Four major automotive lenders have stopped financing Smart Choice vehicle service contracts because the financial ratings of the program administrator, National Warranty Insurance Co., have declined.
Ford Motor Credit Co. and General Motors Acceptance Corp. have issued notices to dealers saying they will not finance extended service contracts insured by National Warranty, also known as NWIC. Ford Credit and GMAC require ratings of A-, but NWIC's rating slipped to C- on June 10.
Toyota Financial Services and DaimlerChrysler Services, which require a minimum rating of B+, also say they won't finance NWIC-insured contracts.
NWIC, based in Lincoln, Neb., and incorporated in the Cayman Islands, has underwritten as many as 35,000 contracts a month for about 5,000 dealers, say competitors and distributors.
The company obtained an order from the Grand Court of the Cayman Islands on June 6 protecting it from creditors. NWIC earlier this year was rated A- by A.M. Best, a firm in Oldwick, N.J., that rates the financial strength of insurance companies.
"The issue with the funding is simply the lender is not willing to take the risk of the potential liability," says Nicholas Stanutz, executive vice president of consumer credit administration for Huntington Bancshares Inc. in Columbus, Ohio, and chairman of the Consumer Bankers Association's auto finance committee.
Agents who sold Smart Choice contracts say NWIC has stopped writing new business, but even if it hadn't, the contracts would be difficult to sell.
That's because the vast majority of vehicle service contracts are financed along with the purchase of the automobile, and if lenders are unwilling to finance the contracts "it will sound the death knell for that product," says Dave Robertson, executive director of the Association of Finance and Insurance Professionals.
In Illinois, Etta Mae Credi, assistant deputy director of regulation for the Illinois Department of Insurance, sent a letter advising NWIC that its registration was suspended. Credi says she received about a dozen complaints alleging the company has not paid claims.
Bruce Ramge, Nebraska's chief of insurance market regulation, says the Nebraska Department of Insurance has received about 75 complaints.