seems like a great idea:

Annette Alejandro just emerged from bankruptcy and doesn’t have a job, and her car was repossessed last year. Still, after spending her days job hunting, she returns to her apartment in Brooklyn where, in disbelief, she sorts through the piles of credit card and auto loan offers that have come in the mail.

“Even I wouldn’t make a loan to me at this point,” Ms. Alejandro said.

In the depths of the financial crisis, borrowers with tarnished credit like Ms. Alejandro were almost entirely shut out by traditional lenders. It was hard enough for people with stellar credit to get loans.

But as financial institutions recover from the losses on loans made to troubled borrowers, some of the largest lenders to the less than creditworthy, including Capital One and GM Financial, are trying to woo them back, while HSBC and JPMorgan Chase are among those tiptoeing again into subprime lending.

The subprime lending discussed here is mainly about credit cards and auto loans, not home loans. Mortgage lending remains under a watchful eye at this point. But it is clear that banks are trying to recoup some of their losses by going back to the same customer base that fueled the subprime housing boom. And the reason why is simple: they’re easier to rip off, particularly with lucrative fees. The financial literacy is lower at the low end of the scale, and the opportunities for fees higher. I don’t think this is a sign of a better economic environment per se, as much as it is a sign that banks have to rip off an ever-expanding base of customers in order to make their profits.

In fact, it’s not the banks that should be wary of this as much as the subprime borrowers. Unfortunately they have little choice. Their wages are stagnant, their savings non-existent, and they have to use credit in some cases just to survive and maintain. If they don’t go to the banks, they’ll have to go to the loan shark. It’s unclear if there’s much difference.

If we had a tightly regulated credit market, where fair dealing and good faith were the watchwords, this wouldn’t be so dangerous. And indeed, as the Consumer Financial Protection Bureau evolves, we might get closer to that. At the moment, however, if I were a subprime borrower, I would view a credit card or auto loan offer from a major financial institution the way I would view a three-card monte game on the street. That’s particularly true of auto loans, which so far stand outside CFPB regulation. Auto loan securitization is becoming a fast-growing business, as mortgage securitization withers on the vine.

By the way, Annette Alejandro, the woman in the piece, turned down Capital One’s credit offer. Good for her.

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David Dayen

David Dayen

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