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Here's How Banks Can Simultaneously Love And Hate Subprime Car Loans

Jayson Derrick

Ally Financial Inc (NYSE: ALLY), a notable player in the subprime auto loan market, warned investors its 2017 earnings per share will now grow less than previously expected.

Ally Financial isn't alone in its outlook, as major banks are becoming hesitant in issuing new subprime loans suing money from their balance sheets. According to a Bloomberg report, Wells Fargo & Co (NYSE: WFC) lowered the number of loans it made to subprime car buyers during the first quarter by 29 percent.

Wells Fargo's decision wasn't a result of a damage to its reputation for its account opening scandal, rather it was a calculated move to tighten its standards. The bank also joins JPMorgan Chase & Co. (NYSE: JPM) whose consumer and community banking head Gordon Smith said earlier this year it is looking to "dramatically" lower its own subprime auto lending activity.

Wells Fargo And JPMorgan Also Love Subprime Auto Loans?

How is that banks are shying away from their subprime auto lending activity but at the same time supporting it in the face of concerning data.

Bloomberg noted major banks are indirectly funding billions of dollars' worth of subprime auto loans by helping companies such as Santander Consumer USA Holdings Inc (NYSE: SC) borrow cash in the asset-backed securities market.

There may be some logic behind the seemingly confusing double-standard. Specifically, money managers including hedge funds tend to have a higher risk tolerance for riskier assets such as an auto subprime loan.

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