Don Foss, chairman, president and CEO of Credit Acceptance Corp., is still recovering from a streak of bad risks that his company and other subprime auto lenders took in the go-go years of the mid-1990s.
Foss, 55, started Credit Acceptance in 1972 to generate business for his own used-car lots. He went public in 1992. The gimmick: Credit Acceptance rejects no one. The catch: Credit Acceptance demands a substantial down payment and limits how much it will lend.
At one time, Foss' family had 17 stores in six states. 'If you were buying a used car in the Detroit area, you had to consider us,' he said. The family still owns four used-car dealerships.
Credit Acceptance adopted stricter lending policies in 1998 but took a pretax charge of $47.3 million in the third quarter for older, poorly performing loans. That drove the company $33.6 million into the red for the quarter and $15 million into the red for the nine months, compared with profits of $5.6 million for the year-ago quarter and $19.9 million for the nine months.
Third-quarter revenue fell 16 percent from a year earlier to $27.9 million and was down 20.5 percent for the year to date, to $87.8 million.
Credit Acceptance is traded on the NASDAQ exchange. Its stock recently hit a 52-week low of $3 per share, compared with a 52-week high of $10.25 in January 1999. Its all-time high was close to $30 at the end of 1996.
Foss admits lenders have themselves to blame for the subprime shakeout that began in 1997. In the segment's heyday, too much money chased too few sound loans. However, Foss says a few rotten apples share the blame - dealers who purposely defrauded companies like his.
'I call them `con' men, not `car' men,' Foss said.
Flimflams included phony down payments, straw buyers, odometer tampering and phantom options to drive up the value of a car. Few lenders are willing to comment on the record, even though dealer fraud is auto lending's worst-kept secret.
New York-based Staff Reporter Jim Henry interviewed Foss at Credit Acceptance headquarters in Southfield, Mich., this month. Edited excerpts follow:
If you don't turn anybody down, how do you manage risk?
The fundamental thing is, the customer is required to have a real down payment. It's really quite basic. ... Nobody else has the data we have, because everybody else was turning these customers down. In the higher scoring category (for us), there is about a 3 percent likelihood of default, to the lowest tier, where there is an 85 percent likelihood of default.
How can you make a profit in a category where there are 85 percent defaults, other than not to write too many of them?
What you have to learn is what needs to be changed in a deal to make it not so risky. Does that customer need a bigger down payment? Is it too much car? Is the debt-to-income ratio way out of whack? Would maybe less car, or less credit, work? Maybe, instead of a $10,000 car, a $6,000 car. We can identify that.
That puts a big burden on the dealer to make sure the potential deal is OK, doesn't it?
The dealer is in every way a partner, because the dealer is sharing in the collections. The dealer gets a profit based on a formula, from the customer's down payment, and from the advance CAC gives him. When we collect the payments, the dealer receives 80 percent, and we collect 20 percent for servicing it.
The dealer is the gatekeeper. All the technology, all the systems we have in place, are no good if the dealer doesn't structure the deal properly.
The dealer we want is the dealer who's in the business because it's his career, not the guy who wants to make a fortune overnight. We had 6,000 dealers signed up on our program. Maybe 100 out of the 6,000 got in business with the idea of defrauding the finance company, instead of making a profit from selling cars.
Some of them are pretty blatant. They change the mileage on cars. Obviously, that increases the value. But that's pretty stupid because there's a paper trail. Mileage is recorded by the state. Some of them do pretty stupid things. My father used to say, they get so used to doing it the crooked way, after a while they don't realize they're doing something wrong. They do it, thinking it's OK.
Is fraud commonplace?
We're not alone in our experience. I'm sure other lenders encounter dealer fraud. But we don't think we should turn a blind eye to it. Things do happen. I remember selling someone a car once, and I checked off the box that said 'air conditioning.' I looked in the car; there were lots of vents, and every car nowadays has air conditioning, right? Well, the weather turned hot, and there was no air conditioning. So, I ended up paying for the guy to get air conditioning. But I paid.
The real problem is the dealer who sets up a systematic plan so that most of the deals include some kind of fraud.
What do you do when that happens, drop the relationship?
We don't only drop the relationship; we sue 'em, to force them to pay it back.
How often would you say this has happened to your firm? Dozens of times?
Yeah, I would say dozens. One of the old dealers I used to deal with had been a Buick dealer forever. He used to say: 'The ones who make it big in this business are the ones who stick.' When the time comes, I want to be carried feet first off the showroom floor.