Credit Card, Mortgage Lending Returning to Sub-prime Market (COF, GM, HBC, JPM)

Borrowers with less-than-perfect credit are being courted once more by lenders trying to bolster their loan portfolios to make up for the loss of fee income from new regulations. The lost fees can be made up, at least partially, by higher interest rates and expected late payment fees from less creditworthy borrowers.

The New York Times reports that Capital One Financial Corp. (NYSE: COF) and the lending arm of General Motors Co. (NYSE: GM) are offering credit to sub-prime customers and that HSBC Holdings plc (NYSE: HBC) and JPMorgan Chase & Co. (NYSE: JPM) “are among those tiptoeing again into subprime lending.”

Consumer advocates suggest that banks are once again preying upon people who are the least sophisticated when it comes to borrowing and who are the most in need of credit though among those most at risk of being able to make repayments. Lenders point out that current deleveraging has opened up the market for new credit. Lenders also note that new credit offers are being more carefully monitored than they were before the financial crisis.

If we are seeing the beginning of a new push to expand credit availability to sub-prime borrowers in the same way that credit exploded before 2008, that is not likely to turn out any better than it did before. But with stagnant wages, still-high unemployment, and a reduction in hours worked, a bit more credit availability could help keep the US economy on its slow-motion growth path.

Paul Ausick