The big automakers are starting to move into subprime lending, perhaps providing the seeds of renewal for that battered business.

On Tuesday, General Motors Acceptance Corp., the finance division of GM, announced it would buy LSI Holdings Inc., a Little Rock, Ark., subprime auto finance and servicing company. The price was reported to be about $30 million.

GMAC also said it would establish Nuvell Credit Corp. as a stand-alone subprime finance company. Nuvell is expected to begin operations within the next two months with a small number of GM car dealers in Georgia and Illinois who have been successful dealing with subprime credits.

"GMAC's entry into subprime financing is consistent with our long-range plans to profitably expand our involvement in the financial services industry," said GMAC president John Rines in a press release. "Through Nuvell we're looking to grow our business and to gain a profitable share of a very sizable automotive financing segment."

With the announcement, GMAC joins Ford Motor Co. and Nissan among major car makers building up their subprime lending. Market observers say the presence of these companies could go a long way toward restoring credibility to subprime auto finance.

"It's a real positive for the sector," said Thomas C. Blum, managing director at Bear, Stearns & Co. "The fact that GM and Ford want to learn how to do lending despite the sector's recent turmoil speaks to the prospects of subprime lending. And because LSI is a small investment for them, they can take the time to really learn how to do it right without exposing themselves too much."

GMAC vice president Terry Sullivan said, "We think now is the right time to get into this business." Many industry observers agree. The financial crisis that devastated Mercury Finance Co. and forced Jayhawk Acceptance Corp. and First Merchants Acceptance Corp. into bankruptcy is showing signs of subsiding, they say.

"Car dealers are scrambling for new places to sell their subprime loans because so many players have gone out of business," said Ted Palant, national sales manager at Boston Portfolio Advisers, a research and due diligence firm based in Fort Lauderdale, Fla. "As a result, the surviving companies have been able to increase volumes while tightening underwriting standards."

But others caution that subprime auto is still a volatile place. "Maybe underwriting has tightened on the fringes," said one investment banker close to the industry, "but I wouldn't get carried away with that. At heart, it's still an extremely competitive business."

LSI's specialty is servicing loans rather than originating them, people familiar with the company said. That's a crucial strength because most subprime auto lenders' problems stem from boasting unachievable collection rates to keep up with the unrealistic growth projections from Wall Street brokerages.

GMAC has already shown some sensitivity to the culture gap that distinguishes subprime auto lending from lending to consumers with good credit by naming Tim Sambrano, LSI's chairman and president, as president of Nuvell Credit and keeping the headquarters in LSI's building in Little Rock.

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