Credit crunch has lenders reducing

Victoria Fierson

The credit crisis is causing lenders to use more creative
risk-management methods in order to make loan approvals. In the
past, lenders relied heavily on standard computed risk-management
data to approve applications. In the current climate, however, many
have tightened up credit-assessment standards, excluding loan
applicants with less-than-excellent credit scores. 

Additionally, dealers have taken a more active role in the loan
process and even screen customers’ credit. Nowadays, it’s become
more common for dealers to ask customers about their credit scores
soon after they arrive at a showroom. Such questions were once
addressed in the finance office after a vehicle was all but paid

Lenders are finding that they need to adjust their
risk-management strategies because the number of loans defaulting
and being denied has significantly increased. Current technology
allows lenders to enter an applicant’s personal information onto
risk-management software. 

Upon inputting criteria such as a customer’s credit score,
occupation, and income, the level of risk associated with approving
that person for a loan is produced. In the past, many lenders
relied primarily on these so-called “hard numbers.” However, that
dynamic is changing.

“Risk management is not all science, there’s an art to it,” said
Paul Kramarz, risk manager for America Honda Finance Corp., during
a panel discussion at the recent Auto Finance Summit.
 Like their mortgage sector counterparts, auto lenders have
changed their loan-assessment processes and now look beyond credit
data, so that the same customer may look completely different,
possibly more desirable for loan approval. 

There has been a recent industry shift toward manually approving
loan applications because of the credit crunch; in fact, 60 per
cent of loans are now approved using a combination of manual and
technology-based risk management. For one, Volkswagen Credit Inc.
has changed its look-to-book ratio on used cars, said Bruce Harris,
the captive’s vice president and chief financial officer. Customers
are currently more interested in used cars than in new ones, partly
because they are less expensive, which makes securing loans more

“There’s not the same draw as there is on the new-car side,”
Harris said. “The demand is not as high.” 

At Honda Finance, the situation is a bit different. The captive
is generally benefiting from the manufacturer’s full line of
fuel-efficient vehicles. “Honda hasn’t experienced such a volatile
swing,” Kramarz said. “If captives come out with incentives, it
could affect sales.” Kramarz is more worried about residuals on
SUVs and trucks that haven’t fallen yet. 

Meanwhile, at Chevy Chase Bank, “target returns are the most
important thing,” said Chas Roscow, senior vice president of the
bank’s consumer lending division. “You need to assess your
deposit-gathering and whether or not doing business with a
particular dealer will result in a direct return.” Chevy Chase
strives for a 1 per cent return on assets (ROA) after taxes. “We
try to keep credit loss at 75 basis points,” Roscow said. “Our
approval rate is about 50 per cent right now.”

Victoria Fierson

GMAC eyes move to become third-party

As it pursues government funding and bank holding company
status, GMAC LLC is mulling a move to service auto loans for other

“As you may know, we’ve taken several key steps to our goal of
transforming GMAC into a deposit-funded lender and scale servicer
with GMAC Bank at the core,” said CFO Robert Hull during a
conference call to discuss third-quarter earnings. 

Specifically, “GMAC’s automotive servicing operations have been
developed with an eye on providing greater internal servicing
efficiencies for other GMAC business units and potentially
providing third-party automotive servicing,” company spokesman
Michael R. Stoller Jr. told Auto Finance News.

Nonprime lender Triad Financial Corp. has been working to
implement a similar structural change this year. Triad has been
transitioning itself into a third-party servicer since it stopped
originating indirect auto loans when its funding dried up in

For GMAC, the decision comes amid struggles with credit
performance and access to capital. The mega auto and mortgage
financier lost $2.5bn (£1.6bn) last quarter and has curtailed
leasing and restricted certain lending operations. For instance,
GMAC made $13.3bn (£8.6bn) of auto loans and leases last quarter,
putting it on pace to originate about $45bn (£29bn) for the year,
down nearly 30 per cent from $62.5bn (£40.3bn) in 2007. 

The company may have to further suppress originations to
preserve capital, Hull said.  

Also, GMAC’s losses have been creeping upward since midyear
2007. Annualized credit losses as a percentage of managed retail
contracts hit 1.55 per cent last quarter, up from 1.05 per cent at
yearend 2007 and 0.92 per cent at midyear 2007. In North America,
net losses shot up 71 basis points, to 1.9 per cent from 1.19 per
cent in the third quarter of 2007. 

And funding has been hard to come by, as well. “Our short-term
debt is under pressure, especially unsecured borrowing, such as
commercial paper, demand notes, and short-tenor bank loans,” Hull
said during the call. “This is a direct result of increased risk
aversion in all parts of the credit market, banks, institutional,
and retail.”

Marcie Belles

New auto lending at finance companies

Average maturity in months
Q1 08   Q2 08   Q3 08
62.6   63.5   65.4

Average loan-to-value ratio
Q1 08   Q2 08   Q3 08
94   93   89

Source: Federal Reserve Board

Auto ABS volume