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GMAC Problems Drag Chrysler and Fiat, Too, Not Just GM

The behind-the-scenes doings of the car companies' captive finance companies, like Chrysler Financial, Ford Credit (F) and GMAC, provide a unique insight into the nuts-and-bolts realities of automotive retailing.

For instance, a recent Fitch Ratings report on Chrysler Financial serves as a reminder that the ongoing problems at GMAC Financial Services are an acute problem not just for General Motors, but for Chrysler and Fiat (FIATY.PK) as well.

That's because GMAC, formerly the captive finance company exclusively for General Motors, since last spring has been handling subvented loans for Chrysler dealers, as well as GM dealers.

Subvented in this case means Chrysler the car company pays GMAC the finance company for the difference between normal market interest rates and discount interest rates offered to customers. Competitors like Ford the car company and Ford Credit the finance company work the same way. The aim is to protect credit ratings for the captive finance companies.

According to the Fitch report, Chrysler Financial repackaged and sold about $1.6 billion in loans earlier this year with a weighted average annual percentage rate of only 1.68 percent, according to Fitch. That denotes a high degree of subvention.

Ever since Chrysler Financial and GMAC announced in April that GMAC would be handling discounted deals for Chrysler dealers, I've been wondering what was left for Chrysler Financial to do. The answer, according to Fitch, is that Chrysler Financial continues to buy market-rate loans from dealers.

The latest Fitch report, issued last month, concerns over $900 million in Chrysler Financial loans, to be repackaged and sold to investors. As a group, the loans carry a weighted average annual percentage rate of 6.04 percent, since GMAC is now buying the subvented loans Chrysler Financial used to buy.

Car dealers are so-called "indirect" lenders. That means the dealership acts as a middleman, sending your loan application to multiple lenders. That includes banks, not just the captive finance companies. A lender agrees to make the loan at a certain interest rate. The dealership in effect marks up the interest rate to the rate you pay, and takes a share of the profit.

Later in the process, auto lenders commonly "securitize" loans into so-called asset-backed securities. That is, a lender packages together a group of loans and in effect sells the monthly income from the loans to investors. That way, auto lenders get money to make new loans, instead of having to wait for consumers to repay the loans.

That's another interesting thing to note about the recent Fitch report - that Chrysler Financial is back into securitization. Last year's credit freeze all but shut down the market for auto securitization, and forced auto lenders to raise money by other means, such as taking out loans themselves. It's good news for the auto industry if securitization is recovering.

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