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Is current credit squeeze hardest on dealership's F&I manager?

November 17, 2010

Amid all the cries of wolf about the economy, one would assume the toughest job at a dealership these days is that of the sales staff. But The Financial Times newspaper assigns that dubious distinction instead to the finance manager.

The F&I manager’s work life is "extremely difficult" compared to a year ago, said Carl Strobl, who holds that title at a Chrysler-Jeep dealership in eastern Pennsylvania.

Almost every way of paying for a new vehicle, apart from hard cash, has become less accessible or more expensive, or both. "Sometimes customers have to move down in vehicle price, or put more cash in the deal, or they turn to used cars," says Mark LaNeve, marketing chief of General Motors North America.

LaNeve estimates that tighter credit is costing GM about 10,000 vehicles a month in lost sales. It sold 307,300 cars and light trucks in August, down from 385,500 a year earlier, a 20 percent drop. Industry sales during the summer plunged to their lowest levels in more than a decade.

HSBC and Texas-based Triad Financial are among lenders that have pulled out of vehicle financing in recent months. Citigroup chopped its car loan advances by more than half in the second quarter to $800 million, from $2.8 billion a year earlier. Even buyers with strong credit records are being asked for bigger deposits to secure a loan.

Americredit, a Texas-based finance company with about 1 million vehicles on its books, charges borrowers 3 to 4 percentage points more now than in early 2007. "And I don’t think that’s the extent it could be, going forward," Dan Berce, chief executive, told an investment conference this month.

Americredit has also become choosier, pushing up the average household income of its customers from about $50,000 a year to $60,000. "We repossess and take loans to default quicker than we did five to six years ago," Berce added.

While the credit crunch is squeezing the entire industry, it is most acute for the three beleaguered Detroit carmakers — GM, Ford Motor and Chrysler — and their financing arms. Chrysler Financial shocked dealers and customers by pulling out of the leasing business last month because of the high cost of funds.

Strobl’s dealership has struck deals with two independent leasing companies. However, leasing terms have tightened sharply, especially on big sport-utility vehicles and pickup trucks, to reflect lower resale values at the end of the lease.

On another front, the housing slump has dried up access to home-equity loans, an important source of funds for vehicle purchases.

CNW, an Oregon-based automotive research company, estimates that home-equity loans financed 5.3 percent of vehicle purchases in the first seven months of this year, down from 11.8 per cent in 2007. The drop was especially steep in California and Florida, where house prices have fallen furthest.

Art SpinellaCNW’s president, says that financial institutions are forcing homeowners to reapply for lines of credit because of dramatically lower house prices.

Vehicle financing has also taken a knock from the meltdown in the asset-backed securities market. Lenders obtain much of their funding by selling packages of securities backed by car loans and leases.

According to JPMorgan, spreads (risk premiums) on the three Detroit carmakers’ ABS issues have climbed from 0.15 percentage points above the market benchmark in January to a record 0.75-1 point in early September.

Even Nissan was forced earlier this month to top up the reserves associated with two lease ABS issues in order to retain their triple A Standard & Poor’s credit rating. JPMorgan concluded in a recent report that "liquidity has diminished for even top-tier names and, at the other end of the spectrum, evaporated for weak, off-the-run names."