Auto Financing: ‘No One Knows What Normal is Anymore’

ORLANDO, FL – It’s hard to say when auto financing will get back to normal because “no one knows what normal is anymore,” says Charles Aiesi, a senior manager at American Honda Finance Corp.

That’s how much the market has changed in a dramatically short time.

With a hint of nostalgia, lending-industry players recall how different it was little more than a year ago, back when dealers readily secured commercial floorplan credit to buy vehicles from auto makers and consumers easily obtained loans to purchase cars from dealerships.

“Funding wasn’t even a topic then,” says Marguerite Watanabe, president of Connections Insights LLC.

“It was when dealers could pick and choose financing sources; when your captive lender always was there for you; when all customers could be financed at some price, tier and payment,” she says at an F&I Management and Technology conference here.

It’s hard to grasp what’s happened since then, Watanabe says. That includes asset-backed securitization drying up, floorplan funding becoming scarce and consumer-loan applications undergoing tighter scrutiny.

Then there are the unusual reconfigurations within the industry, such as GMAC Financial Services transforming from an auto maker’s lending arm into a bank that now also services Chrysler Group LLC dealers in a post-bankruptcy era.

That turn of events surprised no one more than staffers at GMAC, a firm that started out as a “captive” lender for General Motors Corp.

“I recall being told we needed to go to Auburn Hills, (Michigan headquarters of Chrysler) because we were going to partner with them,” says Alex Sarafian, GMAC’s director-consumer credit and risk management. “I was shocked.”

Alex Sarafian says despite GMAC’s metamorphosis, it’s “fully committed to auto business.”

What triggered the credit crisis and ultimately led to the unusual chain of events, including the GMAC metamorphosis, was the fall of Lehman Brothers bank in September 2008, he says. “We never could have dreamt what (the collapse of) Lehman would mean for GMAC.”

As part of the Chrysler bankruptcy restructuring, GMAC replaces the outgoing Chrysler Financial in providing Chrysler-brand dealers with floorplan loans.

But the segue hasn’t been seamless. For instance, GMAC this month informed dealers it needs more collateral for such loans.

For some dealers, that means putting up their stores as security. But Chrysler Financial, as the mortgage holder on some of those facilities, is balking at that. It creates a Catch-22 for affected dealers.

Meanwhile, GMAC is about to ask the U.S. government for more money.

Sarafian sees a bright future, once things settle down. “GMAC is fully committed to the auto business; it is our business,” he says. But for now, “We recognized we just have to embrace the chaos.”

Several financial firms have stopped floorplan lending, indicating it’s too risky in an economic climate that has hit the auto industry like a hurricane.

In droves, dealers are turning to financial institutions that still offer credit for inventory purchases. “We have been absolutely flooded with floorplan requests,” says Honda Finance’s Aiesi. “We’re taking those requests on a must-need basis.”

Several conference attendees say that, because of the way things are now, lenders and dealers need to understand each other better. “You can’t take relationships for granted anymore,” Watanabe says. “We have to work together.”

That includes sharing as much information as possible, says Paul Rule, a senior vice president for Chase Auto Finance. “A lot of companies that closed didn’t do that.”

Lenders need to keep dealers informed on what structured auto deals will get financed, conference participants say.

That means passing along information on today’s standards of shorter lengths of loans, higher down payments and closer looks at customers’ credit histories.

“We need to educate dealers on what loans to send us and what not to send us,” says Adam Pope, a vice president at Wachovia Dealer Services.

Adds Aiesi: “You need to set goals, and part of that is to explain to dealers what those goals are.” Rule sees an auto-finance future with fewer but better capitalized players.

“The fundamentals don’t change, even though every now and then a new group thinks they have found a better way,” he says. “You need good relations with dealers and a program that works for customers. And the bank has to make a profit.”

Stick to the basics, Pope advises. “Make rational decisions and don’t go crazy.”

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