UPDATE: GMAC Defends Dealer Cull

Robert Farago
by Robert Farago
update gmac defends dealer cull

GMAC is facing mounting criticism (lawsuits to follow) for suckling on Uncle Sam’s teat for $6B, then turning around and cutting car dealers off at the knees. And so, on the same day TTAC takes GMAC to task for doing the dirty on dealers, on the same day ChryCo CEO Bob “The Prowler” Nardelli is out and about, sniffing around the federal trough for even more bailout bucks for Chrysler’s former captive lender, GMAC has issued a press release defending its “death to dealers” policy. I mean, newfound financial probity. Color me unconvinced. As one of our Best and Brightest pointed out, where there’s smoke, there’s mirrors. (Grammarian mulligan evoked.)

Wholesale Financing

* GMAC is currently doing everything it can to provide broad-based funding support to auto dealerships during these very difficult times. For example, despite the tight credit markets, GMAC continues to provide wholesale financing for about 75 percent of GM auto dealers – a level consistent with the past five years.

* Dealers are not required to finance their wholesale inventory with GMAC; they are free to choose any lender. However, we recognize that many banks and financial institutions have ceased to offer auto wholesale financing given the strained credit markets and uncertainty in the industry. GMAC is working to preserve such funding for its existing wholesale dealer accounts.

* GMAC currently extends over $20 Billion in wholesale financing to U.S. dealers.

Dealership Default

* The stresses facing some automotive dealers today are the result of the U.S. economy in recession, a weakened auto industry, and inadequate sales for some dealers to meet expenses and manage debt.

* We work with dealerships facing financial difficulty that have GMAC loans, but cannot extend credit indefinitely if there is a default or significant risk of loss. In our 2008 financial report, GMAC increased its loss reserves for impaired loans from the prior year – from $8 million to $138 million – due to anticipated U.S. dealer defaults.

* GMAC’s approval as a Bank Holding Company and TARP funds came with additional government oversight of our credit risk management process, which must operate in accordance with safe and sound principles. We must continue to protect our capital when the risk of loss appears too high.

* When GMAC cannot resolve with the dealer its concerns over wholesale pay-off performance, profitability and operating trends, and is unable to continue wholesale arrangements, the dealer is given 90 days to locate an alternative lender.

* If a dealership cannot meet its commitments and cannot raise additional capital or find alternative financing, then in some cases, the dealership owners – not GMAC – may make a decision to close the dealership.

* People in some local communities have spoken out in support of dealers that are facing closure. We certainly recognize the contributions by dealers to their local communities. In many cases, it is unfortunate that the vocal support has not translated into sufficient vehicle sales to sustain the business, likely due to the difficult economy. No business can survive without customers, even with the best of lenders at their side.

GMAC Curtailment Policy

* Wholesale financing is a revolving credit line secured by individual vehicles. As vehicles age, their value decreases and the loan risk increases. Requiring a portion of the loan to be repaid after a period of time – known as a curtailment – is not new for GMAC and is standard practice for any collateral-based lender.

* Until recently, GMAC did not need to extensively enforce its curtailment policy, because there was not a lot of aged inventory in the system. Today, the situation is different. With the significant reduction in auto sales, there are growing numbers of aged vehicles on dealer lots. Curtailments are required for GMAC to manage the risk of lending against this aged collateral.

* Dealers who effectively turn their inventory either avoid paying any curtailments, or pay very little.

* GMAC considers its curtailment practice on new vehicles to be fair and reasonable, and General Motors recently indicated that GMAC’s policy is actually more lenient than that of other wholesale lenders.

o GMAC requires monthly curtailments only on past model-year vehicles (new 2007 GM models and any new 2008 GM models financed for over 18 months).

o Additionally, GMAC only requires a percentage of the loan (10 percent/month) to be repaid monthly on aged inventory, rather than requiring full vehicle payoff after a certain timeframe like some other lenders.

* Regarding used vehicles, the majority of GMAC wholesale dealers are not required to pay any curtailments until a used vehicle has been financed for six months. Further, most dealers are not required to pay off a used vehicle until it has been financed for one year.

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2 of 14 comments
  • PickupMan PickupMan on Mar 19, 2009

    @andrew: " feeling the warm, musky scent of a F&I guy breathing sweet nothings down my neck whilst he feels up my wallet from behind..." Awaiting your first full-length TTAC editorial. Dang, boy, you can write!

  • Power6 Power6 on Mar 23, 2009

    What can GMAC do? It doesn't matter who it is, the lenders aren't buying the cars, the consumers are, and not so may of them these days. A lender like GMAC can help make that easier to some extent by taking on more risk or helping GM lose money on cars but they don't make the sale. And now GMAC is pointing out that it is the dealers business to lose at. BFD, who didn't know that. Any dealer that wants to make it through this recession needs to grab an increasing share of a smaller pie. That guarantees that some dealers won't make it. Again BFD we already know that. Seems like it's kill or be killed for GMAC. I do have a different feeling for dealers being put out by closing brands but that hasn't happened yet.

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