General Motors dealers — already hurt by plummeting vehicle sales — say the former GM finance arm, GMAC, has tightened credit terms on unsold vehicles on their lots so much that some dealers may be forced out of business.
In what GM dealers call a two-pronged attack, GMAC Financial Services — now majority-owned by Cerberus Capital Management — has stopped lending to retail auto customers with all but the highest credit ratings, and now it's requiring dealers to begin making hefty payments on new 2008 model-year vehicles still in stock.
The payments can run into the tens of thousands of dollars a month at a time when many dealers are already financially strapped.
It's "just a staggering blow to dealers," said Chuck Hanes, general manager of Team Chevrolet in Smyrna. "Many dealers don't have the cash to make these payments, and a lot of them won't be able to keep it going."
GMAC is the primary lender to customers and dealers of General Motors Corp., the biggest U.S. automaker, which holds a 49 percent stake in parent company GMAC LLC. Cerberus Capital Management, the New York private-equity firm, owns 51 percent.
GMAC needs new sources of capital to escape a cash squeeze after $5.4 billion of losses in the past year, a factor that has led to the company's tightening its lending standards.
Hundreds of retailers here and nationwide received letters outlining the stricter GMAC terms starting last week, Denny Fitzpatrick, chairman of the California New Car Dealers Association, said in an interview.
"Dealers just don't have that cash lying around," said Fitzpatrick, who owns a GM dealership in Concord, Calif. U.S. auto sales were at a 15-year low last month.
The latest requirement applies to dealerships whose wholesale inventories have been financed by GMAC, which includes most of GM's 6,500 U.S. dealers.
National Automobile Dealers Association executives are meeting in Washington today to discuss the crisis and try to come up with a plan to help the affected dealers, said Annette Sykora, NADA chairman and owner of Smith South Plains Ford Mercury in Slaton, Texas.
The situation is so dire that NADA has predicted that at least 700 new-car dealers will go out of business this year out of about 25,000 in the nation.
"It's a huge issue, and I've been hearing about this from our dealers several times a day," Sykora said. "It's agonizing to know that these dealers are having to scramble, and don't have many, if any, avenues to turn to. We're continuing to hope that the federal bank rescue package can free up some credit."
Chrysler deal at stakeThe squabble with dealers comes as GM and Cerberus are discussing a GM takeover of Chrysler, another member of the U.S. Big Three car manufacturers.
GM has been lobbying the Bush administration and some members of Congress for at least
$10 billion in aid to help the company maintain its operations and possibly facilitate a deal with Chrysler.
Cerberus may want GM's stake in GMAC in exchange for Chrysler and an equity stake in GM. GM sold the 51 percent stake in GMAC to Cerberus in 2006.
Sykora said that while dealers "do have access to credit for consumers, they are seeing their own financing options extremely limited. We're exploring every possible avenue that we can legally explore as an association."
GMAC says that its own financial problems forced it to take action to raise more cash from the dealers it serves.
"Turbulence in the markets reduced our access to funds and increased the cost of funds where available," GMAC Chief Executive Officer Al de Molina said in a letter sent Oct. 21 to a group of California dealers. "In response, we adjusted our credit policy to reflect the reduced level of funding availability."
Middle Tennessee dealers received a letter dated Oct. 22 that said they would have to begin in November paying 5 percent monthly on the principal balance owed on their financed inventory of 2008 vehicles that have been in stock at least 180 days, and 10 percent a month on all leftover 2007 or older vehicles, "regardless of how long they have been in inventory."
One GM dealer calculated that the policy would cost it about $71,000 in November alone on about 35 vehicles that the new policy would apply to.
Higher scores requiredDealers say another problem is a GMAC policy announced earlier this month under which the lender will finance deals only for consumers with a credit score of 700 or above, which some dealers say eliminates up to 85 percent of their customers.
Those people must go to independent banks, credit unions or other finance companies in search of car loans. Hanes and other GM dealers say the rule presents a challenge because those buyers typically have to make bigger down payments to buy a vehicle.
GM officials in Detroit, though, insist there are "plenty of other sources" for vehicle financing, and GM spokesman John McDonald said the automaker had begun a national advertising campaign to let consumers know just that.
Some dealers contend that Cerberus, which bought 80 percent of Chrysler from Daimler-Benz last year, is using GMAC as a bargaining chip in its talks with GM about a merger of the automakers.
One solution for the strapped GM dealers is to sell more cars, NADA's Sykora said.
"One reason dealers are having to make these curtailments is because these vehicles are sitting unsold on dealer lots," she said. "It's a great time for consumers to buy vehicles, because the dealers need to make deals. They would rather do that than have to make these payments to GMAC."
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