Tighter criteria offset looser credit-score terms at

GMAC LLC has opened its lending door — but just a

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

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.” 

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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

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.

Marcie Belles

Economist explores potential fallout of Big Three

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?” 

Marcie Belles

Capital crunch spurs better credit, lower payments in

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

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.

Prime position

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. 

Paring payments 

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.  

Marcie Belles

Prime/Nonprime/Subprime/Below Subprime

 Average monthly paymentAverage amount financed

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