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Anonymous

Former Market Area Manager at Credit Acceptance

Credit Acceptance: Loan Volume Growth

Food Delivery Wars and Credit Acceptance's Underwriting Moat

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:0:00:20} Could you provide a short introduction to your background?

{audio:0:00:27} After serving in the military for eight years, I got into the automotive industry. Initially, I sold cars and, over the course of 17 years, held every sales position in the dealership, up to and including general manager of a multi-franchise store. In addition to selling cars and managing people, I also secured loans for people with both prime and subprime credit. I was getting ready to open my own store but ended up accepting a job offer from Credit Acceptance and suddenly I could work Monday through Friday, making less money, but without risking my entire life savings and I would not be working 12 to 14 hour days, six or seven days a week.

{audio:0:01:28} We had children entering high school so I opted for that. Within Credit Acceptance I grew the market over 300% each year and was promoted to regional director of sales. I managed multiple states and was responsible for hiring, terminations, development training, coaching market area managers and growing and expanding the market. The only reason I left was because my wife and I had relocated to Idaho with my promotion to director of sales, and our grown sons had both moved back to Southeast Washington. ACV Auctions head hunted me to be their director, which prompted my leaving Credit Acceptance to be closer to the kids.

{audio:0:02:34} Can you explain the traditional process of underwriting subprime loans?

{audio:0:02:58} A traditional deal looks at the value of the vehicle and how quickly it depreciates. The auto loan is structured based on what the customer buys, how much they put down and if there are additions such as vehicle service contracts. The lender will forecast, over six-month increments, the depreciation based on payments received to find where the saturation point is. They always want to be in an equitable position and will calculate how long it will take and balance that against the credit worthiness of a customer.

{audio:0:03:49} Would the lender provide 100% of the loan up front to the dealer?

{audio:0:03:58} Yes, with prime and good credit; whereas subprime credit is slightly different. Unfortunately, most lenders who offer subprime credit have a poor grasp on how to mitigate risk, which is why they always struggle. Most of them limit risk by going as short term as possible. They also charge much higher interest rates because that is based on the risk associated with the loan. The more risk there is, the more interest they charge. A good credit customer would get 60 months at a low interest rate, but when interest rates climb up to 30%, which most subprime lenders do, they cut it back to 36 months which make the payment way too high.

{audio:0:05:01} With high interest rates, customers realize, after making six to eight payments, that almost everything they have paid goes to interest and they have made no headway. This makes them more open to disengaging because they feel they will never pay it off. Traditional subprime lending goes as short as possible in the term and as high as possible in the interest rate to secure a profit margin, while charging dealers a fee for doing business with customers who have bad credit. If a customer purchases a $15,000 vehicle and puts $1,000 down – and for easy mathematical purposes we will ignore taxes and additional fees – the loan will be for $14,000.

{audio:0:06:03} Most subprime lenders will short fund the dealer and charge them an acquisition fee between $2,000 and $3,000 for a person with really bad credit. The dealer only receives $11,0000 or $12,000 of the $14,000 being financed. In that way, subprime lenders put themselves in a safer position in that they’re charging the dealer a fee for doing business with someone with bad credit. Coupled with that, it is short term, high interest and high monthly payments, which fosters disengagement from customers.

{audio:0:06:44} How does that advance rate compare to what Credit Acceptance offers?

{audio:0:06:59} Credit Acceptance typically offers the same. The difference is that regular subprime lenders get a $3,000 fee, so on a $14,000 loan the dealer receives $11,000 up front. They will probably also be on the hook for six months for a payment default clause, meaning if the customer misses any of those first six months of payments, the dealer has to buy the contract back and honor the terms of that contract. $11,000 is all the dealer will ever get; there is no end game. Unfortunately, that causes dealers to do what I like to call 'putting lipstick on the pig'.

{audio:0:08:02} They try make it better than it is. If a customer has nine months on their job, the sales person rounds it up to a year on the credit application to show more stability. If a customer makes $1,500 a month, they round it up to $1,700 which makes the disposable income look better. This results in drastically inaccurate data from which lenders base their risk assessment. It is their job to inspect the data and assess the risk accurately, however information falls through the cracks. On that $14,000 loan, Credit Acceptance might fund the dealer $11,000 or perhaps $1,000 less, however there are several big differences.

{audio:0:09:06} There is no payment default clause; if a customer misses a payment, the dealer does not have to pay back the advance. If they gave them $10,000 instead of $11,000 the dealer is at a $1,000 disadvantage by using Credit Acceptance over other lenders. The difference is that once Credit Acceptance has collected $10,000 in payments, the dealer can earn back the fees associated with that contract, and will receive 80% of every payment made. This makes it more of a partnership with dealers which encourages them to give accurate information to allow the system to accurately assess the risk which affects how that contract performs. If that contract meets or exceeds expectations, dealers receive additional funds, as opposed to the funds which line the pockets of every other subprime lender who operate their business traditionally.

{audio:0:10:24} How does that change the dealer margin in the short term? Are used car dealers encouraged to effectively mark up the car?

{audio:0:10:48} The difference is you cannot mark it up because you will only get $12,000. You are limited based on what the lender will finance. Credit Acceptance allows dealers more control to structure deals because everything they do can increase or decrease the amount of risk on that loan. If a good credit customer gets a 60-month term and a bad credit customer gets a 36-month term, Credit Acceptance would offer 48 months. With any change to the car deal, dealers can see how it increases or decreases the risk.

{audio:0:11:54} As they make changes to the loan and decrease the associated risk, they are rewarded by getting funded more money. This trains dealers to build car deals in a manner which provides less risk for both parties and offers customers more affordable payments. With other lenders, when you lower your selling price, you give up profit margin, but with Credit Acceptance a dealer can lower the selling price by $1,000 and make $700 more up front on day one.

{audio:0:12:50} Lowering the price by $1,000 brings down the monthly payment by roughly $30, making it more affordable for the customer. They could lower the price by $700 but add a vehicle service contract, so if the vehicle breaks, it gets repaired and all the customer is at risk for is a $100 deductible instead of a $1,400 repair bill. They can now continue to make those loan payments without getting into a financial pinch. Credit Acceptance teaches dealers to create deals with less associated risk to achieve the best performance because that gets them more money up front and a bigger portion of profits later.

{audio:0:13:39} Why would dealers choose Credit Acceptance over other lenders?

{audio:0:14:00} A big part is knowing you will make more money later which creates stability. Many dealers run a buy here, pay here business and avoid banks. They collect all the interest and make money throughout the life of the loan, which is substantial with bad credit customers. On a long term 66 to 72 month loan, with high interest, there might be $10,000 in finance charges. Taking $2,000 less on day one, with a possibility of an extra $6,000 later, makes a huge difference.

{audio:0:14:56} Credit Acceptance is a conservative company who seldom tweak their systems. They minimize risk during income tax refund season when there is more cash in the market and dealers are able to get more money down. They scale back slightly on advance to avoid mis-assessing it because customers have more money down during that two-month period of the year than they normally would any other time, which paints a prettier picture. That is the only thing Credit Acceptance ever changes after which it goes back to the norm. Every other lender considers the current market and vehicle availability. Normal subprime lenders' parameters and limitations resemble a heart monitor.

{audio:0:15:58} They post good profit margins then their board of directors realize they are making too many profits and not enough losses, taking few risks and leaving money on the table. They then loosen up their lending parameters to increase market share and make bigger losses. Their lending parameters resemble a heart monitor or roller coaster, which creates confusion and frustration with the finance managers who are trying to secure loans with lenders.

{audio:0:16:44} In January, you only need proof of income and proof of residence on a customer, but in May you need 10 references and a job verification. This frustrates dealers because it now takes 21 days to get funded because the lending parameters constantly fluctuate.

{audio:0:17:44} Why do other lenders not follow Credit Acceptance if it’s proven to generate profitability?

{audio:0:17:57} Many are trying to differentiate themselves from Credit Acceptance or it is the old way of doing business. I am now with ACV Auctions who are a totally digital platform but there are still traditional car dealers because that is the way they have always operated. In my current role, I encounter dealers who refuse to buy a car without touching, smelling and feeling it, but with our digital inspection you know more about the car than if you were standing next to it. It is hooked up to an OBD2 sensor which reveals engine codes. Similarly, in the lending world, many operators continue to do business a certain way and refuse to change. They do not have the over 50 years of subprime data which Credit Acceptance has, nor do they interface with collection databases. Credit Acceptance looks at three main factors when assessing customers.

{audio:0:19:01} For a car deal, they look at the performance of a dealer's portfolio, which is a good indicator of the accuracy of their information. Every lender looks at how the car deal is structured. What is the value in relation to the loan amount and how quickly will it be paid off? The third is customer attributes and Credit Acceptance has over 50 years of data based on how customers pay. They interface with national collection databases to see what is missing from a credit report. When dealing with consumers with bad credit, credit reports are very inaccurate.

{audio:0:20:01} This is because collection companies are charged to report outstanding debt. They evaluate the likelihood of a customer paying their outstanding debt and if it seems likely, they will pay to report that customer's credit. In the case where a customer has been rebuilding their credit, they believe if they report them, they might pay off the debt to avoid getting dragged down. However, when a customer has bad credit, most collection companies do not report it because they will simply end up being another name on the list and refuse to throw good money after bad.

{audio:0:20:53} You might see three collections on a credit report but they probably have 12 because collection companies only report twice; once for the outstanding debt and then when it is paid up. You cannot see any interaction between which is why Credit Acceptance interfaces with national collection databases to gain three key insights. When a customer gets a collection account, are they relatively easy to contact or are they a hermit hiding up in the hill, and rank them 1 to 10. Secondly, once a collection company established contact, how easy is it to maintain that?

{audio:0:21:52} Can they call them monthly to maintain regular conversation and dialogue, or once the customer is informed do they become a hermit hiding up in the hill? They rate that 1 to 10 and the third factor is, can you get money out of them? Do they make an effort to resolve the debt, even if it is only $30 per month for a year and a half, or do they constantly mislead you and suddenly their contact information changes? It is about focusing on the individual and how collectible that contract is, which has an associated cost which other lenders refuse to spend. Many of these are trademarked so they cannot get access to it.

{audio:0:22:47} How is it trademarked that other lenders cannot get access to this data?

{audio:0:22:53} It is data which Credit Acceptance collected and do not share with other lenders. You would not share that information just like Coca-Cola would not share their recipe.

{audio:0:23:11} Is it proprietary information on customer types, such as willingness to pay?

{audio:0:23:19} From a dealer's perspective what is the typical inventory for subprime?

{audio:0:23:32} There is no typical inventory, but for traditional subprime it is that rental rocket, that Hertz or Enterprise rent a car that a dealer can buy for $2,000 back of book because the market is flooded with them. They can recondition them and end up with a good spread between what they bought it for and the retail value. With Credit Acceptance, it is about the price of the vehicle and the monthly payment relative to customer income, because they finance everybody. If you only have $1,000 to put down, traditional subprime loans require you to earn $1,800 to $2,000 per month to qualify for a loan, whereas Credit Acceptance allows you to earn $1,000 per month.

{audio:0:24:34} However, it needs to be on a car which will last with a monthly payment of $200 to allow you leftover funds. Credit Acceptance evaluates the affordability of monthly payments and if the car will only last 12 months and the loan is for 24 months, that is a bad decision. Unfortunately, most traditional subprime lenders do not dig that deep when structuring the deal. They see they have $2,000 down, the vehicle is being sold for $2,000 under book and they charge a $2,000 fee, so they are $6,000 light on this vehicle and go ahead and accept the loan.

{audio:0:25:34} They fail to consider the reality of those rental rocket vehicles such as a Nissan Altima, Toyota Camry or Ford Fusion. When they are done with their rental life and go on to the regular public, they are sold in a traditional subprime platform, where their reliability is ignored. Will this be a 36-month car on a 60-month loan, or a 60-month car on a 36-month loan and will the vehicle last the life of the loan? Dealers are not incentivized on customers who pay well. To them it is a won and done situation and becomes the bank's problem. Many dealers are totally fine with the idea of tattooing victim between a lender's shoulder blades and putting them in bad loans which they know customers cannot repay.

{audio:0:28:10} If they pay $12,000 and did some repairs, would they sell it for $15,000?

{audio:0:28:24} It probably has a book value of $17,000 and the customer will put $2,000 down. The bank charges a $2,000 acquisition fee, so if you sell it for $15,000 and it's got a retail book value of $17,000 that type of car will last longer. The reason many of them do rental rockets is because they can buy it for $12,000, put $1,000 into it for reconditioning and own it for $13,000. They can sell it for $15,000 and end up with a $2,000 profit margin. The customer will put $2,000 down and the lender will charge a $2,000 acquisition fee, making the profit margin fairly skinny.

{audio:0:29:17} Does that encourage subprime lenders to place a 36-month car on a 60-month loan and thereby misalign the incentives for customers?

{audio:0:29:37} They do it because, on average, customers trade in their vehicles every 27 months. They ignore the noises because they will trade the vehicle in in less time anyway. However, it is more difficult for subprime customers because the bulk of what they pay goes to interest. Two and a half years into the loan process they still owe more than the vehicle is worth and since they have bad credit and cannot save money, they do not have the $4,000 down payment required to trade them out of that car.

{audio:0:30:37} Why would a dealer take that risk if they could earn more in the hold back? Is the gross margin on the metal and the ancillaries not enough?

{audio:0:30:56} Most lenders do not allow ancillaries with subprime loans whereas with prime customers they allow you to add things on. They try to police the book value in relation to the loan, keeping it as low as possible, but quite often they do not. Vehicle service contracts offer additional protection but many subprime lenders prevent that being financed into the contract. Dealers are really stuck.

If you look at the scenario where you buy a car for $12,000, put $1,000 into it and own it for $13,000, normally, traditional lenders do not allow you to make $2,000. They will limit you to $14,000 as the amount financed. If the customer put $2,000 down, you only make $1,000 profit on day one which is all you will ever get. Whereas with Credit Acceptance, you may only make $700 or $800 up front, but the CAPS system shows you the expected payout of back-end funds. You make $300 less on day one but are almost guaranteed to make at least another $1,000 later.

{audio:0:32:56} That is a good switch and I would take that risk as a dealer. If I was to take $500 less now, to make $600 later, I would rather do the loan with traditional subprime lenders to maximize my profits on day one. Credit Acceptance's system shows you your profit on day one and also shows you your anticipated profit before a second collection event. The first collection event is based on what you are funded on day one.

I remember one of the contracts I worked up with a particular customer, because the dealer was convinced that it would not work. He was trying to sell the vehicle for $24,000 because, traditionally, that is how you make the most. However, with Credit Acceptance, if you reduce the risk, you get a bigger percentage of the contract up front. In this case, the customer had a $2,000 trade in and they had $2,000 in down payment, which meant he would lose money by going through Credit Acceptance. By selling the vehicle for $21,000 with $2,000 down and $2,000 on a trade in, the loan was $17,996.

{audio:0:34:57} The customer was financing the loan for 72 months and their monthly payment was $457. Credit Acceptance funded $19,186 which is called a negative fee deal. If the dealer had done that deal with a regular lender, he would have gotten at most $17,996 but got more utilizing Credit Acceptance. That is about 10% of the deals they do. The challenge is getting dealers to understand how the system works. Dividing $17,996 by $457 gives you a rough number of 39.38.

{audio:0:36:06} Credit Acceptance anticipates this customer will make 39 or 40 payments before they go 60 days past due. That is what they give the dealer up front. The system then calculates that after engaging the customer and getting them back on track, this is your 80% share of the additional funds we feel confident we will collect in future. The dealer is able to see they get $300 less on day one, but almost $1,200 near guaranteed funds later, and switch to Credit Acceptance. They can make a better-informed decision than a won and done with a regular subprime lender.

{audio:0:37:00} Those negative fee deals are 10% of the total volume Credit Acceptance underwrites?

{audio:0:37:07} Yes, 10% of the deals Credit Acceptance does are negative fee deals where the dealer makes more money by going through them. They fund them more than the finance amount because the dealer did a good job of mitigating the risk. The contract is so collectible that they know they will get more out of it.

{audio:0:37:33} Is it more collectable because of the structure or the right customer?

{audio:0:37:39} Both; a combination of the customer attributes. Credit Acceptance can see that collection companies can easily contact them and when they do the customer maintains contact. They make an effort to repay the debt and are a good customer, but cannot manage their money. In those situations which have good loan structures there is less exposure to risk. You can lower the interest rate to reduce some risk, so more of each monthly payment pays the loan down faster, versus most traditional subprime lenders who want to increase that because it increases profit.

{audio:0:38:30} Instead of pushing dealers to increase margins up front, you get them to think longer term and collect more cash flow over a 54-month period?

{audio:0:38:48} Absolutely. Many dealers love the idea because of the extra funds they can make. It adopts it to every dealership level including franchise stores because they have the ability to finance everyone using Credit Acceptance. The big push with Credit Acceptance had been to only market to independent car dealers. Buy here, pay here dealers felt like we were robbing them. That was their model and we were trying to get them to do that with us instead of internally and we would be cutting into their profit margins. Franchise dealers did not keep that inventory; instead, they kept a nicer, cleaner, fresher low-mileage inventory. In my region, I persuaded franchise dealers to keep some of that inventory instead of giving it away or wholesaling it, and sell it to everyone who came on their lot.

{audio:0:40:02} What inventory is it? You mentioned there was no specific type?

{audio:0:40:07} It is typically lower priced vehicles. It could be a 10-year-old high-mileage Escalade or a car which is inexpensive on day one; it depends how much money your customer makes. For dealers it also depends on local demographics. I live in Southeast Washington, next to Hanford Nuclear Site. Many people make $100,000 a year but do not pay their bills on time. They can buy a $35,000 vehicle through Credit Acceptance because of their income. Yakima is an hour away and the average income there is only $50,000 a year so in that area, dealers have to focus on $15,000 and under inventory.

{audio:0:41:37} Do the recoveries differ depending on demographics?

{audio:0:41:42} No, but part of that is because Credit Acceptance polices it very closely. Initially it was found that some of those lower priced vehicles paid slightly better, but after more research it was more people looking to improve their credit who ended up working their way out of subprime.

{audio:0:42:13} I was surprised the average Credit Acceptance loan is almost $20,000.

{audio:0:42:23} It moved from $17,000 when I started in 2013 to $19,000 before I left.

{audio:0:42:34} Is that due to moving to more franchise dealers?

{audio:0:42:38} Bringing on franchise stores who sell newer low-mileage vehicles was part of it. Another thing traditional subprime lenders do wrong is look at vehicles with mileages over 85,000. They believe they can reduce risk because they cost less, but they also cost more to maintain. Getting a customer into a vehicle with 11,000 miles and a ton of factory warranty gives them mechanical breakdown protection at no additional cost.

{audio:0:43:18} Why are recoveries of recent vintages lower post the great financial crisis as opposed to historically?

{audio:0:43:29} In the United States, there is a shift back to the buy here, pay here dealers. They used to be on every corner. It was not the situation that people became more responsible and that reduced the risk, but realized they had fewer options and were slightly more protective. In 2009 Cash for Clunkers happened and people thought the administration saved the car business but they almost ruined it. Older high-mileage vehicles would have poor fuel economy and high emissions, so it was more of a grain type movement to get those vehicles off the road.

{audio:0:44:32} The challenge was when customers traded those in. If a dealer wanted to get the Cash for Clunkers money, they had to crush that vehicle, seize the engine and destroy the tires. Literally every component had to be completely destroyed. If it had brand new tires on or a new engine in, too bad, you had to seize it up. That ruined the parts market because there was a very low supply but still the same demand. It also hurt the buy here, pay here dealers, who prior to Cash for Clunkers could buy a vehicle on auction for $2,000 and spend $500 reconditioning it.

{audio:0:45:32} He owned it for $2,500 and could put it out on his lot for $6,995 or $5,995. When a bad credit customer comes in with $1,500 down payment the dealer lets them take the car and agrees to collect $300 a month. In that scenario, the dealer is in the hole for $1,000 on day one. That is low risk because once you receive your third payment you are almost made whole. Even with a $4,000 vehicle and the customer putting $1,500 down, you are only $2,500 at risk. If the customer only makes five payments, you have received $3,000 and are still $1,000 in the hole when you repossess that vehicle. So you put another $500 into it and now own it for $1,500, sell it to another customer who has $1,500 down and you have been made whole.

{audio:0:46:45} That car is a boomerang, it comes back to the dealer and he keeps doing that. That business model works but Cash for Clunkers destroyed all $5,000 and under vehicles. The cheapest car at the auction was now $6,000 but because that was the cheapest car and there was no supply and huge demand, those started fetching $7,000. Now the cheapest car you could get at the auction was $7,000. When the dealer puts a nickel into it and owns it for $7,500 the bad credit customer still only has $1,500 to put down. The disparity between the cost of the vehicle and the down payment is too big, so you need to collect payments for two or three years to break even. Many buy here, pay here dealers got out of the business. That was a big reason for the shift in collectability because people had fewer options available if they stopped making payments.

{audio:0:47:57} Before they could walk away, go to a buy here, pay here dealer and find a car. Suddenly those cars were harder to get and were higher priced. Buy here, pay here dealers no longer now wanted $1,500 down; they wanted $3,000 or half the loan amount and it left people with fewer options.

{audio:0:48:21} Did Cash for Clunkers change the low end buy here, pay here dealers?

{audio:0:48:26} It almost ruined it but it has recently recovered. It took over 10 years for the market to start righting itself and get to a point where you could spend $2,000 at an auction and get a vehicle with some life left. Between 2009 and 2019, anything you got for under $3,000 was pretty much a parts-only vehicle or it had severe frame damage.

{audio:0:49:10} So pre-crisis vintages were more profitable but Cash for Clunkers changed that?

{audio:0:49:22} How did you educate dealers on the Portfolio Program?

{audio:0:49:35} I would sit down with them but the challenge was dealers had been taught to do it the traditional way, which is wrong. When you tell them to sell the vehicle for less money and they will get more profit, their head goes sideways because it makes no sense. They had to understand how to work the system so I educated them by asking them to pull their last five subprime deals. We put them in our model, showed them what they would have paid in comparison, as well as the down the road money they would have had. They would realize they would fair out roughly the same amount of money, sometimes $500 or $1,000 less, between those five car deals.

{audio:0:50:37} But they also had the potential for all this future profit. I would then make them understand the lender they currently use already does this but do not share future profits; they were not getting a piece of the pie. If they did it our way, they could make more money. It took quite a bit of work to get a dealer to do their first 100 contracts; that was the portfolio. They now have two options, a 50-contract pool or a 100. It took consistent follow up, repeatedly visiting dealerships and holding them accountable to throw everything in. My big deal was, we do not have a look to book.

{audio:0:51:36} Most lenders have what they call look to book. For every 20 contracts they look at, they expect to book five of those deals. They expect to gain 25% of the deals you send them. We had no look to book at Credit Acceptance so it cost the dealer nothing to take a look and see what Credit Acceptance would pay. I got them to plug every bad credit customer into our system and see what we would pay. Credit Acceptance finance everyone so if we always say yes, why would you go elsewhere to see if they say no first, then use us as the lender of last resort?

{audio:0:52:30} Put it in here first, get a guaranteed way to go, then build it with everyone else. If someone else would pay them more money, by all means take it, but put them all into the system.

{audio:0:52:45} Would they have the CAPS system on their lot and put everything through?

{audio:0:52:52} That is what I started pushing. Coming from the industry, I knew the situation. However, you did not want to pitch Credit Acceptance to a finance manager because he disliked it and believed they would not make money from it, but they do not realize how much business they lose due to bad credit. Many finance managers bang their chest thinking they are King Kong credit. There are probably 100 people they never breathed on who have previously been kicked out. You go back to the sales manager and show him how many deals he is losing. Get a sales person you have built a relationship with to tell the sales manager about the 50 bad credit people he saw over the course of the previous month.

{audio:0:53:50} He was aware of the 50 who never got to his office because the sales people told them there was no possible way to do this. A sales person will not waste their time on someone they cannot sell a car to. It was about getting them to realize they have 100 potential car deals because we finance everyone. Even if they capitalized on 25% of them, that is 25 more car deals. If they only made $2,000 per car, that meant $50,000 additional capital, which ignores cash flow because our funding was so quick. If each of those 25 car deals was worth $10,000 deal, that equates to $250,000 cash flow going through your business every month.

{audio:0:54:49} With an additional $250,000 it is easy to replace vehicles and keep your lot full. It is easy to run the day-to-day operations of the store and make payroll without scrambling. I drove into all the aspects it hits; that is how I got dealers engaged.

{audio:0:55:11} What was the biggest challenge educating dealers?

{audio:0:55:14} The biggest challenge was getting them to stop thinking that pricing the vehicle at the highest is the best way to go. Someone who has been in the business for 27 years believes the more they charge for a vehicle, the more profit they make, instead of understanding our risk based desking tool. This is not a regular car deal and dealers are not accustomed to mitigating risk. They send the contract to the bank who mitigate the risk and decide what they will finance. I struggled to get them to stop looking at it as a simple calculator and to understand risk mitigation.

{audio:0:56:01} What are the operational differences or changes the dealer had to make to work with Credit Acceptance, compared to the old model of farming it out to banks?

{audio:0:56:12} I told them to incentivize their sales people and showed them how it would make them more money and give increase their cash flow. Throw them extra money for bringing you additional deals. Plug every one of those deals into Credit Acceptance and if you get a guaranteed way to go, then you could go through the rest of it. I also had them change their greeting slightly. They went with their regular sales process, because the worst thing you can do is try to change something for a business entity. If you try to change their process, they will be more reluctant to it. I simply taught their sales people who used to say, welcome to William Barnes Ford, change it to, welcome to William Barnes Ford, the home of guaranteed credit approval.

{audio:0:57:18} I just had them add that tagline. A customer might say, we wanted to look at the F150s. Okay great, did you already have financing or are you looking to get financing? Did you come by because of our guaranteed credit approval? Did you see our big sale? If you threw that tag out twice, 80% of your bad credit customers would latch onto one of those too. So if somebody gave an indication that they had credit challenges, you say, instead of me showing you 50 vehicles, getting your heart set on something and then it possibly not working, why don't we sit down. You let me know what you are comfortable with for a monthly payment and a down payment. I find eight to 10 vehicles that fit those parameters and you let me know which of those you like best.

{audio:0:58:16} Bad credit customers were used to it taking them three or four days to buy a car. They looked at the nice one but settled for one with two keys and a heater, none of the extra stuff. They never wanted to go through that nightmare anyway. All I did was to say, add in home of guaranteed approval twice in your initial conversations with the customer. If they bite, take them inside for a credit application, insert them into the CAPS system and see what you are dealing with. That would interface with the dealer's inventory so they could sort their inventory by the 10 most profitable vehicles in stock, or go for the 10 most profitable vehicles in a certain segment.

{audio:0:59:11} If a customer was looking for a four-wheel drive SUV, they could plug them into CAPS and show them the 10 they would make the most money from. Showing them 10 different options made them feel they were in control, but that was only a perception. They chose from the 10 options you gave them so you were ultimately in control. That is how I educated dealers and by doing it that way, it resulted in the growth I achieved.

{audio:0:59:49} You almost want to get the customer into the finance room to talk about finances, then show them the inventory they can purchase rather than the whole shop and letting them down when they cannot afford the car they like?

{audio:1:00:03} Exactly; do not let them fall in love with something they cannot get. I taught them that it was easy to sell up but almost impossible to sell down. Out of the vehicles you stand to make the most money from, start with the least expensive, and let them work their own way up. By doing that, they built a follow up system with customers where they were the first stop when they were back in the market. They knew going in that the dealer was not trying to rip their head off and make a ton of money from them and had their best interests in mind. Credit Acceptance ensured that the dealer's profitability, the customer's best interest and the collectability of the contract were all aligned, which was a huge recipe for success.

{audio:1:01:03} How are 14,000 active dealers split between franchise and independents?

{audio:1:01:15} It is more independents due to Credit Acceptance chasing them for over 40 years. I continued to push the franchise dealers to use the Portfolio platform and had great success. It allowed them to operate a buy here, pay here business using Credit Acceptance's check book. When you dealt with dealers who were in for the long game, that really helped. The mix was probably 60% independent dealers, 25% to 30% franchised and 10% to 15% with buy here, pay here.

{audio:1:02:08} How are franchise dealers limited when using the Portfolio Program?

{audio:1:02:16} Dealers are not in control of their own store. Many franchise dealers are absentee and have a general manager running the store. They are not there on a day-to-day basis which makes it difficult to get in front of them, because ultimately it is them who get that money later. The general manager and finance manager are dismissive because they will not see any of it. We had great success with dealer groups. We got Lithia and Group 1 to use it, after which many other franchise dealers suddenly started hearing about it and started to embrace it more.

{audio:1:03:12} They have increased the number of franchise dealers over the past five years. It was a slow grow for a long time due to not being able to get in front of the right audience. Once dealer groups adopted, they saw each other’s financial statements and who they did business with. Once they saw that Lithia, Group 1 or Penske used Credit Acceptance they wondered why. That gives you an avenue to get into that store.

{audio:1:04:02} Do franchise dealers mainly use Purchase or do they also use Portfolio?

{audio:1:04:07} On a national basis, they primarily use purchase because franchise dealers care about what they can get today. I had success with many of them doing the Portfolio Program, but those were typically smaller dealer groups with four to six roof tops, as opposed to Lithia or Group 1. For the dealers with more than one roof top, I explained that this down the road money would keep their kids in business when they took over.

{audio:1:04:45} Why is there a churn of a few thousand dealers every year?

{audio:1:04:50} Dealers are stuck in their own ways and cannot be trained. Dealerships are often sold, bought out or move to different areas. Dealers are very fickle. I am currently working with three stores in Seattle who are all going through a buy sell and when that happens, some fall off. The other fall off challenge is based on how an employee presents it. It depends how savvy your sales people are and how good they are at building relationships. If they have built a relationship with the sales manager and finance manager, all it takes is for one of them to leave the Ford store and go work at the local Chevy store, then all your program connections in that store are gone.

{audio:1:05:51} Compare that with slowly getting their interest and using them to help you present to the dealer principle. Now you get the owner of the dealership to embrace the program. When he replaces a sales manager, a general manager or a finance manager, it becomes, this is how we do business here, if you cannot embrace that, seek life elsewhere.

Former Director of Sales at Credit Acceptance

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