GMAC Bangs Heads With the FDIC

GMAC and the FDIC appear to be at loggerheads over auto finance.

According to an article in today's Wall Street Journal, GMAC and the FDIC have been battling over GMAC's auto finance business. An excerpt from the article:

The FDIC also was cool to GMAC's desire to expand its auto lending by reaching out to consumers with lower credit scores. GMAC executives argued to government officials that they needed to reach lower down the credit scale in order to boost business and provide credit to a broader swath of American consumers, according to people familiar with the matter. But the FDIC, concerned about protecting its rapidly depleting bank-insurance fund, imposed policies that made this more difficult. The FDIC, for example, declined to relax a requirement that Ally Bank extend auto loans only to customers with credit scores above 660. The median score in the U.S. is currently above 700.
All this made it difficult for GMAC to stem declines in its auto-finance business. The average car loan made by GMAC's bank this year is to a customer with a credit score of more than 750, above the U.S. median. GMAC made $5.6 billion of new car loans in the second quarter, up from late last year but far below the $12.5 billion made in the year-earlier period.

GMAC has the option to lend to riskier borrowers through the parent company, which is regulated by the Fed. The Fed allows GMAC's financing arm to offer loans to consumers with credit scores as low as 621, and in some cases even lower. But raising money for such loans in the bond market is costlier than it is for Ally Bank to bring money in through bank deposits.

Looks to me like an example of how a heavy-handed federal government can unduly limit an enterprise trying to regain its financial footing through a reasonably sound strategy. How do other AutoFinanceNews.net members see this?

Tags: ally-bank, bank-deposits, compliance, credit-scores, fdic, federal-reserve, gmac, regulators, subprime, underwriting

Comment by Frank Rauscher on November 2, 2009 at 1:37pm: How many people at the FDIC have been engaged in any conversation regarding the impact on credit scores when a credit card issuer reduces the credit limit to a cardholder. Immediately, the credit line utilization % increases and the credit score goes down. It is a big part of the credit score. It is still the same customer who has done nothing to deserve it.

On the other hand, car finance is "collateral lending". Anything financed beyond a look at the collateral (and the direct risk of relying on the collateral) is unsecured lending. Does GMAC have any data that they can provide to help the FDIC to understand the 'unsecured part of the risk' on every car loan? The government is not being heavy handed when they know that GMAC top level risk management was not adequate to keep them out of trouble (even if much of it was mortgages).

It would be more interesting to see what GMAC presented to the FDIC that would allow the FDIC to be more responsive. If they are proud of what they can do with good underwriting results, let GMAC convince readers of this blog that they know what they are doing with the same info presented to FDIC. Otherwise, with their size, they could contaminate the underwriting for everyone if they are allowed to make bad short term decisions.

Comment by Gary Schurman on November 2, 2009 at 1:58pm: ...but raising money for such loans in the bond market is costlier than it is for Ally Bank to bring money in through bank deposits.

Dah!

The good thing about the bond and/or securitization markets is they are the true arbiters of risk, unlike the Fed which tries to account for risk via capital rules, etc. The bond market has spoken and has priced the risk of lending to sub 660 borrowers. Why should the Fed second guess them?

Comment by William Fowler on November 2, 2009 at 6:07pm: I think a main point to the FDIC decision has not been addressed by anyone yet. Look at this statement more closely:

"GMAC executives argued to government officials that they needed to reach lower down the credit scale in order to boost business and provide credit to a broader swath of American consumers, according to people familiar with the matter. But the FDIC, concerned about protecting its rapidly depleting bank-insurance fund, imposed policies that made this more difficult."

The FDIC decision was not made on the actual additional risk Ally Bank wanted to take by raising their credit risk from Prime to Near Prime loans by raising their rates accordingly. Rather they based their decision to protect the rapidly depleting bank-insurance fund. By taking this position FDIC has shifted Ally from a risk-return mindset to a risk-avoidance mindset.

This will in effect hinder the auto market from future development and growth across the board.

Here we have the problem of failing banks stopping another bank (Ally) from helping the auto industry bail its self out of the hole.

I repeat "Will Government Interference Ever Stop?"

Comment by JJ Hornblass on November 2, 2009 at 6:18pm: William, my sentiments exactly! Perfectly worded!

Comment by Gary Schurman on November 3, 2009 at 12:41pm: How can this be government interference? If a private bank makes a business loan to a business it has every right to set the debt covenants to what ever it wants. From the banks perspective they are more concerned with getting paid back than having the business be more profitable, which is understandable. Why is it that when the government bails GMAC out the debt covenants that it mandates are "government interference" rather than just business?

Comment by JJ Hornblass on November 3, 2009 at 1:06pm: Speaking for myself, I see GMAC caught in a Catch 22, Gary. On the one hand, it sees an opportunity to make more loans to borrowers with lower credit scores -- presumably because the risk-reward calculation makes sense -- yet the FDIC is restricting GMAC from doing so to protect the government's losses. There appears to be a mismatch in risk assessment between the government and GMAC, and in the end, which entity ideally should divine GMAC's course? The federal government, which is facing a depleted deposit insurance fund and seeks to minimize (I might argue, eliminate) its risks vs. GMAC, which is better-suited to assess the auto finance market and maximize its returns on capital there? It would appear that the FDIC has made the decision for GMAC -- and that constitutes "government interference." (A caveat, I certainly don't mean "government interference" in the malicious, legal manner, meaning I do not believe the federal government is out to "harm" GMAC.)

Then again, the government, which owns much of GMAC, can do with it what it pleases.

Comment by Gary Schurman on November 3, 2009 at 3:36pm: JJ - What you described makes sense and you see it all of the time. Debt holders view risk differently than equity holders. As an equity holder, it I take risks that payoff then I reap the rewards. Debt holders do not reap those rewards and therefore have very little incentive to let the "debtor" take risks for which the lender (you and me) gets very little, if any, benefit. As a debt holder I don't care about GMAC stockholders getting rich. I want to get paid back, period! If the trade-off is risk (which equity holders love and debt holders abhor) vs return, as a debt holder (again, you and me) I'll take no risk / no return any day.