In a restructuring of its financial division, Wells Fargo (WFC) recently said it will close 638 financial stores in the US and cut some 3,800 jobs as it ceases originating non-prime portfolio mortgage loans. The closure of much of the Wells Fargo Financial consumer finance operations results in a gap of funding that may never be fully replaced, according to a weekly credit outlook today by Moody’s Investors Service. “The contraction of the traditional consumer finance industry leaves a hole that will not be filled by regulated banks with tighter underwriting standards,” said Curt Beaudouin, a senior analyst at the firm in commentary. “A withdrawal of this form consumer lending is credit negative and suggests the prospect of slower economic growth and a stubbornly gradual decline in unemployment.” For the remaining branch-based players — including the CitiFinancial unit of Citigroup (C), the the American General Finance Corp. unit of American International Group (AIG), it underscores product mix issues like the effective elimination of core mortgage products and tight wholesale funding that have done in a number of branch-based consumer finance operations. The housing and subprime mortgage crises also eliminated residential mortgages — particularly cash-out refinancing — and the ample supply of wholesale funding. Wells’ closure of the Wells Fargo Financial branch network is just the latest move in an industry-wide contraction of consumer finance. And the gap it leaves, particularly in non-prime mortgage lending, may never be filled. Beaudouin noted several means of meeting the consumer lending demand left by Wells’ restructuring. Traditional banking operations — like Wells’ newly expanded community banking network — will likely look to fill the gap. Stricter regulatory oversight and minimum regulatory capital requirements, as well as safety and soundness concerns, will “ensure that a portion of the customer base is turned away,” he said. Retailers will similarly look to fill the gap by offering “creative financing” and other promotions like discounts on retail chain credit cards. Additionally, the void left by the decline of traditional consumer lenders potentially leaves room for new non-bank participants, although Beaudouin noted funding will continue to constrain operations. Write to Diana Golobay. Disclosure: the author holds no relevent investments.

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