GMAC Receives $6 Billion from Fed, Will Consider 621 and Above
GMAC Financial Services will immediately loosen its lending policies after receiving a $6 billion shot in the arm from the U.S. Treasury. Two months after restricting financing to customers with a minimum 700 credit bureau score, the captive lender said it will now consider apps that carry a score of 621 or higher.
WASHINGTON — GMAC Financial Services will immediately loosen its lending policies after receiving a $6 billion shot in the arm from the U.S. Treasury. Two months after restricting financing to customers with a minimum 700 credit bureau score, the captive lender said it will now consider apps that carry a score of 621 or higher.
“The actions of the federal government to support GMAC are having an immediate and meaningful effect on our ability to provide credit to automotive customers,” said Bill Muir, president of GMAC. “We will continue to employ responsible credit standards, but will be able to relax the constraints we put in place a few months ago due to the credit crisis.”
The captive finance company’s announcement came after the Treasury Department announced yesterday that it will purchase $5 billion in senior preferred equity. Additionally, the Treasury agreed to lend up to $1 billion to GM so the automaker can contribute to its captive finance company’s reorganization as a bank holding company.
The Treasury exercised this funding authority under the Emergency Economic Stabilization Act's Troubled Asset Relief Program (TARP). The preferred stock purchase and the loan to support GMAC's rights offering are part of an auto industry-focused TARP program, which was announced on Dec. 19. The loan is in addition to the $17.4 billion the Treasury agreed to lend to General Motors and Chrysler LLC.
As part of the deal, GMAC will issue warrants to the Treasury in the form of additional preferred equity of $250 million. The company must also be in compliance with section 111 of the Emergency Economic Stabilization Act, with enhanced restrictions on executive compensation.
The move by the Treasury comes after GMAC missed a crucial deadline last week to transform itself into a bank holding company. With the Treasury’s move, GMAC now gains access to the $700 billion federal bailout package.
The Fed approved GMAC’s application to become a bank holding company on Dec. 24, but the approval was contingent on the finance arm’s ability to raise new capital by last Friday. To meet the requirement, GMAC needed to raise $30 billion in capital, a majority of which would come from the debt-to-equity exchange. The Fed also stipulated that $2 billion of total capital come from new equity.
The Treasury’s offer for the $6 billion in aid came simultaneously with GMAC’s announcement that it had raised enough capital to satisfy the Fed’s requirements. However, it is unclear whether the government’s intervention prompted or followed GMAC fulfilling the capital requirement.
As a bank holding company, GMAC could request up to $6.3 billion from the $700 billion bank bailout package, estimated CreditSights analyst Richard Hoffman in an Associated Press story last Saturday. GMAC has not disclosed how much money it would request from the federal government’s bailout fund.
GMAC’s inability to provide financing to car buyers and dealers would deal a serious blow to its parent company and its new-vehicle sales, with more than half of new-vehicle sales involving loans from financing arms like GMAC and banks, according to Tom Libby, an auto industry analyst at J.D. Power and Associates. And even with its expanded credit criteria, GMAC said it will not finance higher risk transactions characterized by a 620 score and below.
“If this source of credit would diminish, it would greatly affect sales. That’s one reason for the dramatic decline in new-vehicle sales in recent months,” Libby said.
Edmunds.com predicted that GM sales fell 39.3 percent in December compared to the year-ago period. The automotive information Website also said the domestic automaker’s market share is expected to be 22.8 percent of new-vehicle sales, down from 23.1 percent a year-ago.
With those dismal sales figures, the deal between the Treasury and GMAC provides hope for dealers and car buyers who rely on credit.
“The deal (between the Treasury and GMAC) is significant in terms of shoring up the finance arm’s access to funding and ability to function as a financial intermediary,” said Brian Bethune, an economist with IHS Global Insight. “These developments will substantially ease the upward pressure that we have seen on auto loan borrowing spreads, and provide greater access to auto loan credit for American households.”
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