CHARLOTTE, N.C. - Bank of America Corp.'s decision Wednesday to stop writing auto leases and subprime mortgages takes it out of two businesses it says are keeping it from hitting growth and profit targets, but the announcement may hide other motivations - at least on the subprime side.
In the leasing business, the Charlotte banking company, which is the nation's largest in consumer lines, has had to contend, as have some peers, with increased competition from big automakers and declining prices for used cars, especially sport-utility vehicles. B of A counts on sales of cars coming off leases for revenues when it writes auto leases, but overly optimistic predictions of resale values have led to losses of nearly $2,000 per car and caused an average of $75 million in charges per quarter since last year.
While B of A joins a veritable parade of banks seeking to get out of auto leasing, it is to some degree swimming against the tide in exiting the subprime real estate market, a business where revenues have been rising. The company will sell its $26 billion subprime loan portfolio in the next seven to nine months, as well as its loan origination, fulfillment, and servicing operations.
Indeed, B of A had no difficulty in finding buyers for its 96 EquiCredit subprime mortgage branches. Resource Bancshares Mortgage Group Inc. of Columbia, S.C. is buying 27 mortgage origination offices in the Midwest and on the East Coast. Aegis Mortgage Corp. of Houston is buying the remaining 69 branches. [See story on page 16.] The banking company also is seeking a buyer for its subprime loan servicing business.
B of A chairman and chief executive Kenneth D. Lewis, who has been trying to reshape the company into a collection of high-growth, more profitable businesses, said it had tried to improve the two units but ultimately decided to sell. Mr. Lewis said the company would take a $1.25 billion charge in association with the restructuring.
"While most of our businesses are performing well, we've been saying for more than a year that we would not hesitate to exit businesses that don't fit our strategy or cannot be reconfigured to meet our goals," Mr. Lewis said during a conference call.
Though many analysts said the moves appeared likely to improve B of A's financial results, others suggested that its exit from subprime lending may also be a reaction to the growing stigma attached to predatory lending and new legislation, including a one-year-old North Carolina law, that tightens regulation of lending to people with poor credit histories.
Mr. Lewis hinted that besides worrying about volatile earnings from subprime lending the company is concerned about the increasingly chilly climate. "While subprime real estate lending has experienced growth in revenues, the challenges posed by that growth have proved to be significant," he said during the conference call. "In addition, the cost of managing this highly regulated business continued to increase."
An investment banker, who asked to remain anonymous, said: "It doesn't appear to be a core business strategy with the bank, and as such the reward associated with higher interest spread may not be sufficient to cover potential credit losses, as the economy appears to slow down, and increasing regulatory scrutiny."
In recent years subprime lenders have faced mounting scrutiny from legislators, regulators, and consumer activists over so-called "predatory" lending practices used to strip equity from low-income borrowers' homes. An anti-predatory-lending law that took effect last July in North Carolina caused a flurry of criticism from mortgage lenders and in January led Countrywide Credit Industries of Calabasas, Calif., a top lender, to stop making subprime loans in the state.
In addition, federal regulators weighed in on the matter later in the year, prompting a rule proposed by the Federal Reserve in December that would increase the number of subprime loans which would fall under federal consumer protections. Merging banks also found the issue nettlesome and have had to address and change some of their subprime lending policies in response to criticism.
B of A's decision to leave the business has also raised eyebrows among consumer activists, who typically battle banks over their lending practices to poor and minority customers. Robert Gnaizda, general counsel at the Greenlining Institute in San Francisco, said he was saddened to see B of A pulling out of subprime lending.
"It's not a loss; it's a disaster. B of A has the potential to be the most responsible and the largest subprime lender," Mr. Gnaizda said. The company is currently No. 4, writing $7.8 billion of loans in 2000. But Mr. Gnaizda said he thinks the strict North Carolina law, and legislative rumblings in other states, helped steer the company away from the business. And he blamed the nation's two major bank regulators, the Office of the Comptroller of the Currency and the Federal Reserve, for failing to set strict enough policies.
"I believe that B of A is being forced to pull out of it by the negligence of the OCC and the Federal Reserve," he said. "The two primary regulators have not set a standard for subprime lending, to avoid local legislation like the North Carolina legislation. This puts enormous pressure on financial institutions that might like to do the right thing."
Whatever B o A's motivations, analysts were quick to say the moves should help it improve earnings. In a research note, Lori Appelbaum of Goldman Sachs Corp. said, "They are getting rid of a cancer that has been on the balance sheet for some time." She said the capital freed up by the moves eventually should exceed the size of the charge and predicted that the changes would not affect earnings this year or next.
B of A said about 50% of the $1.25 billion charge would go to write off goodwill associated with the two businesses. Also included are writedowns of subprime loans and auto lease residuals, the latter accounting for losses the company continues to suffer as used cars sell for less than predicted when leases were written.
Bank of America had announced last spring that it was getting out of the used-car business. It had operated its own used-car lots where it tried to sell cars coming off leases.
About 2,750 employees of the two businesses are affected by the changes, and it was unclear how many would lose their jobs. A company spokeswoman said most would be offered jobs elsewhere in the bank or with buyers of the divested operations.
Erick Bergquist contributed to this article.