Banks Are Feeling Pretty Good About Bad Lending Again

Want a troubling sign of how great the economy is doing? Banks are feeling confident enough to lend money to people with bad credit again. What could possibly go wrong?

Want a troubling sign of how great the economy is doing? Banks are feeling confident enough to lend money to people with bad credit. What could possibly go wrong?

According to The New York Times' Jessica Silver-Greenberg and Tara Siegel Bernard, financial giants have started to recover, which has led lenders like Capital One and GM Financial to try and make money off of bad borrowers again while HSBC and JPMorgan Chase are "tiptoeing" back into subprime lending by diving into auto loans that "were largely untouched by many of the new regulations." And financial institutions aren't just handing out loans: They're also giving away credit cards. Citing an Experian report, Silver-Greenberg and Siegel Bernard add, "Credit card lenders gave out 1.1 million new cards to borrowers with damaged credit in December, up 12.3 percent from the same month a year earlier... These borrowers accounted for 23 percent of new auto loans in the fourth quarter of 2011, up from 17 percent in the same period of 2009."

The Times notes that last year, "investors scooped up $11.7 billion in auto loan securities, up from $2.17 billion in 2008." The growth is kind of scary when you recall what happened with subprime mortgages a few years ago. Though, the risk manager for GM told The Times that unlike mortgage lenders, auto lenders understand how to manage risk while still making loans to borrowers with poor credit.

As for the increase in credit card lending (complete with terrible fees)-- it isn't exactly reassuring either, especially when you consider, as Bloomberg' s Elizbeth Ordy reports today, that consumer spending on credit cards last year was up 9.5-13 percent with the country's most popular credit cards (Visa, Mastercard, American Express) even though fewer customers had those cards. Ordy reports that despite the growing  popularity of prepaid cards, "those who hold credit and debit cards are using them more. Consumers spent about 5.7 percent more on their credit cards in March than they did the year before, according to a report from payment processor First Data Corp."

Of course the numbers are fuzzy, and Experian can't tell which debts and spending are from troubled borrowers or the filthy rich. Silver-Greenberg and Siegel Bernard do report that lenders are trying to separate the very unflattering "deadbeats" from "fallen angels" (borrowers who were in good shape before the crisis) even though they acknowledge that most of the money will come from finance charges and late fees.

And, apparently this is all supposed to be a good thing, since, as Silver-Greenberg and Siegel Bernard point out, dalliances with shady, subprime lending is a sign that the economy is back on its feet, and point to the fact that consumers have been reducing their debts, and delinquencies on auto loans and credit cards aren't as high as they were during the height of the financial crisis. Maybe it's just us, but comparing anything to the worst U.S. financial crisis in the past 50 years and saying "not bad," isn't exactly comforting.