August 4, 2014 at 6:48 pm

U.S. subpoenas GM Financial over subprime auto loans

Washington —The Justice Department subpoenaed the lending unit of General Motors Co. as part of a review to determine if banks were misled into buying some auto loans, the Detroit automaker said Monday.

General Motors Financial Co. Inc. said in a securities filing it was served with a subpoena July 28 asking for documents related to the company’s and affiliates’ subprime auto loan originations and securitizations since 2007.

Auto lenders — including GM Financial — package loans by creditworthiness and sell them to banks and other investors in a process called “securitization.” The practice is used to assure that auto lenders that are lending billions of dollars have access to enough capital to lend large amounts of money at a relatively low price.

The filing said documents were demanded by the Justice Department which is looking at potential violations of the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The investigation could lead to a civil suit.

In particular, the subpoena requested information about the underwriting criteria used to originate the auto loans and “the representations and warranties relating to those underwriting criteria that were made in connection with the securitization of the automobile loan contracts.”

Susan Sheffield, GM Financial executive vice president and treasurer, said in an email, “Our understanding is that the request is focused on the subprime auto finance space in general. There are no allegations set forth in the subpoena and GMF is cooperating with the request.”

The Justice Department has been looking at auto lending practices for several years.

Easy credit has helped fuel a jump in auto sales, but some regulators have raised concerns. The Office of the Comptroller of the Currency — the U.S. government bank regulator — said in a report issued in June that “signs of risk in auto lending are beginning to emerge.” The report cited an “erosion of underwriting standards because of competitive pressures.”

Auto lenders “are pursuing growth by lengthening terms, increasing advance rates, and originating loans to borrowers with lower credit scores. Loan marketing has become increasingly monthly payment driven, with loan terms ... easing to make financing more broadly available,” the report said.

Peter Henning, a Wayne State University law professor who writes on financial investigations, says the Justice Department wants to know what GM Financial said “about the credit quality of the people financing cars that it was bundling into securities.” One question may be how much verification was done.

GM Financial takes loans it makes and pools them into an entity called an Asset-Backed Securities trust. The higher the risk, the greater the return for investors.

GM Financial earns the net interest margin — the difference between the interest rate customers pay on auto loans and the interest rate paid to the investors. The company noted that one of its securitizations has an average customer interest rate of 16.9 percent, “but we are only required to pay the investors approximately 5.5 percent. Therefore, GM Financial will earn a 11.4 percent net interest margin (16.9 percent minus 5.5 percent) on these loans before covering credit losses.”

Chrysler spokesman Ralph Kisiel said the unit of Fiat Chrysler Automobiles NV has not received a subpoena. In 2013, Chrysler announced a deal to provide lending to dealers through a private-label agreement with Dallas-based Santander Consumer USA Inc., a unit that is majority owned by the Spanish bank Banco Santander. The bank provides services under the name Chrysler Capital.

Ford Credit spokeswoman Margaret Mellott said the lender hasn’t received a subpoena. Its “higher risk” lending has remained consistent at about 5 to 6 percent of loans, she said.

GM in 2010 purchased AmeriCredit Co. in a $3.5 billion deal and renamed the Texas-based subprime lender GM Financial. GM purchased AmeriCredit largely because it was struggling to make loans to buyers with the weakest credit and wanted to make more leasing options available.

GM said GM Financial made $258 million in profits in the second quarter of 2014, compared with $254 million in the same period last year. GM Financial subprime lending — to people with credit scores below 620 — accounted for 8.1 percent of lending, down from 8.5 percent in the same period last year. That’s above the industry average of 6.8 percent in the second quarter, which was up from 6.3 percent in the same period last year. GM Financial auto lending rose from $3.3 billion in the second quarter of 2013 to $5.2 billion in the three months ending June 30.

But net losses remained steady at 1.4 percent of lending even as the number of customers who were 30 days or more delinquent on their car notes rose to 5.1 percent from 4.8 percent in the same period last year.

GM Financial accounts for 30 percent of all subprime lending to GM dealers, up from 25 percent last year. With more than $2 billion in subprime loans issued this year, it is the nation’s second-largest subprime auto lender.