On Tuesday, I argued in this article that banks have officially lost it again. 

They’re lending people money that they never expect will be able to pay them back… all for a few percentage points of short-term returns. 

This chart wraps up this thesis perfectly:

As you can see, there is a significant rise in the number of new auto loans for the groups with poor credit.

“Near prime” (in yellow) are borrowers who have credit scores of less than 660. “Subprime” (in red) have scores below 600. Yet these two groups have received more new money to buy cars than any other.

Why would banks do this? Because these groups have to take whatever interest rates they can get. And banks are desperate. 

Specifically, there are two lenders doing this more than anyone else. And if you know what’s good for you, you’ll steer clear of them.

The first is probably not a huge surprise, if you think about it.

Over the last decade, American carmakers have struggled. They have not been able to compete as well with the likes of Toyota and Honda. Resale values for cars made by General Motors, Ford and Chrysler have dramatically dropped compared to their foreign competitors. 

So, as you can imagine, any group that offers exclusive financing to customers of these brands are going to be desperate.

Subprime Auto Offender #1: Santander Consumer USA Holdings (NYSE: SC) 
Santander Consumer has a bit of a meandering history — going from a non-originator of auto loans working with individual banks to becoming a subsidiary of the enormous Spanish bank, Santander Group, then becoming private again and then going public. The important note from its history was in 2013, when it launched its Chrysler Capital group.

Think of Chrysler Capital as the equivalent of GMAC or Ford Financing. In other words, it is the primary lender to Chrysler customers. The difference is that Chrysler Capital (AKA Santander Consumer) is willing to take nearly any gamble to provide Chrysler customers with financing. 

Santander Consumer is the leader in subprime auto loans. Of its total originations during its most recent quarter, 98% went toward auto loans. And about half of that was given to borrowers with sub 640 FICO scores. 

But here’s the real problem. Even though delinquency rates for auto loans have continued to stay low, at 1.3% in the most recent quarter… Santander Consumer already has a delinquency rate for its auto loans of 3.8%. That’s nearly triple the rest of the auto lending sector. 

Of course, when you are the leader in poor lending practices, then you are going to gain some attention. Unfortunately, for SC, it’s mostly bad attention.

The Securities and Exchange Commission, the New York Department of Financial Services and the Consumer Finance Protection Bureau are all looking into the company’s lending policies. Any one of these could bring suits against the company for misleading investors. 

If this trend breaks and delinquencies do begin to rise like I expect, then you can expect the dam to come crashing down around Santander Consumer.

If you happen to own Santander Consumer’s stock, sell immediately. 

Subprime Auto Offender #2: Wells Fargo & Co. (NYSE: WFC)
Of course, GMAC, Ford Financing and Santander don’t have a monopoly on auto lending. Regular banks have also gotten into the game. And surprisingly, of the large banks that did survive the last financial fallout, the one that performed the best is now the one making the biggest mistake.

Wells Fargo somehow slipped through the banking crisis of 2007-08 without many scratches. The company stayed away from most of the worst types of subprime mortgage packages and risky speculation that was going on around the industry in the pre-2009 world.

However, it is front and center of this new potential fallout.

Wells Fargo is now one of the hottest banking stocks to own, thanks to its relative solid performance through the ups and downs of the last decade. But like its competitors, it is still a bank stuck in a zero-bound interest rate world. 

So, to make up for its weak margins elsewhere, it has gotten into auto financing — specifically subprime lending — in a huge way.

Over the last few years, the bank has opened up 56 branches across the country that deal exclusively with auto financing. 

Last year, the bank lent nearly $30 billion to car buyers. That might seem small compared to its $175 billion in new mortgages during the year. But considering that its total income for the year was just $23 billion, its auto business is important.

The risks associated with its subprime-heavy auto division, however, are not lost on bank officials. In March, Wells Fargo announced it is going to cap the amount it lends to subprime borrowers at 10% of its total auto financing. 

That will help limit some of the risk from this new poor credit epidemic. But even 10% of $30 billion leaves it with a serious hole if delinquencies go up. And considering this is a percentage-based cap (self-imposed too), its total subprime portfolio will still rise. 

The company has already shifted away from its mortgage business significantly. Last year, Wells Fargo originated half of the amount mortgages it did in 2013. Meanwhile, the bank’s auto loan portfolio grew 9.6% during 2014… and 21% since 2012.

Of its current auto loan portfolio, 62% of it is made of loans to customers with FICO credit scores below 720. That’s a much higher percentage of lower credit loans than the industry average.

Unlike Santander, Wells Fargo has a chance to right its wrong here. But it needs to reverse this trend now, before delinquencies and write-offs begin to rise. 

Until that happens, stay away from Wells Fargo’s stock. If you currently own shares, consider selling them before it gets into deeper trouble. 

My colleague Andy Obermueller recently made a bold prediction about the company’s future. He predicted the Wells Fargo could shut down thousands of its retail branches in 2016 — just like Bank of America, Citibank and JPMorgan Chase have all been doing for the past few years. But this wasn’t Andy’s only prediction…

He believes that these closings could open the door for an innovating new lending company to steal valuable market share from these big banks. This under-the-radar firm has already doubled its loan issuance each of the last three years. 

Andy’s included the name of this up-and-coming new lender in his latest financial briefing he calls “10 Shocking Predictions for 2016.” To see all of his profitable forecasts for 2016 — including the names of these little-known firms he thinks could skyrocket in the coming year — simply click here.