With GMAC out, banks trickle in

But loan money is elusive for shoppers with less-than-sparkling credit

After GMAC Financial Services' broad retreat last week from auto lending, General Motors dealers were trying to plug the gap with banks, credit unions and independent finance companies.

GMAC said it would lend money only to consumers with credit scores of 700 or above — low-risk prime customers — and raise rates, too. The changes disqualify up to three-fourths of some dealers' shoppers.

"That, in effect, puts GMAC out of the retail finance business," says Ken Cooper, sales manager of Alex Chevrolet Inc. in Charles Town, W.Va. "GMAC used to be there for us all the time when things were good or bad. Now they float with the wind."

The GMAC pullback means opportunities for other lenders, such as banks and credit unions. But the frozen credit markets mean that whatever the source, auto loans will be expensive and availability limited for those with poor credit scores.

GMAC added three-quarters of 1 percentage point to the buy rate — the interest rate it charges dealers to provide auto loans to consumers. Rates vary around the country, but dealers say the increase pushes GMAC's buy rates to as much as 2.5 percentage points above rates of competing lenders.

In Cooper's market, GMAC's best buy rate is about a percentage point higher than competitors' — 7 percent, compared with 6 to 6.25 percent — on five-year loans for customers with an ideal credit score and profile.

Dealers make money on the deals by charging consumers a rate above the buy rate. The profit-generating spread between the two typically is between 0.75 and 1.5 percentage points.

On a five-year, $20,000 loan, 1 percentage point adds about $10 to the monthly payment.

Temporary retreat?

But it's not clear how long GMAC's retreat will last. The captive told dealers its pullback would last until the credit markets improved. GMAC raises funds by bundling loans and selling them to investors.

"GMAC's businesses continue to be affected by the frozen capital markets," CEO Alvaro de Molina told GMAC employees in an e-mail last week. "There is limited, if any, access to funding for our mortgage and auto finance operations."

Although GMAC's problems stem from chaotic financial markets, they also point to a new reality: GM no longer controls its former captive finance unit, which once existed to support the automaker's sales.

In November 2006, GM sold 51 percent of its captive finance company to an investment group led by Cerberus Capital Management LP for $14 billion.

It's not clear how much help will come from other lenders, such as credit unions.

"This provides credit unions with a good opportunity to gain new loans," says Tony Boutell, CEO of Credit Union Direct Lending, an online service that connects dealers with credit unions. "We're making sure that the credit unions are informed of GMAC's new loan restrictions, and we're recommending that they contact GM dealers in their areas."

But Boutell says credit unions will stick with low-risk customers. He says credit unions "have not traditionally been active in the subprime lending arena."

Banks seek loans

Huntington National Bank, a major auto lender based in Columbus, Ohio, also expects more business.

"I don't think we will have to go after GMAC business," says Nicholas Stanutz, an executive vice president with Huntington. "It will come to us."

Dealer Bob Maguire, former chairman of the National Automobile Dealers Association, says GMAC's minimum 700 credit score disqualifies three out of four of his customers. And its standard rates would scare away the rest of them.

Maguire, chairman of Maguire Auto Group in Bordentown, N.J., says GMAC's buy rates, at best, are 2 percentage points higher than the three other lenders he uses for customers with good credit.

Maguire's GMAC buy rate on a 700-score customer for a five-year loan is 7.69 percent, while the next highest lender charges 5.69 percent.

Dealers fear that GMAC's minimum credit score would scare prospects away. So on Oct. 17, GM launched an ad campaign to push the idea that financing is available.

Automated credit application systems such as RouteOne help dealers find credit sources. "Even in the current environment, RouteOne has a broad set of lenders available who purchase across the credit spectrum," says Justin Oesterle, a RouteOne executive.

Hard for small dealers

GMAC's retreat is difficult for many small and mid-sized dealers who send most of their business to the captive.

Dealers who finance much of their vehicle inventory through GMAC can become Platinum dealers. GMAC's Platinum program qualifies participants for better rates on inventory financing and retail contracts, as well as cash bonuses.

GMAC has eliminated some of the incentives. But it has suspended volume requirements on the Platinum program, recognizing that dealers will need to shift business to other lenders.

Tommy Brasher, owner of Brasher Motor Co., a Chevrolet and Buick dealership in Weimar, Texas, says alternative lenders are available. But "to go out and find more banks is not as easy as it may sound," he says.

Brasher says that to use the new lenders' forms, dealers must sign new agreements and update computers.

Banks often cancel low-volume dealers. They also expect dealers to send their best-quality contracts to offset the riskier contracts. Because of this, dealers say, they can't funnel all their prime customers to GMAC.

Says Jerry Seiner, president of Jerry Seiner Dealerships in Salt Lake City: "Banks don't want to buy the contracts unless you send them the borrowers with 700 scores and above."

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