Credit Gets Some of the Blame

Light-vehicle sales would increase 1.5 million to 2 million units if auto financing returned to “normal,” the head of the National Automobile Dealers Assn. says.

But NADA Chairman John McEleney adds it could “take a while” for credit to ease up and stop impeding car sales, which this year are estimated to be 10 million units. That's 3 million fewer than last year and 6 million fewer than 2007.

Although credit is thawing somewhat since the arctic freeze that arrived in 2008, lenders have become much more conservative and selective.

“Auto lending is slowly improving, but it is nowhere near where it was two or three years ago, and it may never get back to that,” McEleney says at the annual F&I Management and Technology conference in Orlando, FL. “It was pretty loose.”

Today's tighter lending has led to many consumers facing difficulties in getting car loans. It's particularly affecting people without sterling credit. That includes many consumers who had good credit scores, but no longer do because of job losses and other casualties of the recession.

Tighter lending practices has prompted many would-be new-car buyers to settle for used vehicles, McEleney says.

Fussier lenders pay more attention to consumer risk factors, he says. “They are much more interested in a borrower's ability to pay.”

He frets the federal government will include auto lending in recent efforts to step up regulations for the mortgage and credit-card industries as part of proposed consumer-protection legislation.

Lawmakers and regulators should realize auto financing is different, McEleney says. “Auto loans are well-regulated and fixed. They don't have balloon payments and variable rates. But everyone is anxious to lump auto lending in with mortgage and credit cards.”

He adds: “We support transparency in lending, and buyers who are well informed are the most satisfied. But there is no reason to double regulate. Our industry is already heavily regulated.”

Dealers continue to face credit problems of their own because many financial institutions are unwilling to provide them with floorplan financing for inventory purchases.

Floorplan funding could be revived through securitization “but it is easier to say that than do it because the securitization market remains dysfunctional,” McEleney says.

Average floorplan loans run into the millions of dollars per dealership. Because of the current state of the auto industry and the closing of thousands of dealerships, lenders worry about providing large loans to what they view as credit risks.

“It's truly a lenders' market,” McEleney says. “Lenders who do take on floorplan financing are looking at dealers' financials. Some are even checking for customer complaints.

“There's a general bias against dealers,” he says. “We urge lenders to look at dealers on a case-by-case basis.”

Eighty-five percent of dealerships are successful, despite the bankruptcies of General Motors Corp. and Chrysler LLC, and the elimination of thousands of their sales outlets.

NADA is trying to alleviate the floorplan problems through various efforts, says Andrew Koblenz, the trade group's vice president and general counsel.

One is to make such loans available through the Small Business Admin. Getting more dealerships to qualify took some effort. The agency didn't consider most of them as small businesses because their gross revenues are so high, a reflection of the price of vehicles.

NADA pushed for small-business status to be based on the number of employees instead of total revenues.

“The SBA expanded their universe so that, whereas 25% of dealerships had qualified, it's now 50% that are eligible to apply for small-business loans,” Koblenz says.

But a setback occurred because, even though the SBA-related loans are government guaranteed, many banks still refused to cover floorplan costs.

“We're still working on that and securitization for floorplanning,” Koblenz says. “Securitization is a top-down approach. SBA loans are a bottom-up approach.”

Meanwhile, McEleney praises another government effort, the “Cash for Clunkers” incentive program that resulted in about 700,000 vehicle sales this summer. “It was an unmitigated success, despite some administrative problems,” he says.

Some detractors say it merely pulled ahead new-car sales. McEleney disagrees. “We think it converted a lot of potential used-car sales into new-car sales.”

Of the GM and Chrysler bankruptcies, “a lot of people didn't realize how close those two companies were to liquidation,” says the NADA chairman, a GM dealer from Iowa and a 33-year veteran of the business.