UPDATED: 10/13/08 9:00 pm EDTDETROIT -- GMAC Financial Services said yesterday that it will only lend money to prime borrowers with credit scores of more than 700.
The restriction would rule out one out of four car loans, according to one recent report.
Dealers say they may have trouble finding alternative lenders if they funnel all their best contracts to GMAC.
“This is scary,” said Jerry Seiner, president of Jerry Seiner Dealerships in Salt Lake City. “Who is going to step in and buy these contracts?”
Seiner says other auto lenders want dealers to send them a mix of contracts --including the most creditworthy. “Banks don’t want to buy the contracts unless you send them the borrowers with 700 scores and above,” he says.
In a statement, GMAC officials attributed the new policy to "the lack of stability in the global capital and credit markets."
GMAC spokeswoman Sue Mallino said the finance company had to cut back on retail financing because of the company’s shrinking access to capital and rising costs.
“This is an unprecedented credit market environment right now,” said Mallino.
GMAC has also suspended some sales bonuses for its highest-volume “Platinum” dealers. Dealers say the bonuses applied only to standard-rate contracts without incentives, which is a small percent of their business. They say the bonuses amounted to $300 to $400 per contract.
For the first seven months of 2008, prime customers with scores exceeding 700 represented 74.3 percent of the U.S. auto loan market, according to information services company Experian Automotive. A year ago, prime borrowers made up 71.1 percent of the market.
Besides the new credit score limits, GMAC said it will restrict contracts with higher advance rates and longer terms. Last week, GMAC increased by 75 basis points the rate it charges dealers for providing consumer automotive financing with no incentives.
"These changes in pricing and underwriting are related to the current market environment, which has reduced access to funds and increased the cost of funds," the GMAC statement said. "The company currently expects these actions to remain in place until the credit markets stabilize and accessibility improves."
Separately today, Standard & Poor's said it is keeping its credit ratings on GMAC -- and its 49 percent shareholder General Motors -- on review for a possible downgrade following reports that GM held talks on a partnership or merger with Chrysler LLC.
"The CreditWatch placement is not immediately affected by the possibility of a GM-Chrysler combination or alliance, despite the potential cost savings, but also massive execution risks, that we anticipate would result from such a transaction," S&P analyst Robert Schulz said in a statement.
GM sold its majority control of GMAC to Cerberus in 2006. According to The Wall Street Journal, one scenario would call for GM to acquire Chrysler from Cerberus in exchange for selling the rest of GMAC to Cerberus.
Reuters contributed to this report
PRESS RELEASE: GMAC Financial Services Statement on Automotive Finance Purchase PolicyDETROIT, Oct. 13 /PRNewswire/ -- GMAC Financial Services today implemented a more conservative purchase policy for consumer auto financing in the U.S. as a result of the lack of stability in the global capital and credit markets. The changes include limiting purchases to contracts with a credit score of 700 or above. Additionally, the company will restrict contracts with higher advance rates and longer terms. Last week GMAC also increased by 75 basis points the rate it charges dealers for providing non-incentivized consumer auto financing.
These changes in pricing and underwriting are related to the current market environment, which has reduced access to funds and increased the cost of funds. The company currently expects these actions to remain in place until the credit markets stabilize and accessibility improves.
GMAC's wholesale auto finance business is unchanged by the actions announced today.