GMAC said yesterday that it would use a $5 billion infusion of federal funds to resume lending to a segment of less-creditworthy car buyers shut out during this fall's credit squeeze - the most explicit promise so far by a major recipient of funds from the $700 billion bailout of the troubled U.S. financial industry.
GMAC Financial Services, the financing affiliate of General Motors Corp., said it would again lend to people with credit scores between 621 and 700, a range that many lenders consider higher risk. On Oct. 13, the company shut off lending to those borrowers, a decision some dealers blamed for accelerating the downward spiral of General Motors and the U.S. auto industry.
The announcement was welcomed by car dealers, finance-industry representatives, and outside analysts, who said GMAC's willingness to relax its standards could be a boost to the recession-plagued economy.
"Going from 700 to 620 means that about 50 million additional Americans will now be able to borrow from GMAC, and that's a huge number," said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, a trade association that represents 100 of the nation's largest financial-services companies.
But some analysts warned that GMAC's move did not mean a return to conditions that existed before credit dried up this summer and fall. They said a weak economy had undoubtedly depressed many consumers' credit scores, the common three-digit measure of creditworthiness that is often referred to as a "FICO score" because the original version was developed by Fair Isaac Corp.
"It's very laudable that GMAC is lending to people with those FICO scores, but that doesn't mean that they're going to be lending to the same people they were a year ago," said Bart Narter of Celent L.L.C., a financial-services consulting group.
Narter said he expected that car buyers with lower credit scores might be required to make larger down payments or be held to stricter standards for the size of a loan relative to a vehicle's value.
Dealers say that before the credit freeze, GMAC would sometimes lend as much as 105 percent of a vehicle's list price to borrowers with less-than-perfect credit - a practice that often proved key to sending buyers home with the cars they coveted.
"Banks are very, very tough on anything under a 640 right now," said Randy Jordan, general sales manager for Faulkner-Ciocca Chevrolet, of Quakertown. "The way they've been going recently is, the lower the credit score, they'll only loan 80 percent of the vehicle. So if it's a new vehicle at $20,000, they'll only loan out $16,000."
With credit markets still tight, it is unclear whether such loans will return as widely as before. But GMAC spokesman Michael Stoller said the company was also lifting a 100 percent limit on loan-to-value ratios that it imposed when it quit lending to sub-700 borrowers.
Dealers catering to higher-income shoppers said they had been less affected by GMAC's stricter lending policies, because they were able to secure bank loans as alternatives for buyers.
But Jordan said banks were generally less willing to lend as much to car purchasers. So GMAC's pullback often meant lost sales.
For example, Jordan said, a buyer seeking a $20,000 Chevrolet Malibu might have hoped to use its $3,000 rebate to substitute for a down payment. But if that buyer also needed to trade in a car on which he still owed $4,000, the final deal would require a $21,000 loan - a deal that GMAC would often finance when a bank would refuse.
GMAC's announcement was welcome news to local GM dealers, many of whom have seen sales bottom out in recent months as tighter credit and the worsening economy hammered the auto industry.
"It's going to help spur on our business," said Mark Donahue, general manager and co-owner of Fred Beans Chevrolet Buick Pontiac GMC, of Doylestown.
"These are positive things happening and what the whole economy needs - you, me and everybody," Donahue said. "We need confidence, right?"
GMAC made clear that it considered buyers in the lower credit-score range to be creditworthy customers.
Bill Muir, president of GMAC, said the relaxed standards were made possible by GMAC's recent conversion to a bank holding company. He said that would allow the company "to resume its traditional spectrum of prime-based credit."
Philadelphia-area dealers say GMAC's pullback in October was hardest on smaller dealers, and especially those that serve less-affluent customers, such as Magarity Chevrolet, in Flourtown, Montgomery County.
Magarity general manager Rob Shields said the move had devastated the dealership's business by cutting off sales to buyers who were clearly creditworthy.
"It impacted our core client - a blue-collar guy who, if he had any inkling as to what a credit score was, 700 would be perceived as the stratosphere," Shields said.
After GMAC pulled out, Magarity Chevrolet used a relationship with a bank to get car loans for those with strong credit. But for others, the bank was no help.
Consumer advocates say credit scores are widely misunderstood, and sometimes misused, by lenders.
The scores were developed to help lenders quickly assess the creditworthiness of prospective borrowers. But because Fair Isaac and its competitors guard the details of their scoring models, it is not always clear what a particular score reflects.
"On mortgages, the old subprime cutoff used to be about 620, and then they gradually moved it up because of problems in the mortgage market," said Norm Magnuson, a spokesman for the Consumer Data Industry Association, which represents the three main credit-reporting companies. Magnuson said the best mortgage rates now required a score of about 760 or above.
Talbott, of the Financial Services Roundtable, said that, according to a 2006 study, about 58 percent of American adults had credit scores of 700 or above and that about 21 percent were between 620 and 700.
Gail Hillebrand, a financial-services expert at Consumers Union, said the recession had undoubtedly lowered some people's scores without making them significantly worse risks.
"If you got laid off and are now working again, you might have a lower credit score," she said.
Hillebrand said credit scores could also be depressed when consumers used a larger portion of their credit limits. Since some credit card lenders have reportedly reduced borrowers' credit limits, even though the consumers were up-to-date on their bills, that could also depress some credit scores, she said.
"If we limited car buying to people with credit scores of 700 and above," Hillebrand said, "that would mean an awful lot of people couldn't buy cars in this country."