The Federal Reserve and U.S. Treasury may be moving to buttress America's banks and keep the loans flowing. But General Motors Acceptance Corp., the finance company that is 51%-owned by Cerberus Capital Management and the rest by General Motors (NYSE:GM – News), didn't get the memo.
Instead, the auto- and home-loan company sent a letter to GM dealers on Oct. 13 saying that the company won't loan money to car buyers with credit scores lower than 700. Consumers with credit scores above 680 are considered prime-credit borrowers. That means even some would-be car buyers whose credit is considered sterling would be nixed by GMAC.
GMAC isn't the only lender that's tightening credit. Data from the Federal Reserve Board shows that almost 70% of banks this year have tightened lending standards to non-credit-card customers.
“In a Pickle”
GMAC's tighter purse strings also show how GM's options are dwindling. When the auto giant was GMAC's sole owner, it could set lending policies to help dealers sell more cars. But given the losses GMAC has taken on mortgage loans and leases, it has had to get stingy. “When GM gave up control to Cerberus, they got in a pickle,” says Mark Rikess, president of the Rikess Group, a consulting firm for dealers. “It has taken away flexibility from dealers.”
Now, dealers have to go to several banks to get some borrowers a loan. Banks are lending, Rikess says, but only to borrowers with strong credit. The shame of it, says Rikess, is that some buyers with above-average credit are fearful of getting denied. So they won't even shop for a car until they hear banks are loosening up.
As if selling cars wasn't tough enough anyway, with consumers worried about their jobs and losing home equity and other sources of cash. Before GMAC started tightening standards in recent months, the credit company loaned money to about half of GM's buyers. “We're going to have to utilize open markets,” says Mark LaNeve, vice-president of GM North America Sales and Marketing. “Dealers are accessing outside banks.”
Losing 10,000 Buyers a Month
This isn't the first time GMAC has pulled on the reins. LaNeve says the company has been getting tougher on borrowers for months. He says tighter credit has cost GM at least 10,000 buyers a month. Chad Eddlemon, general manager of Ron Tonkin Chevrolet in Portland, Ore., says that in some markets such as the Northwest, banks and credit unions are bigger players than GMAC anyway. Still, he says, “Within the last six months, GMAC has shifted their lending model so they did not help dealers sell cars.”
In its letter to dealers, GMAC said it will restrict approval of loans with terms longer than 60 months. LaNeve said that won't hurt GM because the automaker had already pulled back on 72-month loans, unless they were extended as part of a special incentive program.
In the letter, which was sent by Barbara Stokel, executive vice-president of GMAC North American Operations, the company also said it will suspend bonuses to dealers who earned the lender's Platinum designation for bringing the firm strong buyer volume. One Chevrolet dealer in Dallas said the bonuses amounted to $200 to $400 a car. Many dealers used that bonus money to pay off the interest on their own inventory.
