Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:07:55} We are very interested in Credit Acceptance, who I know you have a history with.

{audio:0:08:21} I've been in the car business for 30 years, working both sides of the desk. I was a finance manager for a large franchise dealer for 15 years but got burned out of that day-to-day car business. I then moved into the banking end working for Citigroup for four years before the 2008 debacle. I worked for Credit Acceptance for six years, then opened my own store where I have been for eight years, building pools, collecting checks and paying the bills. Being on both sides makes it unique but I enjoy it.

{audio:0:09:25} Have you been a dealer for the last eight years?

{audio:0:09:31} I own an all-independent dealership in Erie, Pennsylvania. The majority of our business is done through Credit Acceptance. This morning, our books were audited and it took less than six hours and we were free and clear.

{audio:0:10:03} Credit Acceptance's process doesn't allow a dealer room to make mistakes.

{audio:0:10:18} I'd love to talk about your experience working for Credit Acceptance and as a customer. What were you doing when you were working for Credit Acceptance?

{audio:0:10:41} I was a market area manager, enrolling dealers into the program. You had to sell them on the $10,000 setup fee investment to be a part of this business. They have since done away with that and leave that up to market area managers to decide. I trained dealers to use the CAPS system the way it was designed, which was to deliver cars to anybody who walks through the door. I also helped those dealers manage their pools as their performance went up or down, moving the needle if things were bad, and getting their averages back on track. My job was to spend a lot of time in the reports so that the dealer principal knew where his money was.

{audio:0:11:55} What could you do to help dealers if pools moved in the wrong direction?

{audio:0:12:01} Credit Acceptance does a thorough job of documenting everything. If a customer has a first payment default, the report would say you maxed out his payment at 25% so he probably couldn't afford it. You could then tell the dealer that he was setting up customers to fail. I would remind them to use Autopay to attach automatic direct deposits from the customer's bank account. If dealers don't set up their cars correctly, a customer will tell them the car doesn't run so I won't pay for it. Did you sell them a quality car which had been serviced or did you sell him a car with some issues because that's ‘all he could afford’ and now he's not paying? Within a few hours, any good market area manager could determine why their performance was bad.

{audio:0:13:39} Was it coaching dealers to help them build good lending businesses?

{audio:0:13:46} That is a great word; it was a coaching role.

{audio:0:13:50} Which geographic area were you responsible for?

{audio:0:13:53} Buffalo, Pittsburgh and Cleveland.

{audio:0:14:08} Were you visiting the dealers or managing the people who visited them?

{audio:0:14:12} No, I actually went into the dealerships. The market area manager manages a dealer's portfolio in that area.

{audio:0:14:28} How many dealers and how much contact did you have with them?

{audio:0:14:32} Daily contact for those who needed it, but you didn't have to be in stores. 80% of my time was spent visiting dealers, helping them launch and set up for success.

{audio:0:15:00} Switching to your role as a customer, you mentioned that a large number of your loans are done with Credit Acceptance, why is that?

{audio:0:15:19} The biggest reason is the ease of selling that car. Customers who can buy a car for $25,000 won't go to an average independent dealer to get approved. There is a stigma of not wanting to buy a car from a lesser independent dealer, which is one of the struggles I had as an employee of Credit Acceptance. Dealers have a mental block that Credit Acceptance is less than. Today, being an owner, I see that pay plan process issues are the reason they don't reach their BHAG 600,000 loan goal. Franchise dealers pay a finance manager on back end products, but due to the way Credit Acceptance sets their portfolio profit up, there was no incentive for me as a finance manager because everything was front loaded. I do all the work because a customer needs special stipulations to put the loan together, so it will get moved aside.

{audio:0:17:19} Are you referring to the dealer hold back that the finance manager feels like there's no benefit to them?

{audio:0:17:30} Yes. When Credit Acceptance pays a deal, they have the initial profit which the dealer gets today, potential profit which is what their algorithm says you will get down the road. They also have profit potential which is an over-inflated number, if the customer makes every payment on time. Unfortunately, we already know the customer probably won't satisfy that loan 100%.

{audio:0:18:15} Do they dislike the hold back because when it gets paid in three years they may no longer be working there, or do they not think that hold back is real?

{audio:0:18:27} They don't feel it is a real number and the car business turnover affects it. When I was an employee, one of my better dealers threw me out of his store twice and told me this was phony, full of fluff so he wouldn't do the deal. His son came to me a year later to go ahead, now Larry is a good friend who has made millions of dollars and is very happy with the product, and there are many similar stories.

{audio:0:19:31} Is the pool program better suited to long-term owners who plan to be around in five years, rather than someone not expecting to be in the role for years?

{audio:0:19:51} Yes. When I was the employee, they told me I couldn't sell the program as a silver bullet because it was a long-term investment.

{audio:0:20:18} Has the pool program and dealer hold back worked for you as an owner?

{audio:0:20:25} Yes. I have two pools paying me monthly so I'm getting that dual income, which comes in handy in the current economy. I just received my check which allows me to breathe and pay my expenses. It was tough. My wife is my partner here, and as an employee and owner of the business, she was skeptical whether this would work. For people who don't know the car business, it does seem scary. Why sell a car to only make $1,000 profit today when lender ABC allows you to sell it and make $2,000? They can but they're not approving that customer. The potential is there if they could get approved, but they can't, so I am better off taking less today to deliver the car, than holding onto it with the promise of maybe I could make more from the next customer. That is a management and business decision; you set up your business to work well.

{audio:0:22:02} You said the dealer hold back program was the reason they hadn't achieved the 600,000 car target, could you talk more about that?

{audio:0:22:14} When I was there, their goal was 600,000 loans. I talked to my market area manager who tells me they moved it higher to 700,000. I believe they've knocked the socks off everything else. Shares were $17 when I started with the company, but I didn't buy a bunch, which is why I am a car guy and you are an investor. If you compare Credit Acceptance to Wells Fargo or other lenders doing auto loans on new and used cars, Credit Acceptance are only selling to used cars. They could knock the socks off of these other companies if they allowed franchise dealers to sell new cars in that system. I respect the company staying in their hula hoop because they've done well with that. Even my peers tell me not to venture out from what I am doing because I have a good niche and my customer base is solid. I am very proud of the business we have.

{audio:0:24:33} What does Credit Acceptance need to do to grow more rapidly?

{audio:0:24:41} The new car market is a big opportunity they are missing out on. They need to figure out how to tap that new car market. They struggle making an algorithm for predicting new car values, making it hard to protect portfolios without making errors.

{audio:0:25:35} You are already doing a lot of business with Credit Acceptance, but when you speak to your peers who do less than you, how can Credit Acceptance get more?

{audio:0:25:56} I hear that they do not advance enough money. If they make more money at a Credit Union, why would they send that loan to Credit Acceptance. We are currently struggling with inventory in the States, so dealers hang onto cars longer.

{audio:0:26:48} Is Credit Acceptance doubly impacted by the current tightness of inventory?

{audio:0:26:55} Yes, my numbers are down, not because I don't have the customers but I am paying more for the cars and service because I still want to sell quality cars. You cannot pee in your pool, you have to keep it clean, so I will not change my standards because that will hurt me in two months when the residual income is no longer there.

{audio:0:27:41} Credit Acceptance were recently criticized by the New York Attorney General; what is your view on that?

{audio:0:27:53} I don't know what they're looking to go after. I have a feeling the consumer went to the dealer who said, Credit Acceptance allowed me to do this. The dealer did something wrong and are pointing the finger at Credit Acceptance, who are the big fish they will go after, instead of the dealer who maybe did five or six deals wrong and skated the system. Credit Acceptance will probably take a hit on this, but it frustrates me that it probably started at a dealer coloring outside the lines which created a flag. Part of the problem is that Credit Acceptance allows me to change the price of my car today, but I have to click a link to state why I am changing it. There is no choice for, I want to make more money on the customer, because the FTC doesn't allow for that.

{audio:0:29:45} One criticism is that retail prices are inflated versus the true market price, and that is a hidden finance charge, what is your view and how do you price cars?

{audio:0:30:05} Credit Acceptance never has a bank fee listed on anything, they advance you this much money, which they don't consider a fee, whereas other banks literally say, there's a bank fee of $2,300. I don't believe that's part of the deal because I know I have to charge more for the car in order to get my advance to make my money. Credit Acceptance don't make me do that, in fact there are many occasions in CAPS where if I lower the price of the car, I will make more money due to the way they over advance. They allow you to over advance but will tell you they don't think the deal will perform as well if you sold the car for this much money. If the customer's payment came in line slightly better, they think that deal will perform better. I coached dealers that it was less about the sale price of the car and more about the performance of the loan and your potential return on investment down the road. I don't foresee this being valid. New York had gap insurance 10 to 15 years ago but they ran all the companies out.

{audio:0:32:00} The attach rate for gap insurance is very high for subprime loans; how much value does that create for the customer as a product?

{audio:0:32:11} I think it's great value, and most of my deals I try leave gap and warranties on because my customer has a history of being a poor manager of their money. If a breakdown occurs, having that warranty helps that customer. Customers often encounter problems two years later and cannot fix their car, and I will send them to the service garage if they've been making their payments perfectly, and pay the $100 deductible to get that widget fixed on their car. They are happy and they keep the loan and I get that residual income. I'm willing to make that investment to get 80% of that $400 car payment. We already know these customers had to pay more for the car and that the value of their car is lower because they may not have changed the oil, put new tires on it or taken steps to maintain their vehicle properly. If their car gets totaled, gap insurance takes care of their loan and protects them. I am a big advocate for both of those things because I think it builds both a better customer and a better pool.

{audio:0:34:05} Now is a good time to dive into CAPS. 

{audio:0:35:31} Each time you log in you are given where are we at today, how many apps we've had, where's my market, who's doing what and where are we at?

{audio:0:35:55} Do you have one dealership or several dealers?

{audio:0:35:58} I have only one store so my approvals are all stuck in. This is a listing of all of my customers that are sent. Here is where that lead is coming from. I do not pull credit bureaus on most of my customers as Credit Acceptance gives me a credit score for each customer when I do the deal. What I've been able to do is go down here and see this kid has a 760 credit score, so I may not have to send him to Credit Acceptance. I would simply send his deal over to one of my credit unions which pay me more. That's how I classify mine. Every customer who enters my store goes into CAPS, every deal, every time. Resources is where the market area manager would see my statement, and Credit Acceptance is great at giving dealers every dollar and penny. I can tell you how my pools are performing. Currently everything is green, which is good. I want to see mine performing above 72 which is where my target is, and I've done pretty good.

{audio:0:37:55} Is 72 the percent of the outstanding loan you are collecting?

{audio:0:38:06} Does a pool get closed once it reaches 50 loans?

{audio:0:38:09} No, the first one was 100 then the rest are 50. In mine, I have already collected $175,000 to date in back-end profit, not including initial profit per vehicle. This is where things get interesting to a point. In my first pool, I was doing deals and making $1,000 in the front, had this in the back and this is how they were performing. My deals are performing better, I'm maximizing my front, not putting much in the back.

{audio:0:39:28} What does maximizing my front and not putting as much in the back mean?

{audio:0:39:31} Initial profit is profit today; portfolio profit is profit tomorrow. When this closes, I'm going to get this much per car. The problem is, I'm making more money today because my pools are performing better, so I'm not going make as much money down the road because they've maximized it front loaded.

{audio:0:40:01} Your pools did well historically, so you get higher advances now?

{audio:0:40:09} Is that a reward for good performance?

{audio:0:40:13} Yes, and those things you can see here, it's called the rate change summary. They clump the deals together to where you can see that my deals over two years old are $3.2 million and are performing at a very high rate. I can expect to collect that money over time and can watch to see if they are all performing well. Here I had a little bit of a hiccup, performing at an average of three on those deals.

{audio:0:41:16} What is a typical range of outcomes for your pools? How many default, refinance or pay in full?

{audio:0:41:35} I would use a DANA report which is Delivered And Need Another.

{audio:0:43:21} If you look at one of the more recent pools with 50 loans, how many would typically be current and non-current?

{audio:0:43:35} At any one time, or how does that change over time?

{audio:0:43:38} I watch my delinquents; these past due customers are flagged for repo. These are what you've collected, their current balance and how much are past due. These three are going to hurt because they were pool five, which is my current deals. These customers bought a car less than a year ago and are already having a problem. Pool six and seven are past due but probably only one payment, so not a big problem.

{audio:0:45:10} What would you typically do if someone is past due?

{audio:0:45:15} I don't ever want to be the collection guy because I don't want the excuses. I do reach out by sending a text to see how things are going or calling them to see how I can help. They will sometimes open up and tell me their alternator went bad but they didn't have enough money to fix it. I don't believe these are bad people; they're simply bad managers. I will tell them they have a warranty but they never thought it would cover that. Those are the comments.

{audio:0:46:27} There you can play a positive role in helping them fix their car?

{audio:0:46:39} Is inventory still tight in the current market?

{audio:0:46:48} I will pull up a recent customer I've been working with. These people are fairly credit challenged. This is an Uber driver dealing in that market and some of the problems they are having. That was the credit app we were looking at, which takes us through the steps. Step three qualifies that customer. These are the cars this customer would qualify for with $2,000 down, and this would be your front-end profit. These dealers don't want to sell a car to only make 300 bucks. This is the way it was structured, but you can change things to say, I can't help you with your $2,000 down, but if you come up with $1,000 more, we could probably put you in that car. Suddenly, you have a $1,500 deal.

{audio:0:49:14} Is that $1,500 the monthly payment?

{audio:0:49:16} That would be the profit for the dealer today, the monthly payment is $314 and there's the deal. Credit Acceptance gives you the information to structure it. That customer has been pre-approved so that the dealer is protected and can sell it, without worrying about chasing that customer tomorrow for a stipulation the bank required.

{audio:0:50:16} Are the prices of cars uploaded automatically from your inventory?

{audio:0:50:24} That is correct. Here is an example of a car on my website for $11,000. That's the maximum amount I can sell that car for. Today, I would be paid $5,702 selling that car for $11,000, with the customer's down payment of $3,000, potentially pays me $1,495. If I sell the car for less money, for whatever reason their algorithm says I will make more money, which probably has to do with affordability. Here I can make the same amount of money by dropping that customer's monthly payment below $300.

{audio:0:51:34} In an ideal world, wouldn't there be an algorithm working in the background to figure out which is the best deal for everyone where you maximize your profit and the customer minimizes their monthly payment?

{audio:0:51:48} That button is right here.

{audio:0:51:53} What happens if you press that?

{audio:0:51:55} If I press that button, it will calculate my most potential profit, not the best deal for the customer. A greedy dealer will work that deal to maximize it for them, but put that customer into a car for $419 a month, which will not perform well. This isn't the best deal for tomorrow's money, but it might be the best deal for today.

{audio:0:52:41} What about the best deal in the sense that it's a win-win for everybody?

{audio:0:52:48} Unfortunately, car dealers don't think like that. I hate to say that, if you look at the deal, if I'm going to maximize my money today, taking the money and running, the potential profit here says $7,126. If I take that same deal and say that customer can't afford $419 but can afford $300, look what it does to my profit; $9,226. Car dealers are greedy people so that's what happens. These guys are so worried about today's money that they don't paying attention to tomorrow. I look at if I can make a little today and am building a better pool for tomorrow, I may not have to work until I am 103.

{audio:0:54:06} The long term thing to do makes those dealers successful on the program.

{audio:0:54:18} Could you theoretically increase that $11,000 or can you only decrease it?

{audio:0:54:28} This is probably where New York got in trouble. This GMC Acadia has a book value of $15,450. I have it priced at $15,000 so can I change that price? If I go in here and I say I need to be able to make that much money, can I do that? There's the red flag, so this is what dealers in New York, in my opinion, have to go ahead and say, I had a promotion on that or I had a manual entry data error so I've got to change that. I can change that but the reality is I just overrode the system. Credit Acceptance covered their own butt by saying, listen they set up the algorithms so you can't break the law, but if you want to go ahead you can.

{audio:0:55:57} If the overall collection is 73%, is the interest rate 20%?

{audio:0:56:27} If the amount to be paid in a year is $10,000, which includes 21% interest, that is $2,000, but you only collect $7,300 out of $10,000?

{audio:0:56:47} You're not taking into consideration I already made profit up front and put money in the bank. The money I'm losing is interest on money I was already paid.

{audio:0:57:10} I was wondering if this is what forced dealers to increase the price?

{audio:0:57:17} I think it does force you, slightly, to increase the price. In looking at the cars that this girl qualified for, if you look at book value on their cars, I’m at about book value on all of them. Can you sell a car for less? Absolutely. In the market, in my area, they are selling new cars for $10,000 over the MSRP price in the window of the car right now. That’s Ford and Chevy and Dodge. I don’t know how you can fault me, as a dealer, for selling a used car, that doesn’t have an actual window sticker, for any price. If you look right here, evidence is, I’m right at book value so I’m not charging more than MSRP.

{audio:0:59:07} In my opinion, Credit Acceptance, protects every penny I have. I’m sure they are working their own angle, but I do know that if I have a question on where one of my dollars is, they have a report for me to show it.

Credit Acceptance, CAPS, & New York Litigation

Former Market Area Manager at Credit Acceptance

inpractise.com/articles/credit-acceptance-caps-and-new-york-litigation

Executive Bio

Former Market Area Manager at Credit Acceptance

Interview Transcript

Switching to your role as a customer, you mentioned that a large number of your loans are done with Credit Acceptance, why is that?

Are you referring to the dealer hold back that the finance manager feels like there's no benefit to them?

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