THE COVID CREDIT SQUEEZE

While the Federal Government has sought to keep credit flowing in the Australian economy during the COVID-19 economic slowdown, individuals who would normally have no issue financing a vehicle are having their credit applications denied.

AADA has heard of many examples where individuals with good income who would usually present low credit risk are having their income severely scrutinised and credit applications denied. One recent example saw a customer denied finance for a $50,000 car. The next day he returned to the dealership and paid cash for the vehicle.

Another Dealer recently recounted a story about an applicant who was replacing a vehicle like for like and was seeking finance, just as he had done three or four years earlier. His living circumstances had not changed nor had his income or expenses. His credit history was faultless, yet he was rejected on unknown grounds, whereas his loan of some years ago went straight through, no questions asked.

Clearly the system failed these people, and there are many other instances too. These are examples of lending institutions – most if not all of whom have offered ‘hardship’ flexibility or even freezes on repayments to customers with existing loans – not being willing to take on any additional risk in these uncertain times, no matter how slight.

Yet these institutions have benefited from government generosity to assist them to continue providing credit.

When the financial threat posed by the COVID-19 pandemic became clear, the Federal Government, Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA) moved early in a coordinated action to support the flow of credit in the Australian economy, in particular for small and medium enterprises (SMEs).

The Coronavirus SME Guarantee Scheme supports these businesses, with a guarantee for loans of up to $250,000 per borrower, including an initial six-month repayment holiday. The loans are in the form of unsecured finance, meaning that borrowers do not have to provide an asset as security for the loan.

That’s all well and good for SMEs, yet an individual with the ability to pay $50,000 cash for a car can’t get finance. Given the guarantees put in place by the Government, this should not be the case.

The RBA announced a term funding facility for the banking system, giving banks access to at least $90 billion in funding at a fixed interest rate of 0.25 per cent. That was supposed to reinforce the benefits of a low cash rate by reducing funding costs for banks, which in turn would help reduce interest rates for borrowers. In addition, the RBA announced a further easing in monetary policy by reducing the cash rate to 0.25 per cent.

The Government also said it would provide the Australian Office of Financial Management (AOFM) with $15 billion to invest in structured finance markets used by smaller lenders, and that the AOFM would purchase assets that support small business (unsecured and secured loans) and consumer lending (including credit cards, automobiles and personal loans).

“This program will assist smaller lenders, who will not benefit from the RBA’s term funding facility, to maintain access to funding and support competition in the lending market,” a government statement said at the time. “This in turn will help keep mortgages and other borrowing costs for businesses low.”

APRA announced temporary changes to its expectations regarding bank capital ratios. The changes were intended to support banks’ lending to customers, particularly if they wished to take advantage of the new facility offered by the RBA.

And yet car buyers can’t get credit.
It’s a similar story in other countries, including the UK and the USA, where Wells Fargo, one of the largest lenders for purchases of new and used cars, is no longer making auto loans to most independent car dealerships. That has been taken as a sign the bank is concerned about defaults in the wake of the pandemic.

In May, Wells Fargo sent letters to hundreds of independent auto dealerships – which typically sell used cars – telling them that the bank was dropping them as a customer.

“As a responsible lender, we also have an obligation to review our business practices in light of the economic uncertainty presented by COVID-19 and have let the majority of our independent Dealer customers know that we will suspend accepting applications from them,” Natalie Brown, a spokesperson at Wells Fargo, told USA TODAY.

Given the measures the Australian Government has taken to ensure liquidity in credit markets, finance companies are being needlessly cautious in denying credit to formerly A1 candidates. This is adding an extra layer of difficulty for our industry in what are already unprecedented times.

Automotive Dealer Magazine has sought comment from lenders.

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