SAN FRANCISCO - Credit Acceptance Corp. is a survivor in the ongoing shakeout in subprime auto finance.
The Southfield, Mich., company reported sharply higher net income for 1998, despite much lower loan originations. Net income for 1998 was $25 million, vs. $1.5 million in 1997, or $41.5 million in 1996, the company reported last month.
Using more conservative lending policies, originations were $581 million in 1998. The company had $983 million in originations in 1997, but had to take a $60 million provision for credit losses in the third quarter. Many other subprime companies reported higher-than-expected loan losses in 1997 and 1998, which led to half a dozen high-profile bankruptcies.
Credit Acceptance gets its business from 'turndowns' from other lenders, in what is politely called the 'secondary' market.
'We're not a lender, we're a collector,' Richard Vanderport, vice president of sales, said in an interview at the National Automobile Dealers Association convention here this month. Credit Acceptance acts as the dealer's collections department. The dealer gets 90 percent of the money collected, and Credit Acceptance keeps 10 percent, he said.
The company's 1999 outlook is improved because it recently started applying computer-based credit scoring to subprime customers - something traditional lenders said could not be done, said Vanderport.
'The people (whose loans) we have bought provide us with 27 years of data no one else has. We have analyzed more than half a million contracts, and more than $4 billion in loans, to come up with a system of payment probability scoring for customers,' he said.
'We have developed this thing to where it's so accurate (that) out of 100 contracts in our top tier, 97 are good and only three are bad. In our bottom tier, 85 are bad and only 15 are good,' Vanderport said.
That does not mean 85 percent of the bottom tier gets turned down, he said. Credit Acceptance turns no one down, Vanderport said. And it does not charge higher interest for the biggest risks; it just offers less money to those biggest risks.
'We fax back (to the dealer) how much we're willing to fund, and we're willing to fund every deal,' Vanderport said.
If Credit Acceptance does not offer enough to cover the car, 'the money has to come from either the dealer or the customer,' Vanderport said. The preferred solution is a bigger down payment.
'Obviously, the more money the customer kicks in, the less risk there is to the dealer,' he said. 'And what we consider a vested interest is hard-earned cash - not a winning Lotto ticket, not a tax return, not a trade-in. That is not a vested interest.'