GM dealers feel squeeze from GMAC
With credit tight, GM's 'captive finance arm' is tightening terms on dealers and customers.
NEW YORK (CNNMoney.com) -- General Motors dealers are complaining that GM's "captive financing" arm isn't doing what it was set up to do - help them move cars. And if it continues, they say, they could lose their lots.
"Unless immediately stopped, GMAC's actions will directly lead to the insolvency of a number of our GM dealer members and will significantly erode GM's California market share," Peter Welch, president of the California New Car Dealers Association wrote in an Oct. 20 letter to GMAC chief executive Alvaro de Molina.
"At a time of their greatest need, our GM dealer members feel completely abandoned by GMAC's rogue actions," the letter went on.
Those actions include demanding early repayment of dealers' inventory loans and restricting consumer auto loans to only those customers with the best credit, according to the complaints.
"GMAC took the recent actions on pricing and underwriting, which we hope will be temporary, with great reluctance and only after careful deliberation," de Molina wrote.
GMAC has been hit hard by the credit crisis. In the third quarter, GMAC lost $2.5 billion. Of that loss, $294 million was related to auto financing - the bulk was from mortgage financing.
The company blamed "weaker consumer and dealer credit performance" as well as the sharp drop in values of leased SUVs. As a result, GMAC is cutting back on auto lending, according to a recent earnings announcement.
The company is also looking at participating in the Federal Reserve's commercial paper purchase program and is meeting with authorities about getting bank holding company status. That would allow access to the government's $700 billion bail-out fund.
GM originated the idea of captive financing when it founded GMAC as a wholly owned subsidiary in 1919. In 2006, a consortium including banks and Cerberus Capital Management (which also owns Chrysler and its captive finance arm, Chrysler Credit) bought 51% of GMAC. GM retains a 49% share.
GMAC said it will now only lend money to buyers with credit scores better than 700, near the top. It's also financing a smaller portion of the car's value, requiring buyers to make bigger down-payments.
"Scores under 700, that's at least 40% of the population of this state," California New Car Dealers' president Welch told CNNMoney.
Half of California's auto dealers say they could be forced out of business by GMAC, according to a survey of members about their relationships with GMAC by the state dealer association.
80% of California's 340 GM dealers said they finance their inventory through GMAC, according to the survey, and almost 70% of those dealers have received letters demanding speedy repayment of inventory loans on 2007 models still on the lot. Ordinarily, an inventory loan - called a "floorplan" loan - is repaid after the vehicle is sold to a customer.
A GMAC spokesman could not confirm the California group's claims about the number of affected dealers.
The proportion of GM sales financed by GMAC has plummeted nationally. Last October, 42% of GM sales were financed through GMAC, according to data from J.D. Power and Assoc. Last month just 23% were.
At the same time, GM sales last month dropped 45% compared with October, 2007. As much as a third of that decline could be attributed to GMAC's cutbacks, said GM spokesman John McDonald. GM may not be a majority shareholder, but it still co-ordinates with GMAC, said McDonald, and much of what GMAC is doing mirrors what other, non-captive auto lenders are struggling with. But GM simply doesn't have the cash to put into GMAC to support low financing rate incentives.
But even when GMAC does offer an incentive like 0% financing, said Art Hudgins, who owns Holiday Chevrolet Cadillac in Willamsburg, Va., he's unable to get customers approved because of the tighter requirements.
Hudgins also said GMAC has not been communicating with him, as it used to, regarding changes in its business. "That's what's really been disappointing," he said. "It's kind of like of like they've bailed out of financing."
GMAC spokeswoman Gina Proia emphasized that the company is not turning its back on auto financing. "That is the foundation of our business and we absolutely understand the importance of that," she said.
Don Hall, Chairman of the Virginia Auto Dealers Association, said the situation there is not as dire as in California but that Virginia GM dealers are having a tough time. GMAC's tightening credit terms "have got some of my smaller dealers struggling," he said.
A recent survey of GM auto dealers around the nation by the industry newspaper Automotive News found that 84% of GMAC-financed dealers were looking for a new lender.
But for dealers who finance their inventory through GMAC, it's a difficult time to switch, said California New Car Dealers' president Welch. "Everybody's pulling their horns in."