Tighter criteria offset looser credit-score terms at GMAC
GMAC LLC has opened its lending door — but just a crack.
Despite lifting credit-score minimums set in place Oct. 13, GMAC has instituted stricter payment-to-income and loan-to-value ratios that could keep potential borrowers from qualifying for loans. The lender has also pared back advances, the compensation paid to dealers at the time of origination, General Motors Corp. dealers told Auto Finance News.
“GMAC is not back in the game,” said Ray Howard, general sales manager at Sir Walter Chevrolet. “The other restrictions that they’ve put on there have made it difficult to do business with them.”
After more than two months, GMAC lowered its 700-credit-score requirement to 621, after the Federal Reserve Board granted it a bank-holding- company charter and a $6bn (£4.3bn) loan (see US state help for GMAC and Chrysler Financial).
The lower credit-score requirement and fresh funding, though, have done little to facilitate financing, dealers contend. For one thing, GMAC’s minimum income requirement now is $2,500 (£1,800) a month, said Domenic Tucci, finance director at Holiday Chevrolet. “It used to be $1,000 or $1,500,” he said. “A college student making $18,000 (£13,000) a year could leave [the dealership lot] in a new Malibu or Impala.”
Another issue complicating underwriting relates to the limit on loan amounts. In the past, GMAC — and many other lenders nationwide — would finance vehicles for thousands of dollars above their book values. In essence, lenders would roll up consumers’ negative equity on existing loans into new ones. Now, though, “they don’t want to extend too much,” said Joe Quinn, finance manager at Les Stanford Chevrolet. Previously, loan amounts were determined based on how many GM cars customers had bought in the past, and the strength of their credit. “It was done on a case-by-case basis,” he said.
The bottom line, according to Joe Maughan, F&I manager at Bobby Murray Chevrolet: “They have denied credit to anybody that they feel will be any kind of risk. The people who can get loans are the people who can go anywhere and buy anything, but that’s not the American people.”
For now, GM dealers are looking elsewhere to fund contracts. BB&T, Chase Auto Finance, Fifth Third Bank, Huntington Bank, US Bank, and Wachovia Dealer Services have all picked up marketshare. Credit unions, too, are another financing source.
Economist explores potential fallout of Big Three collapse
As Chrysler LLC, Ford Motor Co., and General Motors Corp. restructure to reduce out-of-control expenses, the ramifications for the auto industry as a whole hang in the balance. Plant closures and production cuts at the Domestic Three automakers would have a domino effect, first with employees, then suppliers, and ultimately, dealers and financing, said Michael J. Smitka, professor of economics at Washington and Lee University, during an AutoFinanceNews.net webinar last month.
The current economic downturn “is going to be a much longer and deeper recession than people are anticipating,” Smitka said, one that won’t be resolved simply by monetary policy like lower interest rates. “And if somehow it works, then we’re just going to end up in an even worse crisis not too far down the road.” He predicted that it would likely take two to three years to emerge from the current financial crisis.
A Chapter 11 bankruptcy filing “might be feasible,” he said, but only if the manufacturers are viewed as ongoing businesses with financial structures that render them viable companies.
A Big Three bankruptcy would likely deal a serious blow to the used-car market. “If one or more companies goes into insolvency and needs to liquidate quickly the inventory at thousands of dealerships, that would be a disaster for the used-car market,” he said. “It would push down prices for everyone.” New-car dealers, too, would be affected, he added, “because why buy a new Honda if you can get a comparable GM-segment vehicle, brand new, for half the price?”
Capital crunch spurs better credit, lower payments in Q3
With some financiers and consumers short of capital, loan originations in the third quarter of 2008 pointed to higher-quality borrowers and smaller monthly payments, according to data from Experian Automotive.
The Experian Automotive data analyzed 64m outstanding loans, nearly 5m of which were originated during the third quarter.
Though delinquencies continued to rise in the period, other loan characteristics point to improved lending standards, said Melinda Zabritski, Experian Automotive’s director of automotive credit. For instance, the third quarter was the first time since 2005 that the average loan term dropped below 60 months, she said.
Lenders’ efforts to tighten underwriting criteria were apparent in the third quarter of 2008, as prime loan originations climbed to 59.7 per cent of the total, from 56.3 per cent in the prior quarter. While originations of nonprime loans remained steady during the period, those of subprime and below accounted for a combined 21.5 per cent of the total, compared with 24.9 per cent in the second quarter.
Cash-strapped consumers shelled out less per month for their auto loans in the third quarter of 2008 than they did in the prior-year period, according to Experian Automotive data. The overall amount financed also declined year-over-year, likely because lenders reduced loan-to-value ratios and required higher down payments, Zabritski said.
All arrows pointed up with regard to 30- and 60-day third-quarter delinquency rates. “Hopefully we’ll see severity taper off” in future quarters, Zabritski said. At the least, lenders should have adjusted loss expectations upward, which would lessen the effect of worsening loan performance. Regarding rising 60-day delinquencies, these have a “much higher chance of becoming a significant loss for the lender,” she said.