General Motors Corp.'s GMAC financial services unit said it has agreed to sell up to $20 billion (euro17 billion) in US auto loans to Scotia Capital, the corporate and investment banking arm of The Bank of Nova Scotia.

The agreement clears the assets from GMAC's balance sheet and gives GMAC some cash to redeploy in its more lucrative mortgage and insurance businesses, spokeswoman Joanne Krell said Monday. Banks generally pay a premium to obtain auto loans because of their higher-than-average yields, although terms of this sale weren't revealed.

GMAC has long been GM's most profitable division. GMAC earned $675 million (euro573.64 million) in the third quarter, compared with a net loss of $1.6 billion (euro1.36 billion) at GM. GMAC expects to pay GM more than $2 billion (euro1.7 billion) in dividends this year.

But GMAC's ability to finance loans has been hurt by downgrades of GM and GMAC's debt to "junk" status earlier this year, increasing borrowing costs.

Steve McDonald, co-CEO of Scotia Capital, said the bank wanted to diversify its portfolio. Under the agreement, the Bank of Nova Scotia will buy up to $20 billion (euro17 billion) in auto loans over a five-year period ending in October 2010. The bank will make an initial purchase of $3 billion (euro2.6 billion) this month.

GMAC will continue to service the contracts. The Bank of Nova Scotia will hold the loans and sell them to investors.
The $20 billion (euro17 billion) represents a fraction of GMAC's auto-financing assets. The division originates $40 billion (euro34 billion) in auto loans each year.

GMAC completed a similar deal with Bank of America Corp. in July. Under that agreement, Bank of America will buy $55 billion (euro46.74 billion) worth of US auto loans over the next five years.

GMAC expects to sell $15 billion (euro13 billion) in auto loans this year, said Sanjiv Khattri, GMAC's executive vice president and chief financial officer.

GM Chairman and CEO Rick Wagoner announced in October that GM is looking to sell a controlling interest in GMAC in order to help the division regain its investment-grade status. Burnham Securities analyst David Healy said a controlling stake might command $12 billion (euro10.2 billion) to $15 billion (euro12.8 billion). Bank of America has said it's not interested in obtaining a stake.

GM shares were up five cents to close at $22.13 on the New York Stock Exchange. Its shares have traded in a 52-week range of $20.60 to $40.82.

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