The chokehold on auto lenders may be loosening, thanks to a decision announced two weeks ago by the U.S. Treasury Department to expand the Troubled Asset Relief Program to include non-bank financial institutions.
The Treasury last month set aside $700 billion of TARP funds to be used to buy up distressed mortgage assets from Wall Street firms. On Nov. 12, though, Treasury Secretary Henry Paulson Jr. said the government will instead provide direct injections of capital to troubled firms. Non-bank financial institutions, including auto financiers, credit card companies, and student lenders, may qualify for funding. Currently, banks, thrifts, credit unions, and insurance companies are covered under TARP.
For months, the credit markets have been frozen, forcing auto financiers to curtail lending operations because of a lack of liquidity. AmeriCredit Corp., CitiFinancial Auto, GMAC LLC, and others have slashed originations this year by 30% or more.
The American Financial Services Association, for one, applauds expansion of TARP. “If you’re trying to thaw out the credit markets, you have to get money to the people making the loans,” said Bill Himpler, executive vice president of federal affairs at AFSA, a Washington, D.C.-based trade group that represents 350 consumer and commercial finance companies. While banks issued about one third of the $2.5 trillion of consumer credit that has been extended, non-banks account for 40% to 50%, and “they need to be a part of the equation,” he said.
Limiting TARP to banks and mortgage-related assets would “severely hamper the recovery of the financial system,” Himpler wrote in an Oct. 28 letter to Paulson.
Paulson concurred in his Nov. 12 address on the status of the program. ““Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans, and credit cards,” Paulson said during a speech at the Treasury in Washington. “This is creating a heavy burden on the American people and reducing the number of jobs in our economy.”
HAMMERING OUT THE DETAILS
At press time, specifics of the TARP-for-nonbanks had yet to be finalized. But lenders were awaiting word of the steps necessary to apply for funds. “We are waiting for the Federal Reserve and regulators to determine the qualifying criteria before we will know whether any of our assets qualify for purchase,” said Ford Motor Credit Co. spokeswoman Meredith Libbey. “In general, Ford Motor Credit will benefit from any actions that will improve overall liquidity in the credit markets.”
AmeriCredit, too, had its eye on the program. “The current TARP program is aimed at banks and bank holding companies, so we currently don’t qualify,” said AmeriCredit spokeswoman Caitlin DeYoung. “That’s good that they’re looking at expanding it. We’ll monitor it. If something comes up, something that will benefit AmeriCredit, we could look to apply.”
De Young pointed out that granting funds to companies like AmeriCredit, which focuses on car buyers with less-than-stellar credit, would make credit available to “the consumer base that’s hurting the most out of all of them.”
The process for nonbanks to secure TARP funds will likely be different than it was for the national and regional banks that were granted the first and second tranches of capital from Treasury, Himpler said. “There, they were forcing money on the banks,” he said. “In this case, [the nonbanks] would have to apply for the resources. We think that’s reasonable.”
Still, a handful of companies are sitting on the sidelines. “We have no immediate plans to apply for Treasury funds, but we are watching the development of the government’s program very carefully,” said Frank Armstrong, president of World Omni Financial Corp..
And GMAC is pursuing a bank holding company charter. “As a bank holding company, GMAC would expect to have expanded opportunities for funding and access to capital,” company spokeswoman Gina Proia told Auto Finance News. “This would aid in our ability to provide automotive and mortgage financing to consumers and businesses.”
Meanwhile, the timeline for implementation of an expanded TARP has yet to be determined. It is unclear whether President-elect Barack Obama wants to be tied to Paulson’s plan, Himpler said.