Interview Transcript

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.

We're trying to understand why CACC isn't growing more. The idea of reaching a million contracts is out there, but they're far from achieving that. We've found a few answers, but not all. That's the overarching issue we're facing.

It's been interesting because the company often gets involved in the regulatory process and there's always something happening. Over time, we've developed trust in the company's ability to handle these issues and we're confident that there's no fraudulent or harmful behavior. We regard the company as top-notch and admire its culture. Scoring high in various rankings while being a subprime financing company is quite an achievement.

That's a major focus for the leadership team, achieving high rankings in 'Best Place to Work', 'Great Place to Work in Detroit', 'Great Place to Work in Michigan', 'Top Millennial Place to Work', and 'Top IT Place to Work'. They value these accolades greatly.

The fascinating aspect is the company's culture. How do you maintain that in such a challenging environment? It's impressive to see how the employees' morale is upheld and the positive culture within the company.

If you're agreeable, we can delve right into it. We'll share our understanding and please feel free to correct us if we're mistaken.

That's correct.

Ken appears to have hired a significant number of people in the tech sector. We were considering whether the CAPS system, which has been in use for a while, is still up to par or if it needs some general refurbishment. We've spoken to several dealers.

The feedback we received was that those dealers who work with CACC and truly comprehend the product are very positive about it. They assert that it's the best system and nothing else compares. While they all have their individual minor points for improvement, there's nothing major. However, those dealers who don't frequently work with CACC, specifically franchise dealers, seem to either not know how to use it due to lack of training on the Credit Acceptance system, or they find it too inconvenient to use. We've had a few discussions about this. Sometimes, the issue is related to the different systems they use. For instance, the Westlake system makes it more difficult. It seems they even block CAPS, making it very inconvenient to efficiently manage inventory. The question then is, how many deals could CACC execute without lowering their IRRs, which they are not doing because they simply don't see the deals?

That's an insightful question. Before I left Credit Acceptance Corporation (CACC), one of my main focuses was integrating with DealerCenter, which is owned by Westlake, a major competitor as you know. In simple terms, I informed the leadership team that we could quadruple the approval count by integrating and setting up DealerCenter to submit applications directly into CAPS. This only needed to be unidirectional, not bidirectional.

The idea was to push the application into CAPS, then the dealer could switch over into CAPS at either step three or step four to work the deal. I may digress at times, so feel free to steer me back on track. One thing about Credit Acceptance is that they prioritize their tasks, or what they call "tickets", by EVA.

DealerCenter has a stronghold on independent dealers because it's a multifunctional CRM desking tool that acts like a RouteOne, Dealertrack system, and so on. Westlake has done a commendable job in figuring out how to keep an independent dealer within their circle. They offer floor planning, bulk purchases of receivables, lending, and the DealerCenter system. It's a one-stop shop.

To answer your question, integrating with DealerTrack, RouteOne, and DealerCenter would be a significant move. We used to joke that it's CAPS 2.0, but given the pace of technological changes, they should be on CAPS 8.2 by now. One of the things Ken Booth did, which we didn't quite understand, was hiring 200 engineers for the IT department. They're not IT, they're engineers.

It's a bit too late, as DealerCenter and other lenders have already captured a large portion of the Credit Acceptance space. Around 2018 or 2019, credit unions and other lenders began taking over the space and business from Credit Acceptance, and they lost their relevance. Dealers who are bought into the portfolio program love CAPS because it does exactly what they want. They input a credit application, it picks the most profitable vehicle, and that's it.

However, to sell cars and deals, they need to integrate better with Dealertrack, RouteOne, and DealerCenter. Westlake, for example, offers multiple ways to contract a finance deal in Dealertrack. You can do a paper contract, e-sign it through DealerCenter, e-sign it through RouteOne, or remotely sign it. Credit Acceptance, on the other hand, only allows e-signing.

Westlake has kept up with technology advancements better than Credit Acceptance. I see this as a significant hurdle. For some reason, they see integration as an infringement on their technology, like DealerCenter, Westlake, or Dealertrack might be able to extract their scorecard data and figure out how they score deals.

Even if you have DealerCenter and it's a one-way push from DealerCenter into CAPS, I don't see how they would get that. You don't even have to send a response back to DealerCenter like other lenders do, saying, "Hey, it's approved." But for some reason, they were resistant to allowing that to happen and negotiating with DealerCenter, which is owned by Nowcom, which is owned by the Hankey's people.

Especially on the West Coast, every independent uses DealerCenter. It's probably 90%, a huge number.

Frazer is next, followed by AutoManager and a few others. The main thing is getting the applications. You can't get a deal without an application. Applications are like the fuel of the system. So, getting the applications in there is paramount. That's number one.

Before we move on to the second point, I want to clarify the first one. It seems like you're saying that Westlake isn't preventing CACC from joining the system. Rather, CACC is concerned about the data they might share with Westlake and RouteOne if they join. So, it's not Westlake blocking CACC due to competition?

I didn't hear any indication that Westlake was the issue. It seemed more about Credit Acceptance's concerns about revealing their scorecard. That's the impression I got.

If I may ask a follow-up question, we're not entirely familiar with these systems. Could you provide an overview of DealerCenter, Dealertrack, and RouteOne? Also, could you shed some light on their market shares? You mentioned that DealerCenter has about 90% of the market on the West Coast.

Yes, DealerCenter is primarily 99% used by independent dealers.

It's a CRM, a desking tool, and an aggregator, just like Dealertrack and RouteOne. These systems allow you to input an application, which is then sent to various lenders.

So, all three systems perform the same function? How do they differ from each other?

They all do the same thing, but DealerCenter is mainly used by independent dealers. Franchise dealerships don't use DealerCenter. Dealertrack, which is owned by Manheim and Cox, is the dominant CRM and aggregator. It's primarily used by franchise dealers, though some independent dealers use it as well. RouteOne is less expensive and simpler to use, but it's not as integrated. It's used by some independent dealers. RouteOne was started by General Motors, Toyota, and Ford to compete with Dealertrack. Interestingly, DealerCenter works through RouteOne. Dealers input the credit application in DealerCenter, and then it gets funneled to the lenders from RouteOne. We've been trying to train dealers to send applications to Lobel, UACC, CPS, Tidewater, etc., and then go into their RouteOne account to push the application into CAPS. However, dealers tend to prefer the easiest route and don't want to overwork themselves. Dealertrack and RouteOne are primarily used by franchise dealers and aggregators. RouteOne also has CRM and desking tool capabilities, but it's not as integrated as Dealertrack. Does that answer your question?

Indeed. So, given the focus on independent dealers, I presume DealerCenter is the most crucial system.

Yes, that's correct.

However, if we delve deeper into this, the issue with franchise dealers is that CAPS doesn't integrate well with Dealertrack or RouteOne. With Westlake, if you're using Dealertrack, you have various options to sign a customer up - paper contract, e-sign through Westlake or Dealertrack, mobile sign, app sign, and so on. But with Credit Acceptance, the dealer has to either access CAPS directly or click the button in DealerTrack to enter CAPS and then e-sign through that system. It's an additional system for them to deal with, which complicates the process. Dealers prefer simplicity. Dealers can transfer all the applications they want, but when it comes to e-signing, they would much rather do it through Dealertrack or RouteOne. I've heard rumors that Credit Acceptance is working on this, but Westlake has been doing this since 2018 or 2019.

Would it be incorrect to say that this seems like a solvable problem? It doesn't seem like rocket science to fix this issue. I'm sure there have been discussions about this before, correct?

That's what we couldn't understand. If Westlake can do it, why can't Credit Acceptance? When I was with them, we thought this would be a significant improvement. If a franchise dealer wants to make a deal, but has to log into another system, they might opt for a deal with $500 less profit just for the simplicity of clicking a button to print all their paperwork or to e-sign. When you go into the system, you're entering either step three or step four, depending on how Dealertrack or RouteOne is set up. Then they have to proceed to step five, input some information, and there's no integration to pull information from Dealertrack or RouteOne, like insurance information or previous addresses. Then they have to click a button and agree to a few terms before they can e-sign.

On a side note, Credit Acceptance is the industry leader in funding speed. No one funds a deal faster than Credit Acceptance. However, the main issue is that dealers prefer simplicity. Credit Acceptance should have integrated this, and we were pushing them about it. Remember that Credit Acceptance didn't even join the Dealertrack or RouteOne platform until around 2015. Every other lender was already there, and they insisted that you would get more applications if you logged into CAPS and reentered it manually. We first experimented with Dealertrack, which was a big deal around 2015, and then they moved to RouteOne.

It seems like CACC had a vision to be the primary choice for dealers. We've met some dealers who say they're great and most of their deals are funded through CACC. But is that statement true? It seems like this approach might be hindering them.

Indeed. From 2004 to 2018, Credit Acceptance was the leading choice for subprime and deep subprime. They were unrivaled. They had a specific way of doing business and if you wanted to work with them, you had to adapt to their methods. That's why CAPS hasn't evolved as much as it should have. It should be at version 8.2 or 8.3 by now. But if we can't see any enhancements to the EVA, why change? Some businesses make changes for customer perception value, but Credit Acceptance doesn't. It's all about the EVA, no exceptions.

But earlier you mentioned that you could have quadrupled the deals, right?

The applications.

Returning to my question, what's your best guess of how many deals CACC could be doing but aren't because they simply don't see the deals?

There are two main things. I talk to one to two current Credit Acceptance employees every day. They call me. I had breakfast with two of them yesterday.

What are they saying?

There are two main points I'd like to discuss. Firstly, we need to open up the ability for independent dealers to push applications from DealerCenter. This is the primary issue. Secondly, we need to simplify the integration with Dealertrack and RouteOne, perhaps with a one-touch button, instead of having to log in and out of different systems. Currently, Credit Acceptance Corporation (CACC) is the only lender that requires franchise stores to use a separate system to finalize the deal.

Furthermore, it's important to recognize that there are other lenders in this space. If we observe the pattern of CACC, when the economy is poor, CACC performs exceptionally well. This is because other lenders are scaling back, going out of business, or reducing their contract count, while CACC continues to operate. However, when the economy is thriving and money is cheap, other lenders can borrow at low rates and lend at high rates, thus outperforming CACC.

During periods of economic prosperity, CACC has continued to operate as usual, while other lenders have been seizing business opportunities. This has resulted in CACC losing its relevance in dealerships. In the past, CACC was the go-to for subprime, near prime, and deep subprime credit. Nowadays, there are other options like credit unions and Westlake. Westlake, in particular, has significantly grown its portfolio, not just in the subprime and near-prime sectors, but also in the prime sector.

This is why CACC has introduced the Platinum, Gold, and Silver deals, in an attempt to emulate Westlake and capture more of the market. The third major issue with CACC is that it needs to allow dealers to sell their vehicle service contracts and gap insurance.

You aren't in the car business, but we call it a plus-plus deal with every other lender. You get an approval, say, we'll approve $20,000 on this deal for this customer. Then the dealer can add the VSC. They can add the gap. There's no decrease in the $20,000 that they approved on the deal.

With Credit Acceptance, in order to maintain their EVA if the dealer sells VSC and gap, that's part of the EVA, they get one scoring model on the deal. But if they want to sell their own VSC and their own gap, then that advance goes from $20,000 to $17,632. So they're like, wait a minute. I added VSC and added gap. Now I'm losing $2,000 instead of making $2,000. Yes, because it's the EVA model.

Although it helps them make a significant amount of profit, it hurts because the dealership's model has changed. Back in the day, everyone sold cars and made money, and then you added this stuff in the F&I office, VSC, gap, window tint, paint, tire and wheel, key, Fob, all the extras. Now the main profitability center is the financing and the ancillary products in the back end, they might make $1,000. In 2021, 2022, profitability on cars went up. But that's, to me, an anomaly. They make a lot of their money in the finance office.

So, if you have an approval, you get $20,000 from Credit Acceptance. You get $20,000 from, let's say, Tidewater or CPS or Regional or somebody, each getting $20,000 advance on the car deal. But you add the VSC with Credit Acceptance, that left-hand side is going down a bit, but Tidewater or Regional or CPS or one of them says, hey, we'll give you $20,000, plus you can add $4,000 in product on the back end. Who's going to get that deal? That's where they're losing a lot of the business in the franchise environment is they can't make that money, the dealer can't.

One of the things we heard from franchise dealers is that they didn't like that CACC asked them to use their warranty and gap programs. And apparently that's changing. We heard yesterday that CACC is now allowing franchise dealers to use their own systems, so to use their own gap and warranty. The other information is that they seem to be moving into prime, and that was news to us, so we don't know anything about that.

That's the Platinum program and the Gold program and the Silver program. There are no stips, as low as 4.9% interest terms as long as 84 months. However, goes back to what I just said. In a franchise world, that's great, but hey, there's no stips, 4.9, 84 months, but yet I can get that same approval from Regional or let's say Cap One or Wells or somebody, and they let me add five grand in my own product in the back end.

Now, even though Credit Acceptance is going to allow these dealers to sell their own vehicle service contract in gap, again, it's not a plus-plus program. So in other words, here's your $20,000 advance. Now you can add four grand in product in the back end. With Credit Acceptances, here's your $20,000 advance. Oh, you want to add your VSC and you want to add your gap, but now your advance is $17,382. Yes, because again, they got to keep the EVA. Every deal is the exact same profitability at Credit Acceptance.

I suppose the real question is, where is the intersection of those deals where they can still go ahead with their pricing? To return to my original question, considering the cost of collecting the cash flows, I believe Credit Acceptance is quite efficient. So, unless they're mispricing, there shouldn't be a reason why others can significantly undercut CACC's pricing.

Indeed. However, as far as I understand, CACC is more profitable per deal than any other lender out there. They make a substantial amount of money per deal. That's the crux of the volume issue. There's a point where, if you want to do more deals, you're going to have to reduce the EVA.

What is the general atmosphere and mood when you talk to CACC personnel? How do they perceive it?

It's a mixed bag. They're frustrated because, to be frank, they're out there promoting their programs, but they're being outperformed by other lenders. When a dealer submits 30 applications in a month and only gets one deal, they get tired of the process.

Hasn't that been the case for a while though? They've always been in this niche, although, as you mentioned, they dominated it some time ago. They're not dominating it anymore.

Exactly, and that's the problem. There are too many other players out there, and these players allow them to add that vehicle service contract and the gap. Remember, they're going to add Credit Acceptance warranty. They're going to make, what is it, $425 on the warranty, and then they make $175 on the gap. But, if they sell their own warranty, they can make $1,500. And if they sell their own gap, they're going to make an additional $500 to $800 over that $20,000 advance just on the car. That's what I consider one of the three major issues.

There are three issues? What were the first two? The first one was integration into the system.

Yes, integration with Dealertrack, RouteOne, and DealerCenter.

The aim is to make it easy and convenient for dealers to access CACC without any hassle and having to sign up for their system separately.

I'd like to pose a question to you. In the current technology-driven car deal business that we operate in, is there a real need for CAPS? If you have Dealertrack, Route One, or DealerCenter, you should be able to transfer that approval. Let's set DealerCenter aside for now. With Dealertrack or Route One, you should be able to transfer that deal, have it scored, and push it back to Route One or DealerCenter. There should be an e-sign button there. Why is there a need to go into CAPS?

In my view, based on technology, the dealer should never even have to log into CAPS. They should be able to restructure the deal like every other lender in DealerTrack or Route One. They should be able to click a button, print out the paperwork, or e-sign or mobile sign out of Route One or DealerTrack. CAPS should be in the background.

We tried to explain that this is what every other lender does. It would simplify their lives greatly. They would also get more deals because they wouldn't have to go into another system.

Let's consider a scenario. A customer wants to put down $2,000. They transfer the deal and get an approval in RouteOne or DealerTrack. But then the customer comes in and says, "I only have $1,500." Now, they have to go into Route One or DealerTrack, click the button that says "Work your deal in CAPS", go into CAPS, and depending on how it's set up, they'll land in step three or four. They have to find the car, click the profit button, go into step four, and change the cash down from $2,000 to $1,500. With every other lender, they could have just changed it in RouteOne or DealerTrack.

There's probably a cut-off point, although I'm not sure where it is. From my experience, if the difference is around $300, I'd say it's not worth my time. I'd just do it in the main system. I'm not sure when I'd think, "Oh, this is special for CACC. Maybe it's $400. Maybe then I'd do the extra work."

I've had dealers tell me that for an extra $1,000, they wouldn't bother with that deal. They'd rather simplify their lives and just put it through PNC or something similar.

So, to me, integration is key. It's crucial because the technology has to advance more because everyone else's technology has. If you do your research and find out when CAPS 2.0 was released, let's say 2016, that's seven years ago. E-sign came out in 2015 or 2016, and it hasn't really changed much since then.

I see your point and I agree. But if CAPS becomes like everyone else, fully integrated with RouteOne and DealerTrack, then it becomes more of a competition of who has the best price.

That's what it is.

CACC is quite proficient at what they do. If I'm not mistaken, around 50% of their deals are of the "lender of last resort" type, where there's no one else to turn to. So, you go to CACC. However, here, the strategy is to be part of the entire pool. But how would they win in this scenario? They won't be able to offer the best price in the market unless I'm missing something.

Dealers aim for the highest advance to maximize their profits in the simplest way possible. If they have three deals and PNC offers a $21,000 advance and Credit Acceptance offers $19,500, Credit Acceptance won't get the deal. It essentially becomes a bidding war.

Over the past five to seven years, even though the percentage of portfolio deals increased versus purchase in Q4 of last year, the biggest change I've noticed is a shift away from portfolio money. If I call a Market Area Manager now and ask to review a dealer's dashboard or pool analysis, they might not even know what a pool analysis is.

A pool analysis shows how each individual pool is tracking with portfolio profit, express money, portfolio money collections, and so on. The big picture used to be helping customers re-establish their credit, providing them with reliable vehicles, and making a significant impact on their credit profiles. This would earn their long-term business.

We used to say that Credit Acceptance only wants your business once, but as a dealer, we want your business for life. We aim to help you get your credit back on track. However, this focus has been lost, and we've become just another lender. We've lost our unique selling point, our brand of portfolio building.

The message of changing lives has been pushed aside, and now we're just another lender. If that's the path we choose, we'll have to engage in bidding wars. This has been the trend since around 2018, in my opinion.

I'm just wondering, the last five years may have been the most challenging for them as money has been readily available. Everyone's willing to fund deals at a percent with a 1% cost of capital. But do you see this changing? We've heard news of people pulling out and more pain in the market. What's your perspective on the ground? What are you observing?

You're absolutely correct. If you monitor the trends, you'll see that repossessions and bankruptcies are increasing. This is the advice I give to the market area managers I converse with.

I've spoken with market area managers who now have what they refer to as growth contracts. Their contract count is higher than it was in September or August of last year. This is because other lenders are retracting and dealers need an outlet. Credit Acceptance, in essence, is self-funded. They don't borrow money or securitize their loans on the open market. They do this through their wholly-owned subsidiaries.

How does their cost of funds compare to another lender? Another lender is on the open market, selling their receivables for whatever they can get. They might secure an extra $900 million to lend out. They'll lend that out until they exhaust the $900 million, and then they have to sell again. Credit Acceptance doesn't have to participate in this cycle. They can just continue lending money. I estimate they can grow 16% on current cash flows without borrowing a penny.

One smart move Brett Roberts made since 2009 was to continually extend the maturity dates on these warehouse lines of credit well in advance. This one isn't due until 2025, but they've already renegotiated it to 2027. This ensures that if they need money, it's available. No one wants to lend you money when you need it. They're more than willing to give you money when you don't need it. I predict a significant increase in volume over the next two years, based on current economic conditions and market trends.

I believe that will address the short-term situation. However, we're still grappling with the long-term issues.

Indeed. One of the major challenges is keeping up with technology and staying relevant with the plus plus programs for franchise dealers. If you want to attract franchise business, you have to play their game. This involves negotiating advances and deciding how much you're going to offer in the F&I office.

If you have a deal like Credit Acceptance, where they only require proof of income but allow you to add a vehicle service contract and gap without changing the advance, you'll attract more business. However, the real challenge lies with the EVA model.

From the director level down to the ground staff, they're incentivized based on volume, correct?

Yes.

Okay. That's not good for the atmosphere.

I won't mention any names, but there's a man who controls many of the advances and the scoring model. He gets bonuses based on EVA. So, why would he risk lowering that? We could do 500,000 contracts and make 900, instead of doing 275,000 and making 1,550 per deal. But this model works for him because he's earning a significant amount from his bonus. If you look at their EVA bonuses from five years ago, they were enormous, especially for the chiefs.

I presume the EVA should look something like this curve. They try to reach the optimum?

Yes.

So, if this is volume and this is profitability per deal, or EVA per deal, we could increase volume, but we would lower EVA on this side?

Yes.

They try to reach the optimum. That's my understanding.

Yes. But you're never going to reach a million contracts while maintaining the current level of EVA. The math doesn't work. Now, if every other lender went out of business and stopped originating loans, then absolutely. You would get the money very quickly.

Yes. But that brings me back to my main question. I understand all of this. Make it more attractive, be more competitive, and you will see more deals. That's the simple equation. But if you still want to keep up with this EVA maximization regime, what are all the deals they could do within their IRRs - their return profiles - that they are not seeing yet. It's about the intelligence of getting those deals that are producing the profitability that they are not getting due to some roadblock. Do you have a sense of how much this is due to the inconvenience of not being linked up, not being integrated, and other reasons?

I can't provide a specific number, but when you're deeply involved in a sector, you develop an instinctive understanding, even if you can't quantify it precisely. During my time in car dealerships, dealers would often suggest improvements. While this could be mere rhetoric, it does provide insight. Primarily, if we could increase the number of applications, it would naturally lead to a rise in contracts. Even though the delivery percentage might decrease, it's impossible to get a contract without an application.

If you become more relevant in the space, not necessarily by offering the exact same approvals as other lenders, but by simplifying your delivery process and making your technology more user-friendly, you'll secure more deals. Even if you're only semi-competitive, making the delivery process easier for subprime customers will result in more contracts. However, it's challenging to assign a specific number or percentage to this.

Is there reliable data on market share? Our rough calculation suggests there are about 1.3 trillion in loans outstanding, with 2% being deep subprime, equating to around 26 billion. CACC now has about six and a half billion outstanding. Subprime, I believe, is approximately 160 billion. This would give us a market share of around 4%. Would you agree with these figures?

In my opinion, that's a low estimate. If we consider the available money to be around $1.3 billion and subtract the $200 million used for stock buybacks, we're left with $1.1 billion that isn't being deployed. The key question is how much lower they're willing to take the EVA to increase volume. The only reason they didn't succeed in 2008 and 2009 was due to a lack of funds. They've extended their maturity date to avoid this issue in the future.

The million-dollar question is how much they're willing to lower the EVA to reach a volume of a million contracts. They haven't yet reached their first BHAG with a contract count of 600,000.

And the other BHAG is a $1,000 share price, correct?

Yes, the second BHAG is a $1,000 share price and a million contracts. They also aimed for 18.2% profitability and being a top 10 great place to work. Achieving a $1,000 share price is another challenge. To reach that, they'll need to increase their contract count while maintaining profitability, which is a delicate balancing act.

It's beneficial to have these competing goals, isn't it?

To a certain extent, yes. In the past, as outlined in the book "Good to Great", the focus was on perfecting one thing. That was the approach with EVA when there was little competition. When I started at Credit Acceptance Corporation (CACC), there was no competition. We were charging $10,000 to sign up with CACC. People were paying us to lend them money. It was a simple and profitable business model.

However, as more lenders entered the space, the $10,000 fee was eliminated and the portfolio model was gradually phased out. Even though there was an increase in percentage in Q4 last year, which I consider an anomaly, the trend is more towards purchase program deals. They make the same amount of money on a purchase program deal as they do a portfolio deal. It's something to ponder, but I don't lose sleep over it anymore.

May I ask, what led you to leave Credit Acceptance in 2022?

There were several reasons. At the time, I felt I had reached my limit and was on autopilot. I could have done the job in 20 hours a week, which is not my style. I had a great team and we were doing well, but I felt I had hit my ceiling there.

Also, it was tiring to constantly convince dealers to continue submitting applications despite their application fatigue. We would offer them new plans and programs, but the constant selling was wearing me down. As I was nearing 60, I decided it was time to figure out my next move. I dabbled in a few things before deciding to open my own agency, selling products to car dealers and offering coaching and training.

That sounds good.

And I'm enjoying it.

You certainly know the company very well.

I owe a lot to the company and people like Daniel Ulatowski, Brett Roberts, and Keith McCluskey. I wouldn't be where I am today, living in Scottsdale, Arizona, and enjoying life, without them and the company. I made a significant amount of money on the stock and learned a lot about myself, the industry, and business. I'm very grateful.

What is your opinion of the current leadership team at CACC? Is there a next generation in place? Are the current leaders getting older or tired, in your view?

In my opinion, Ken is too lenient. Bret was stern. I know he and Tom had their disagreements, but I believe Ken struggles with decision-making. I think they have too many chiefs. We were recently discussing their new Chief Alignment Officer, which I found perplexing. They have a Chief People Person, and numerous other chiefs.

In the past, we had Brett Roberts, Ken, Doug, and others, including the directors of sales, the Dawsons. Recently, Daniel Ulatowski was promoted to Chief Sales Officer, which was an excellent decision. However, now there are too many chiefs, and nothing else has really changed. These chiefs are earning millions of dollars a year, which I don't agree with.

I believe they need to focus on their program. They need to stay relevant in the changing market. The world, the industry, and the franchise environment have all changed. The problem with Credit Acceptance Corporation (CACC) is that they can remain as they are, without changing anything, and still be extremely profitable. They'll continue to get business, but they will never reach 400,000 or 500,000 contracts a year if they don't change something.

You mentioned a specific growth number, I believe it was 16%. How did you arrive at that figure?

That estimate is based on my calculations. They can grow at 16% without borrowing any money, based on their current situation. I haven't done the calculation in three or four years, so it might be slightly outdated. I don't recall the exact method, but I sat down and worked it out based on their cash flows. They could grow at 16% without borrowing a cent.

If I understand correctly, you're suggesting that they can reinvest their cash flow into new originations at the same profitability level. You seem skeptical about their relevance. They've become somewhat outdated in many ways. The big question is their relevance in the face of increasing competition. They need to rejuvenate their approach. However, despite these issues, would you agree that they're still likely to benefit from the current situation? You mentioned that they should see growth, profitable growth, for the next two years or so. After that, we'll see how the macro situation evolves and whether they can find new ways to make the process easier and more comfortable for dealers.

Exactly. I talked to the MAMs and they are getting more contracts from AutoNation stores. As the economy declines, CACC's contract count will increase, without them changing anything. Everyone will appear successful.

That's a sign of a good business, isn't it?

As I mentioned earlier, even in challenging times, they perform exceptionally well. During prosperous times, they continue to thrive with their EVA model. There was a period of economic prosperity where rates were around 1% or 2%. I don't think we will see such rates again in our lifetime unless the government intervenes significantly with interest rates.

With these factors, it's unlikely we'll see the same level of competition again. Consider this, if you're borrowing money at 3% and lending it out at 29%, you just need to collect most of it, say around 55% or 56%, and you're going to do really well. However, I don't think we'll see those parameters again in our lifetime. They'll do quite well without changing anything, but they'll never reach even 500,000 contracts a year without making major changes and becoming more relevant, like they were in the past.

I'm interested in understanding the economics of these systems. For instance, how much do they cost? How many licenses do they have or how many customers use them? I'm trying to get a market overview of DealerCenter, Dealertrack, and RouteOne.

I'm not sure about that. Westlake is a privately held company, while Dealertrack is part of Cox, which is public. I'm not sure about RouteOne. I don't have that information.

It seems they missed the opportunity to develop CAPS into something like DealerCenter, correct?

It's interesting you mention that. There was a point around 2005 or 2006 when they wanted to develop CAPS into a CRM, similar to what DealerCenter did. They missed that opportunity. We told them they were too late. To compete now, they would need to develop a dynamic AI machine language interpretive program to simplify dealers' lives to the point where they have to use it. But I don't think that's going to happen. DealerCenter dominates the market. They should have developed CAPS into the central platform for independent dealers, like DealerCenter did.

It's a classic case of software taking over the world. That was a brilliant move by Westlake or their holding company, wasn't it?

Yes, indeed.

They seem to be quite intelligent.

There are competent people there. Ian Anderson is the president of Westlake and Western Funding, and he is involved in various other aspects as well. They have implemented the right strategies. When you purchase a car at the auction and put it on their floor plan, it automatically gets listed in your DealerCenter. It then automatically appears on your website. You can even push it to Craigslist or Facebook Marketplace. All this is possible through DealerCenter.

It's an essential integrated system. It's quite difficult to let go of that.

Consider the vast amount of data they have on people. They receive credit applications from numerous independents. Data is the driving force of the world, isn't it? Credit Acceptance also has a lot of data, but that's a different story altogether.

There was a time when someone, perhaps Doug, mentioned that they had considered using their collections as a service for other lenders.

Westlake does that. They are collecting Nicholas loans now. They collect for Agora Data and many other lenders that you might not even be aware of. They offer white-labeled services and can customize it as per your needs. They provide 40 different ways to pay. Credit Acceptance doesn't offer that many payment options. You can't use Cash App, Venmo, or Zelle to pay your loan through Credit Acceptance. If they have the infrastructure, intelligence, and skill sets to collect, they should have started offering this service 15 years ago. Westlake did it and they are making a significant amount of money. The last I heard, they had 15 billion under management. That's almost three times what Credit Acceptance has.

Is Westlake the main competitor to Credit Acceptance?

Yes.

Who else is there making life difficult for Credit Acceptance?

In different markets, it could be some credit unions, but Westlake is the main one. There is Lobel, UACC, Lendbuzz; what I call boutique lenders that just pick at the Achilles' heel of Credit Acceptance. It might not be one, but it's the collection of those, let's say four or five or six, that just kind of divert the dealer's attention. If a dealer - and you'll probably find this out next time you talk to these dealers who rely heavily on Credit Acceptance - has many other lenders, they might prefer them over Credit Acceptance. Most of those dealers you'll find have maybe two, maybe three lenders in total. But the ones that used to trouble us are the ones that had 40. If an independent has access to 12 lenders, Credit Acceptance becomes less relevant.

This conversation has been extremely helpful. We haven't had such an insightful call with someone who knows the business so well in a long time. So, thank you for that.

I enjoy discussing this topic. As I mentioned, it's a phenomenal company, and I've gained a lot of knowledge from many people there. That's how I've come to understand the company so well; I learned from their insights. So, anytime you want to discuss it further, I'd be more than happy to do so.

Before we conclude, is there anything we should have asked you that we didn't? This is our catch-all question at the end. Is there anything we missed that you feel we should have asked?

I don't believe so. I had a chance to review some of the questions beforehand, so you addressed everything right from the start. Nothing else comes to mind.

The only topic we didn't discuss was the regulatory side of the CFPB.

Let me save you some time. Have you noticed what's happening in Massachusetts? There are accusations against Credit Acceptance of providing loans to individuals they knew couldn't afford them. This is not a viable business model. In my opinion, these accusations lack validity and are politically motivated. They target a company worth seven billion with six or seven billion in receivables, hoping to extract 10, 20, or 30 million from them. This gets them into the headlines, which can be beneficial for political ambitions.

If you read the accusations, they claim that the company loses money at auctions. However, a car at an auction is an asset. It sells for a price, whether it's one dollar or $20,000. There's no loss there. Then there's the deficiency balance, where they go after the person. People need to take fiscal responsibility. Credit Acceptance has a maximum payment income of 25% of the gross income. If someone can't afford their car payment because they've spent their money elsewhere, that's not the company's fault.

The public tends to believe these accusations without understanding the business model. It's not viable to sell a car to someone who can't afford the payment, knowing they will fail.

I may not be a business modeling expert, but even I understand that doesn't work.

I agree. Public perception is easily swayed by headlines, leading to quick judgments.

They believe that these companies deserve to pay. But when you look at the payments, they're not as substantial as they seem. For example, a $25 million payment spread across a million customers is only $25 each. If you read the lawsuits and do the math, the individual payouts are not significant.

I hope that the truth will prevail and the pendulum will swing back. In this world where nobody takes responsibility and the government is blamed for everything, this can't last.