The return of sub-prime: What does it mean for consumer credit?

Sub-prime lending continues to rebound across all sectors of the credit market, despite many analysts' assertions that such activity contributed in large part to the collapse of the finance and housing markets in 2008. According to a survey released this week by ratings firms Equifax and Moody's Analytics, the number of bank credit card accounts increased from December 2010 to December 2011, as lenders grew more aggressive in seeking new customers and consumers demanded new forms of credit. However, lending to sub-prime consumers showed a 41 percent increase from 2010 to 2011, after hitting a four-year high in December 2011 with 1.1 million new bank credit cards issued, the report shows. Meanwhile, new sub-prime card limits rose 55 percent over the same period. "The evidence of increased lending to sub-prime consumers demonstrates banks' ongoing efforts to grow lending by providing credit opportunities to more consumers," said Equifax chief economist Amy Crews Cutts. "Year-over-year results show borrowers are taking advantage of the new opportunities and seeking to diversify their financial activity, which is building momentum toward economic improvement." Sub-prime borrowers are gathering a larger swath of auto loan originations, as they now make up over roughly 46 percent of the market. Prime borrowers account for roughly 83 percent of auto originations, but they have lost share over the past two years to sub-prime borrowers. While some economists may herald the sub-prime trend as goods news, as it affords underserved or disadvantaged borrowers greater credit opportunities. However, these trends contributed to many of the toxic housing assets that plagued Wall Street in the months leading up the 2008 financial collapse that ultimately sparked the recession. Furthermore, the volume of student loan debts has emerged in recent years as a leading financial concern. "Student loans cater to borrowers who have little current income and who are generally young in their credit histories," the report explained. "For this reason, new student loan originations are dominated by higher-risk borrowers, although the share has shifted slightly over the past two years to low-risk student borrowers." Student debt was recently pinpointed at slightly more than $1 trillion in the U.S. - more than that of credit cards, auto loans and mortgage debts.