Lenders lower the bar as looser credit boosts auto sales

DETROIT (Bloomberg) -- Jody Bowman said she didn't expect to be able to buy a new car or even a used one. She owed $8,900 on a failing 2003 Chevrolet minivan, carried a $5,000 balance on her credit card and didn't have enough cash for a vehicle.

Then two weeks ago, the 38-year-old stay-at-home mom got a $15,500 loan and drove away from a dealership in Clinton, Iowa, with a 2005 Toyota Sienna minivan.

Easier credit for buyers like Bowman is fueling a recovery in new U.S. auto sales that are on pace for the fastest annual gain in 26 years. The market for bonds backed by auto loans is expanding for the second straight year, freeing up lenders' capital for customers who would've been rejected last year.

“We had such limited access to funding last summer, we almost were trying not to make loans,” said Dan Berce, CEO of Fort Worth, Texas-based lender AmeriCredit Corp. “Early this year, we looked at how loans were performing in Texas, California and much of the Northeast and liked what we saw, so we decided to lower the bar.”

About $22.9 billion in bonds backed by auto loans, borrowings for dealer inventory and related debt were issued through April, according to data compiled by Bloomberg. That's a 67 percent increase from $13.7 billion a year earlier.

AmeriCredit, specializing in subprime lending, sold $200 million of bonds backed by car loans on March 31, its first sale without help from the Federal Reserve's Term Asset-Backed Securities Loan Facility since November 2008. The company sold an additional $600 million of bonds on May 13.

Scoring system

The company has a numerical scoring system to rate borrowers that uses many of the same variables as Fair Isaac Corp.'s well-known FICO scores, such as the number of credit inquiries and missed payments. Those dimensions are measured against other AmeriCredit customers to determine the probability they will repay the loan.

AmeriCredit's auto-loan acceptance rate ran as low as 20 percent a year ago, and today is about 35 percent, Berce said. The company originated 34,800 new and used-vehicle loans in the U.S. in the first quarter, up from 12,400 a year earlier.

U.S. auto sales through April have risen 17 percent from the same period a year earlier, according to data compiled by Bloomberg. If the trend holds for the rest of the year, it would be the biggest annual increase since a 17 percent gain in 1984, according to AutoData Corp. a research firm based in Woodcliff Lake, New Jersey.

TALF support

The U.S. government sought to prop up loan markets for autos, credit cards and education when Federal Reserve started its TALF program in March 2009. It provides Fed loans to purchase top-rated securities, enabling investors to boost returns with the borrowed cash. The program closed in March for assets except new commercial mortgage-backed securities, for which the program will remain open through June.

Securities backed by auto loans are in demand because they have tended to perform well, even during recessions, said Sameer Gokhale, an analyst at Keefe, Bruyette & Woods Inc., a unit of New York investment bank KBW Inc.

“The funding market for auto loans has improved dramatically, especially the subprime market,” Gokhale said.

About $66 billion in bonds backed by automotive-related loans were sold last year, a more than 30 percent gain from 2008, according to data compiled by Bloomberg.

The improvement has helped sellers extend financing to more car buyers, said Lee Mitchell, vice president of financial services for Group 1 Automotive Inc., a chain of dealerships based in Houston.

Finance companies belonging to automakers accounted for about 34 percent of vehicle loans in the first quarter, according to Art Spinella, president of consulting firm CNW Marketing Research in Bandon, Oregon. Banks also provided about 34 percent of the loans, followed by credit unions and finance companies, each with about 14 percent, he said.

‘Thawing out'

“Credit is thawing out,” Mitchell said. “We're not getting 100 percent of the loans we ask for our customers, but lenders are giving us more ways to go.”

Bill Perkins, owner of Merollis Chevrolet in suburban Detroit, was able to help Royce Lytle, a lounge singer, find a loan to buy a 2007 Buick Rendezvous, costing $18,000.

Lytle, who lives in a nearby suburb, had been turned down for a loan because he didn't draw a regular salary and couldn't produce paystubs from the restaurants and other venues where he performs.

“They wanted to see two or three years of income tax returns,” said Lytle, 50. “Then they brought up the fact that I was self-employed. I've always had a job, always paid my bills.”

Convincing lenders

Michigan First Credit Union agreed to loan Lytle the money because of the dealership's “strong relationship” with the lender and the performance of its loan applicants in the past, Perkins said.

Bowman, the mother of three who bought the Toyota minivan, got her loan from DuTrac Community Credit Union in Dubuque, Iowa. The lender was willing to add the difference between the outstanding balance on her existing auto loan and the lower trade-in value of her old van to a new loan to help her buy the vehicle from McEleney Chevrolet Buick GMC Toyota.

Bowman and her husband, a welder, are scheduled to pay $345 a month for the next 60 months.

“I know on paper we look risky,” Bowman said. “We make all our payments on time.”