US Treasury: Working On Providing Loan Guarantees To Auto Dealers
May 15 2009 - 3:57PM
Dow Jones News
The U.S. Treasury Department is working on a program to provide
loan guarantees to auto dealers, trying to prevent a wave of
failures as General Motors Corp. (GM) and Chrysler LLC
restructure.
Treasury's auto task force is working with the Small Business
Administration on the program, which would back loans for dealers
to purchase vehicles to stock their showroooms. The SBA would
administer the program.
"We can confirm this is something we are working on," a Treasury
spokesperson said Friday, declining to comment further.
Auto dealers are eligible for SBA loan guarantees for certain
purposes but not for inventory purchases, known in the auto
industry as floorplan financing, said Jonathan Swain, an SBA
assistant administrator. Expanding SBA guarantees to cover
floorplan financing has been done once - under a directive by
President Jimmy Carter during a similar crisis facing auto dealers
in 1980 - Swain said.
"Our regulations have never permitted us to do it, except for
the rare exception when the president elected to do it in 1980,"
Swain said.
Details, including the timing and potential size of the
guarantees, haven't been worked out.
In addition to a regulation change by the White House, dealers
are pushing for legislation in Congress that would allow the SBA,
under a lending program known as 7(a), to back at least $5 million
in loans to each individual dealer that qualifies, much more than
what current law allows, said Bailey Wood, legislative affairs
director for the National Automobile Dealers Association, or
NADA.
The administration earlier this year expanded SBA loan programs
to cover a broader set of companies.
NADA officials met with the Treasury task force and officials at
the Office of Management and Budget this week to discuss government
aid for dealers.
Car dealers have found it increasingly difficult to obtain loans
amid the broader credit squeeze and the plunge in auto sales. The
bankruptcy filing of Chrysler LLC and the likelihood of a filing by
GM has tightened the squeeze amid fears that the values of those
companies' vehicles will plummet, thereby making it harder for
dealers to pay back the loans.
NADA has urged the implementation of guarantees that would help
prevent dealer failures that could result from so-called clawback
provisions, which allow finance companies to demand at least
partial payment of dealer inventory loans in the event of an
auto-maker bankruptcy.
NADA's Wood said he didn't know collectively how much dealers
needed in government aid but warned that many are on the verge of
shutting down because of a lack of credit.
"There are dealers across the country who are having
unbelievable problems getting access to inventory financing," Wood
said.
The prospect of government aid follows announcements by GM and
Chrysler this week that they planned to radically cut their dealer
networks as part of their restructuring.
-By Josh Mitchell, Dow Jones Newswires; 202-862-6637;
joshua.mitchell@dowjones.com