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Boat loans still plentiful for credit-worthy

But GE Money’s departure from marine lending could make things tougher for the marginal buyer

Given today’s tight economy and GE Money’s exit from the marine lending market, some financial experts think the average person will have a harder time borrowing money to buy a boat.

That spells bad news for already struggling boat dealers, who now may be forced to turn to lenders with more stringent credit criteria than GE Money.

GE Money, a national player with multifaceted operations, was an indirect lender, meaning the company developed relationships with dealerships that sent customers to GE Money for loan approval.

“The dealerships are the ones who are going to be affected the most,” said Karen Trostle of Sterling Acceptance Corp., an Annapolis, Md.-based marine lender.

Dealerships will have to find another source of loan financing and likely will be subjected to more conservative criteria than the more liberal GE Money, Trostle said.

“That will cut out some of the buyers’ ability to buy,” Trostle said.

In the past, when companies have pulled out of the marine finance business, another company has stepped up to fill the void right away, Trostle said. But that may not be the case today because lenders are tightening their credit requirements.

GE Money’s sales finance unit discontinued consumer finance programs in the marine and RV markets this spring, calling the decision a difficult one, but maintaining it was the “right operational adjustment” for this economic environment. “GE Money has been challenged to continue to deliver a strong level of return in the marine space,” the company said in a statement.

A subprime void
“They were a big player,” said Don Parkhurst, senior vice president at  SunTrust Bank, of GE Money. “I think the reason that the industry may be feeling it as much as they are is GE Money tended to buy the weaker, more marginal type borrower.”

“I think the reality is, with them gone, there really isn’t anyone out there buying that customer, so the subprime financing really isn’t available anymore,” added Parkhurst,  former president of the National Marine Bankers’ Association.

Edward Aaron, an analyst with RBC Capital Markets, said GE’s exit “appears to be part of a broader effort by GE to selectively reduce its exposure to consumer finance.”

But he agreed with others in the industry who say plenty of boat loans are still available.

“That said, this news is clearly a sign of the times and yet another data point supporting our stance that credit availability is a growing risk,” he said in his report.

“In general, we believe lenders are continuing to tighten their standards,” Aaron wrote. “Approval rates are declining and lenders are becoming more strict on advances.”

“And the availability of that loan isn’t going to be there like it has in the past,” said  Parkhurst.

But the experts all agree stricter lending practices and high fuel prices won’t price boaters completely out of the market, and the economic cycle will circle back into more robust times.

Until then, “I think the average person who boats is still going to buy a boat, they’re just probably going to buy used,” said Greg Proteau, consultant to lending and service firms in the boating industry.

A general tightening
Plenty of marine loans can be had, and interest rates have risen only moderately, remaining relatively low historically, Parkhurst said. SunTrust’s rates are in the mid-to-upper 6 percent range.

To get that kind of rate though, credit must be nearly perfect, said Proteau. Banks, he said, are “a little bit gun-shy” right now.

“Historically, [rates] are pretty competitive, but for you, the consumer, to get the best rate you have to be bulletproof,” Proteau said.

Although the marine industry hasn’t faced anything of the magnitude of the housing crisis, banks and lenders will tighten up everywhere to compensate for losses in other areas, Parkhurst said. However, it remains to be seen exactly how hard the marine lending industry will be hit.

“It’s not just GE pulling out,” Parkhurst said. “I think you’ve seen creditors tightening their standards, especially since last fall.”

Marine bankers hesitate to use the term “subprime” to describe borrowers, because boat loans traditionally have been some of the most difficult to secure. But a marginal borrower is someone who is typically on the fringe — someone who didn’t have a 10 to 15 percent down payment, for example, Parkhurst said, or somebody who didn’t have a good debt-to-income ratio or has a credit score below about 650.

Parkhurst says the marginal borrower has always paid higher interest, but with added costs such as those on top of high fuel prices, it could be the last straw.

Proteau speculates the more marginal borrower has already been priced out of the market.

“At the end of a cycle like this, my guess is those lower-credit borrowers weren’t in the market anyway — they’re trying to hold onto their house,” Proteau said. “This isn’t something that just snuck up, it’s been going on for a while. It went a whole lot farther south than the banks thought it would.”

Other sources?
Norm Schultz, of the Boating Association of Ohio, thinks another company will step into GE Money’s role.

“I’ve seen this four times where a major lender decided to abandon the retail market ... and every time I’ve seen someone enter the void, get set up and make money,” Schultz said.

But even if someone new steps in, credit will likely be tighter, Schultz says, “because they don’t want to go the same route as GE with repos. But someone will step in.”

Larry Russo Jr. of Russo Marine in Boston said GE Money was a secondary lender for his customers.

“They’re not the first to go; we lost National City [Corporation] probably a year ago,” Russo said. “So there are two major national lenders who have exited the business.”

“You’re losing choices,” Russo added. “And each of those banks looks at customers’ needs and deals with things a little differently, so it limits our opportunity.”

Those who were using GE Money as a primary lender now will be pressed to form a new, strong relationship with another lender, Russo said. “And that can be real challenging,” he said.

Multiple lenders
Joe Lewis of Mount Dora Boating Center in Florida said it’s important for dealerships to have relationships with more than one lender to avoid a problem if something like this happens.

Lewis does business with Priority One, a business that uses several lenders and emphasizes its ability to find the best funding sources.

“When you do business with one bank, and put all those eggs in one basket, you run a risk,” Lewis said.

“Most dealers do have several different lending sources for that very reason,” Lewis said. “What one lender doesn’t have an appetite for today, another lender may.”

The home loan crisis has spilled over into the marine industry in many unexpected ways, Lewis said.

One thing related to the home loan crisis that has hurt Lewis even more than GE Money withdrawing from the marine lending market has been the drying up of second mortgages and home equity loans.

“People would take a home equity loan, and come in and write a check” for a new boat, Lewis said. “That’s gone away like a dodo bird.”

This article originally appeared in the July 2008 issue.



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