The week after Wells Fargo & Co. announced the closing of its storefront subprime lending unit, Citigroup's chief executive delivered an impassioned defense of keeping alive his similar operation, CitiFinancial.

"In order to be successful at this business, what is really important is that you have scale and that you are diversified, and we've got that," Citi CEO Vikram Pandit said on the company's second-quarter earnings call, when an analyst asked why the two banking companies had arrived at contrary stances. "So in a very different way, we think this is an extremely valuable business from a business perspective but, most importantly, from an American citizen perspective — my God, you don't want to shut this down; you want to keep it growing!"

It was an uncharacteristically candid display from an executive who is uncommonly disciplined about staying on script, though the message itself was not entirely surprising. After all, CitiFinancial is a business Pandit is trying to sell — it was marked "noncore" when Citi reorganized early last year and decided which assets to keep and which to unload.

Pandit had a point nevertheless.

Funding options for people with spotty credit histories are quickly disappearing. The decision to shut down Wells Fargo Financial was preceded by HSBC Holdings' well documented misadventures in, and eventual exit from, the U.S. subprime market.

CitiFinancial, which has 1,300 U.S. branches that refinance mortgages and make personal loans, is not the only big player in a position to capitalize on the competitive dynamics reshaping the market. General Motors Corp. is acquiring subprime auto lender AmeriCredit Corp., and Fortress Investment Group LLC just announced it will buy 80% of the subprime consumer finance unit owned by American International Group.

But countless smaller lenders were done in by the financial crisis, and the cost of complying with new laws and regulations threatens to drive out others, as has already happened in the subprime credit card business. David Kvamme, the president of Wells Fargo Financial, said, "the economics of a separate Wells Fargo Financial channel are no longer viable," especially since Wells plans to serve many of the same customers through its traditional banks and mortgage stores.

The reemergence of pawn shops and department store layaway programs speaks to the difficulty subprime consumers are having in finding credit, and it suggests that enough competitive slack remains in the business to benefit the big players that remain, said Todd Zywicki, a law professor at George Mason University and co-author of the forthcoming book Consumer Credit and the American Economy.

"Subprime borrowers need credit just like everybody else. If their transmission blows and they need $1,500 to have their car repaired so they can get to work, they need to go somewhere for the money," he said.

But Zywicki worries that, for the neediest consumers, the upshot of financial reform will be more expense and less choice.

"I don't blame Wells Fargo at all" for deciding to close all 638 of its Wells Fargo Financial outlets, he said. "They're just responding to the costs that are being imposed on them. But taking away credit options from people who already have limited credit options is not a strategy for making life better for people."

Mary McDowell, the chief executive of CitiFinancial North America, does not expect financial reform to take a drastic toll on the Baltimore-based business formerly known as Commercial Credit Corp., which dates from 1912 and was Sanford Weill's original building block for the Citigroup financial services conglomerate.

In an interview, McDowell said the business is accustomed to complex supervision. State regulators oversee CitiFinancial in each of its markets, and as a part of Citi's holding company — which provides the capital for the business — it also is supervised by the Federal Reserve. Moreover, because CitiFinancial never strayed far from basic loan products, "all in all I feel that we are on top of a lot of the potential [regulatory] changes," she said.

Despite these advantages, CitiFinancial downsized this year, closing more than 300 U.S. branches and turning another 181 sites into places where loans are serviced, not originated, as part of the dressing-up process for a possible sale.

"We just needed a smaller entity to really be able to attract a larger pool of buyers, and we wanted [a structure] where we could take those branches and grow them as consumer demand comes back," McDowell said.

Average loans in Citi's North American local consumer lending group — which includes student loans, real estate lending and other businesses separate from CitiFinancial — fell 8% from the year earlier, to $222.5 billion in the second quarter. But credit costs fell even faster, dropping nearly one-third from the year before. (The company does not break out results specifically for CitiFinancial.)

"Whether we're part of Citi or not part of Citi, I think we'll be able to continue to provide loans to customers who need them and who have shown the ability to pay for those loans," McDowell said.
Meanwhile, the company is mapping out options for doing its own fund raising in the capital markets in lieu of relying on Citigroup's balance sheet.

With no deposit base and a "middle America" customer profile that does not match the up-market, urban customer base that Citi seems eager to target with its traditional bank branches, CitiFinancial was put on the block 18 months ago when it became part of Citi Holdings, a pen for Citi's noncore or distressed assets.

But on the July 16 conference call with analysts, Pandit said he was in no hurry to sell.

"As a matter of fact, it is a business that we continue to like," he said, "and while it may or may not fit — and as we said, it may not fit — in our ongoing strategy, it's certainly extremely valuable to somebody, and we are not inclined to do anything unless we find somebody else who sees the value."

Shrewd words from a willing seller? Maybe. But he might not have been bluffing.

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