Credit Acceptance sees increased activity for originations and compliance


As the subprime auto finance company’s field representatives are generating more business from their active dealer network, state and federal regulators are keeping the compliance team at Credit Acceptance busy, too.

The latest filing to the Securities and Exchange Commission showed Credit Acceptance has encountered nine different regulatory matters since December 2014, including actions from the attorneys general in New York, Massachusetts, Maryland and Mississippi, as well as officials from the Consumer Financial Protection Bureau and the Federal Trade Commission.

The newest addition came when Credit Acceptance indicated that on April 10 the company was contacted by the New York Department of Financial Services, Financial Frauds & Consumer Protection Division (DFS). According to the SEC paperwork, Credit Acceptance said that DFS believes that the company may have:

— Violated the law relating to fair lending

— Misrepresented to consumers information related to GPS starter interrupt devices

— Provided inaccurate information in the course of a DFS supervisory examination

“We have not received any written communication from the DFS regarding its conclusions,” Credit Acceptance said in the filing. “We have provided information to the DFS, as requested, but cannot predict the eventual scope, duration or outcome at this time. As a result, we are unable to estimate the reasonably possible loss or range of reasonably possible loss arising from this inquiry.”

During the company’s quarterly conference call with investment analysts, Credit Acceptance Brett Roberts chief executive officer responded as to whether state regulators are taking a great interest in how GPS and starter interrupt devices are being used since the company previously has been questioned about them by the FTC.

“I think it’s hard to compare at this point. It’s very early,” Roberts said. “I think what we disclosed is really what we know at this point. We had a call. The substance of the call is what’s described in the 10-Q, and we're waiting for something in writing.”

Later in the call, Roberts also addressed how the regulatory environment has intensified.

“I think that maybe the main point here is in the last four years, as you point out, we have seven, eight, nine things that we’ve disclosed now. I think in the 24 years I was with the company before that, I don't think we had any. So clearly, something's changed in the regulatory environment,” Roberts said.

“We’re under a lot of scrutiny. We have been for quite a while now,” he continued. “The regulators have a job to do. We respect that. They certainly have their prerogative to ask questions and challenge the things that we’re doing, and it’s our job to operate in a highly compliant way, and we take that seriously. And what’s disclosed in the 10-Q is just where all those matters stand at this point.

“As you said, I don’t want to generalize. We've been asked a lot of questions. We’ve provided a lot of answers, and that’s where it stands at this point,” Roberts went on to say.

First-quarter performance

During the first quarter, Credit Acceptance generated an 18.5-percent year-over-year increase in the number of contracts originated through its active dealer network, which grew by 11.6 percent.

All told, Credit Acceptance added 112,345 contracts to its portfolio in Q1 through 8,762 active dealers, which the company defines as a store that finalizes at least one deal during the quarter.

The average volume per active dealer rose 5.8 percent to nearly 13 contracts per store.

When addressing that growth, Robert told a Wall Street watcher “that could cause you to conclude that the environment was easier. But at the same time, we've made a big investment in our sales force, which could also be driving that number. It’s hard to break out what’s internal and what’s external there.

Roberts added later in the call, “We can see the growth that came from the people that we’ve hired since the expansion started. In rough terms, they grew about twice as fast as the overall book did, so that still leaves decent growth in the sales reps that were here before the expansion started. So we’re seeing faster growth from the new group but strong growth from everywhere.”

That Q1 origination activity as well as collection on the contracts already in its portfolio all combined to push Credit Acceptance to post consolidated net income of $120.1 million, or $6.17 per diluted share. That’s up from $93.3 million, or $4.72 per diluted share, for the same period in 2017.

The company computed that its adjusted net income, a non-GAAP financial measure, for the three months that ended March 31 came in at $118.9 million, or $6.11 per diluted share, compared to $92.3 million, or $4.67 per diluted share, a year earlier.

Accounting discussion

Credit Acceptance senior vice president and treasurer Doug Busk responded to multiple questions about how the company is bracing for Current Expected Credit Loss (CECL) requirements outlined by the Financial Accounting Standards Board (FASB). Some organizations have to begin complying with these new mandates by the end of next year.

After being peppered earlier in the call, Busk offered his understanding of what accounting regulators are asking finance companies like Credit Acceptance to do.

“CECL is an accounting methodology where, as opposed to recognizing a loss when some event occurs, a certain amount of delinquency or a repossession or a sale of a car, you anticipate that loss at the time you originate the loan, and then book a loss upfront,” Busk said. “The flip side of that is, over time, cash equals accounting, so you'd end up recording some loss at loan origination, and then, conceptually here, then recognizing more revenue over time.

“The fair value option is, you're looking at coming up with an estimate of the forecasted cash flows that the portfolio would generate, and you’re basically calculating an exit price, which represents the fair value of the portfolio at that point, which as I mentioned earlier, would include an estimate of a discount rate, which would represent the return associated with exiting the portfolio,” he continued.

What investment analysts want to know is exactly how Credit Acceptance is going to handle these changes.

“Well, we’re still assessing both alternatives, and our objective would be to end up with the accounting that most closely reflects the economic reality of our business,” Busk said. “So we’re in the process of assessing both of those things. Once we have something material to report, we’ll disclose it in our public filings.

“If neither of those methods line up with the underlying economics of our business, we'll continue to include non-GAAP information in our press release to give shareholders better insight into how the business is actually performing,” he continued.

“We’re obviously working on it. We're working on it hard, but we're not in a position to disclose anything until we've completed our work and fully understand all the issues,” he added.