Back when Brett Roberts started his career at Credit Acceptance in 1991, you could buy a single song— on cassette tape — and the longest term the subprime finance company had in its portfolio stretched to just 24 months.

Now in 2016, Roberts is the company’s chief executive officer and you still can purchase just one song — digitally on iTunes — and Credit Acceptance is now booking paper with terms as long as 72 months.

When the company hosted its latest conference call to share its first-quarter results, Roberts reflected back on how Credit Acceptance has navigated industry changes, just like how the music scene abandoned cassettes in favor of digital products.

“When I joined the company in 1991, the longest loan term we would do is 24 months,” Roberts said. “As we got comfortable with our ability to forecast and to price and to track loan performance over time, we decided to experiment with a longer term and so we went from a max term of 24 months out to 30 months.

“When we did that, we didn’t have any 30-month loans in our portfolio so we had to make an educated guess about how a 30-month loan might perform relative to 24 months,” he continued. “We weren’t 100-percent confident in that guess, so what we did is we piloted it with a small group of dealers. We began to accumulate some data. As we became comfortable that we could forecast loan performance for a 30-month loan, then we began to roll that out as part of our standard program.”

Roberts explained that Credit Acceptance repeated that strategy often during the past 25 years to the point where the company hit its maximum term of 72 months that became available to its dealer network last year.

“We approached it the same way as we did back in 1991,” Roberts said. “We rolled it out to a small group of dealers. We had to guess to some extent because we didn’t have any 72-month loans in our portfolio. So we made an educated guess.

“We’re now accumulating the data,” he continued. “We write a very small percentage of our total loans at 72 months, but as we continue to accumulate more data, we’ll get more comfortable to write more of that business.

“The average term might continue to creep up depending on how comfortable we are with that 72-month loan term. We don't have any plans at this point to go out to a longer term than 72 months, so that might mitigate some of the increase going forward,” Roberts went on to say.

More competition for business

Even though Credit Acceptance is stretching its terms to satisfy buyer requests coming from its dealer network, the company is still seeing competitive challenges. Credit Acceptance’s active dealer network blossomed by 24.9 percent during the first quarter, climbing from 5,996 to 7,488.

But the metric that caught Roberts’ attention is the volume of contracts being booked from those dealers — a pace that softened 2.9 percent year-over-year.

“The environment continues to be difficult. I think the most relevant number is volume per dealer, which was down 3 percent year-over-year,” Roberts said. “We look at that as an indicator of where we stand from a competitive environment perspective.

“We feel pretty good about our ability to continue to sign up new dealers even when the environment's difficult,” he continued. “So the strong unit volume growth we had for the quarter was really more a function of that than it was any kind of easing in the competitive environment.”

Credit Acceptance reported that it originated 73,329 contracts during the first quarter, which was 202 more deals than the same period a year earlier.

Regulatory update

Credit Acceptance confirmed in a regular filing with the Securities and Exchange Commission that the company received a subpoena from the Maryland attorney general on March 18, relating to the company’s repossession and sale policies and procedures within that state.

Senior vice president and treasurer Doug Busk touched on the matter during Credit Acceptance’s conference call.

“In terms of the Maryland matter, as we disclosed, the subpoena is focused on our repossession and sale policies and procedures in the state of Maryland,” Busk said. Not unusually in these types of matters, we don’t really have any insight into why we received the subpoena. We are in the process of providing responsive information to the AG in the state of Maryland.

“I don't think there’s any commonality relative to this and other subpoenas or regulatory actions. I think it’s just more evidence of a very heightened regulatory environment out there,” he continued.

“In terms of the collection practices, being in business as long as we have, we’ve been focused on doing things right from a regulatory perspective. So we assess the (Consumer Financial Protection Bureau’s) position on that and really anything else and make changes to our business if we think it’s necessary to meet their expectations,” Busk went on to say.

Completion of $350.2 million asset-backed financing

In other company news that came to light just this week, Credit Acceptance announced the completion of a $350.2 million asset-backed non-recourse secured financing.

Pursuant to this transaction, the company said it contributed loans having a net book value of approximately $437.8 million to a wholly-owned special purpose entity that will transfer the loans to a trust, which will issue three classes of notes:

Credit Acceptance highlighted the financing has three characteristics, including:

• Have an expected annualized cost of approximately 3.2 percent including the initial purchaser’s fees and other costs

• Revolve for 24 months, after which it will amortize based upon the cash flows on the contributed loans

• Be used by the company to repay outstanding indebtedness.

Credit Acceptance indicated that it will receive 6.0 percent of the cash flows related to the underlying consumer loans to cover servicing expenses. The remaining 94.0 percent, less amounts due to dealers for payments of dealer holdback, will be used to pay principal and interest on the notes as well as the ongoing costs of the financing.

“The financing is structured so as not to affect our contractual relationships with our dealers and to preserve the dealers' rights to future payments of dealer holdback,” the company said.