As the economy continues to show early signs of recovery, many financial institutions are extending credit to less desirable candidates, a practice that worries some while signaling economic growth to others.
According to Equifax Inc. (NYSE:EFX), lenders issued 1.1 million new credit cards to borrowers with damaged credit in December 2011 — that’s a 12.3 percent increase from December 2010. Borrowers with less desirable credit also accounted for 23 percent of new auto loans in the fourth quarter of 2011, up 17 percent from the same quarter in 2009. Due to the lack of regulation on auto loans, subprime loans have again become big business, with $11.7 billion in auto loan securities sold last year.
Some consumer advocates fear that financial lenders are targeting less savvy borrowers. The extension of credit goes beyond credit card and auto loan institutions like Capital One Financial Corp. (NYSE:COF) and General Motors Financial (NYSE:GM). Banks such as HSBC Holdings plc. (NYSE:HBC) and JPMorgan Chase (NYSE:JPM) have also started to slowly re-enter the subprime industry. In general, subprime borrowers are those with credit scores lower than 660.
Many lenders say that they are focusing more on “fallen angel” borrowers who had good credit history before the market downturn. While some see the move as a return to the norms that caused the financial crises, others view it as a sign that the economy is expanding.
Banks lost billions of dollars in fees due to financial regulation that came about after the downturn. With subprime borrowers paying higher rates, as high as 29 percent, and often late fees, extending lending to this segment offers the institutions a way to recoup some of their losses.
While credit is slowly being extended to subprime borrowers, the area of subprime mortgages remains a no-man’s land. Credit card lenders provided $12.5 billion in loans to subprime borrowers in 2011, a 54.7 percent jump from the previous year but well below the $41.6 billion extended to these borrowers in 2007.