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Published: Thursday, 7/12/2012

Subprime lending is on the rise once again


Subprime lending is gaining steam again, although lenders are still largely steering clear of subprime mortgages -- the disastrous home loans that triggered the nation's housing collapse.

Subprime credit cards and auto loans are both on the rise, and some bank risk managers predict further increases in the $600 billion U.S. auto loan market, where lenders are loosening the purse strings and investors are interested in packages of auto loans to those with less-than-perfect credit.

A survey of risk managers at banks and other financial institutions released Tuesday shows that while only 25 percent of risk managers see subprime lending increasing in the next six months, half of those who see an increase expect it to come in auto loans.

It's a cautious but noteworthy response, said Andrew Jennings, chief analytics officer at Minneapolis-based Fair Isaac Corp. Its FICO credit scores are used by lenders. The development does not suggest a flood of new subprime lending on the horizon, he said, but indicates loosening in the market.

"In the depths of the recession, there was an extreme movement to higher FICO scores, and we've noticed that, in the last 12 months or so, it sort of relaxed," he said.

The credit analytics company, also called FICO, and the Minnesota-based Professional Risk Managers' International Association survey U.S. risk managers every quarter about their expectations for the next six months. This was the first time the survey asked about subprime lending. "This is certainly a trend that's worth keeping an eye on," Mr. Jennings said.

Subprime loans are typically defined as loans to borrowers with credit scores below 680, but definitions vary.

According to the credit bureau Experian, 44 percent of all U.S. auto loans made in the first quarter were to borrowers with scores below 680, up from 42 percent a year earlier. That is still short of the 46 percent level before the financial crisis in 2008. Commercial banks continue to dominate.

Subprime mortgage lending all but disappeared after the nation's housing collapse. Wells Fargo & Co., for instance, said it shut its last nonprime mortgage operation more than two years ago.

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