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_________________________________________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ________
 
Commission file number 000-20202
CREDIT ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
Michigan
 
38-1999511
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
25505 W. Twelve Mile Road
 
 
Southfield,
Michigan
 
48034-8339
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:  (248353-2700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.01 par value
 
CACC
 
The Nasdaq Stock Market
Securities registered pursuant to section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ No o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes þ No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes No þ
 
The aggregate market value of 10,249,544 shares of the registrant's common stock held by non-affiliates on June 30, 2019 was approximately $4,959.0 million.  For purposes of this computation all officers, directors and 10% beneficial owners of the registrant are assumed to be affiliates.  Such determination should not be deemed an admission that such officers, directors and beneficial owners are, in fact, affiliates of the registrant.
 
At February 4, 2020, there were 18,151,092 shares of the registrant's common stock issued and outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant's definitive proxy statement pertaining to the 2020 Annual Meeting of Shareholders (the "Proxy Statement") filed pursuant to Regulation 14A are incorporated herein by reference into Part III of this Annual Report on Form 10-K (this “Form 10-K”).
_________________________________________________________________________________________________________________



CREDIT ACCEPTANCE CORPORATION
YEAR ENDED DECEMBER 31, 2019

INDEX TO FORM 10-K

Item
  Description
Page
 
PART I
 
 
PART II
 
 
PART III
 
 
PART IV
 
16.
Form 10-K Summary
 
 
 
 

2


PART I
ITEM 1.    BUSINESS

General

Since 1972, Credit Acceptance Corporation (referred to as the “Company”, “Credit Acceptance”, “we”, “our” or “us”) has offered financing programs that enable automobile dealers to sell vehicles to consumers, regardless of their credit history.  Our financing programs are offered through a nationwide network of automobile dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing; from repeat and referral sales generated by these same customers; and from sales to customers responding to advertisements for our financing programs, but who actually end up qualifying for traditional financing.

Without our financing programs, consumers are often unable to purchase vehicles or they purchase unreliable ones.  Further, as we report to the three national credit reporting agencies, an important ancillary benefit of our programs is that we provide consumers with an opportunity to improve their lives by improving their credit score and move on to more traditional sources of financing.

Credit Acceptance was founded to collect retail installment contracts (referred to as “Consumer Loans”) originated by automobile dealerships owned by Donald Foss, our founder, significant shareholder and former Chairman of the Board.  During the 1980s, we began to market this service to non-affiliated dealers and, at the same time, began to offer dealers a non-recourse cash payment (referred to as an “advance”) against anticipated future collections on Consumer Loans serviced for that dealer.

We refer to automobile dealers who participate in our programs and who share our commitment to changing consumers’ lives as “Dealers”.  Upon enrollment in our financing programs, the Dealer enters into a Dealer servicing agreement with us that defines the legal relationship between Credit Acceptance and the Dealer.  The Dealer servicing agreement assigns the responsibilities for administering, servicing, and collecting the amounts due on Consumer Loans from the Dealers to us.  We are an indirect lender from a legal perspective, meaning the Consumer Loan is originated by the Dealer and assigned to us.

Substantially all of the Consumer Loans assigned to us are made to consumers with impaired or limited credit histories. The following table shows the percentage of Consumer Loans assigned to us with either FICO® scores below 650 or no FICO® scores:
 
 
For the Years Ended December 31,
Consumer Loan Assignment Volume
 
2019
 
2018
 
2017
Percentage of total unit volume with either FICO® scores below 650 or no FICO® scores
 
95.9
%
 
95.6
%
 
95.6
%

Business Segment Information

We currently operate in one reportable segment which represents our core business of offering Dealers financing programs and related products and services that enable them to sell vehicles to consumers, regardless of their credit history.  For information regarding our one reportable segment and related entity-wide disclosures, see Note 15 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.


3


Principal Business

We offer our Dealers financing programs that enable them to sell vehicles to consumers, regardless of their credit history. We have two programs: the Portfolio Program and the Purchase Program.  Under the Portfolio Program, we advance money to Dealers (referred to as a “Dealer Loan”) in exchange for the right to service the underlying Consumer Loans.  Under the Purchase Program, we buy the Consumer Loans from the Dealers (referred to as a “Purchased Loan”) and keep all amounts collected from the consumer.  Dealer Loans and Purchased Loans are collectively referred to as “Loans”.  The following table shows the percentage of Consumer Loans assigned to us under each of the programs for each of the last three years:
 
 
Unit Volume
 
Dollar Volume (1)
For the Years Ended December 31,
 
Portfolio Program
 
Purchase Program
 
Portfolio Program
 
Purchase Program
2017
 
72.5
%
 
27.5
%
 
68.5
%
 
31.5
%
2018
 
69.7
%
 
30.3
%
 
67.2
%
 
32.8
%
2019
 
67.2
%
 
32.8
%
 
64.3
%
 
35.7
%

(1)
Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program.  Payments of Dealer Holdback (as defined below) and accelerated Dealer Holdback are not included.

Portfolio Program

As payment for the vehicle, the Dealer generally receives the following:

a down payment from the consumer;
a cash advance from us; and
after the advance balance (cash advance and related Dealer Loan fees and costs) has been recovered by us, the cash from payments made on the Consumer Loan, net of certain collection costs and our servicing fee (“Dealer Holdback”).

We record the amount advanced to the Dealer as a Dealer Loan, which is classified within Loans receivable in our consolidated balance sheets. Cash advanced to the Dealer is automatically assigned to the Dealer’s open pool of advances. Prior to August 5, 2019, we generally required Dealers to group advances into pools of at least 100 Consumer Loans. Beginning August 5, 2019, Dealers may also elect to close a pool containing at least 50 Consumer Loans and assign subsequent advances to a new pool. Unless we receive a request from the Dealer to keep a pool open, we automatically close each pool based on the Dealer's election. All advances within a Dealer’s pool are secured by the future collections on the related Consumer Loans assigned to the pool. For Dealers with more than one pool, the pools are cross-collateralized so the performance of other pools is considered in determining eligibility for Dealer Holdback. We perfect our security interest with respect to the Dealer Loans by obtaining control or taking possession of the Consumer Loans, which list us as lien holder on the vehicle title.

The Dealer servicing agreement provides that collections received by us during a calendar month on Consumer Loans assigned by a Dealer are applied on a pool-by-pool basis as follows:

first, to reimburse us for certain collection costs;
second, to pay us our servicing fee, which generally equals 20% of collections;
third, to reduce the aggregate advance balance and to pay any other amounts due from the Dealer to us; and
fourth, to the Dealer as payment of Dealer Holdback.

If the collections on Consumer Loans from a Dealer’s pool are not sufficient to repay the advance balance and any other amounts due to us, the Dealer will not receive Dealer Holdback. Certain events may also result in Dealers forfeiting their rights to Dealer Holdback, including becoming inactive before assigning 100 Consumer Loans.

Dealers have an opportunity to receive an accelerated Dealer Holdback payment each time a pool of Consumer Loans is closed. The amount paid to the Dealer is calculated using a formula that considers the number of Consumer Loans assigned to the pool and the related forecasted collections and advance balance.

Since typically the combination of the advance and the consumer’s down payment provides the Dealer with a cash profit at the time of sale, the Dealer’s risk in the Consumer Loan is limited.  We cannot demand repayment of the advance from the Dealer except in the event the Dealer is in default of the Dealer servicing agreement.  Advances are made only after the consumer and Dealer have signed a Consumer Loan contract, we have received the executed Consumer Loan contract and supporting documentation in either physical or electronic form, and we have approved all of the related stipulations for funding. 

4


For accounting purposes, the transactions described under the Portfolio Program are not considered to be loans to consumers.  Instead, our accounting reflects that of a lender to the Dealer.  The classification as a Dealer Loan for accounting purposes is primarily a result of (1) the Dealer’s financial interest in the Consumer Loan and (2) certain elements of our legal relationship with the Dealer.

Purchase Program

The Purchase Program differs from our Portfolio Program in that the Dealer receives a one-time payment from us at the time of assignment to purchase the Consumer Loan instead of a cash advance at the time of assignment and future Dealer Holdback payments.  For accounting purposes, the transactions described under the Purchase Program are considered to be originated by the Dealer and then purchased by us.

Program Enrollment

Beginning August 5, 2019, Dealers may enroll in our Portfolio Program without incurring an enrollment fee. Prior to August 5, 2019, Dealers enrolled in our Portfolio Program by (1) paying an up-front, one-time fee of $9,850, or (2) agreeing to allow us to retain 50% of their accelerated Dealer Holdback payment(s) on the first 100 Consumer Loan assignments.

Access to the Purchase Program is typically only granted to Dealers that meet one of the following:

assigned at least 100 Consumer Loans under the Portfolio Program;
franchise dealership; or
independent dealership that meets certain criteria upon enrollment.

Revenue Sources

Credit Acceptance derives its revenues from the following principal sources:

Finance charges, which are comprised of: (1) servicing fees earned as a result of servicing Consumer Loans assigned to us by Dealers under the Portfolio Program; (2) finance charge income from Purchased Loans; (3) fees earned from our third party ancillary product offerings; (4) monthly program fees of $599, charged to Dealers under the Portfolio Program; and (5) fees associated with certain Loans;
Premiums earned on the reinsurance of vehicle service contracts; and
Other income, which primarily consists of ancillary product profit sharing, remarketing fees, interest, Dealer enrollment fees, Dealer support products and services and GPS Starter Interrupt Devices (“GPS-SID”) fees.  For additional information, see Note 8 to the consolidated financial statements contained in Item 8 to this Form 10-K, which is incorporated herein by reference.

The following table sets forth the percent relationship to total revenue of each of these sources:
 
 
For the Years Ended December 31,
Percent of Total Revenue
 
2019
 
2018
 
2017
Finance charges
 
92.0
%
 
91.5
%
 
91.1
%
Premiums earned
 
3.4
%
 
3.6
%
 
3.7
%
Other income
 
4.6
%
 
4.9
%
 
5.2
%
Total revenue
 
100.0
%
 
100.0
%
 
100.0
%



5


Operations

Sales and Marketing.  Our target market is approximately 60,000 independent and franchised automobile dealers in the United States.  We have market area managers located throughout the United States that market our programs to prospective Dealers, enroll new Dealers, and support active Dealers.  The number of Dealer enrollments and active Dealers for each of the last three years are presented in the table below:
For the Years Ended December 31,
 
Dealer Enrollments
 
Active Dealers (1)
2017
 
4,491

 
11,551

2018
 
4,671

 
12,528

2019
 
4,482

 
13,399


(1)
Active Dealers are Dealers who have received funding for at least one Loan during the period.

Once Dealers have enrolled in our programs, the market area managers work closely with the newly enrolled Dealers to help them successfully launch our programs within their dealerships.  Market area managers also provide active Dealers with ongoing support and consulting focused on improving the Dealers’ success on our programs, including assistance with increasing the volume and performance of Consumer Loan assignments.

Dealer Servicing Agreement. As a part of the enrollment process, a new Dealer is required to enter into a Dealer servicing agreement with Credit Acceptance that defines the legal relationship between Credit Acceptance and the Dealer.  The Dealer servicing agreement assigns the responsibilities for administering, servicing, and collecting the amounts due on Consumer Loans from the Dealers to us.  Under the typical Dealer servicing agreement, a Dealer represents that it will only assign Consumer Loans to us that satisfy criteria established by us, meet certain conditions with respect to their binding nature and the status of the security interest in the purchased vehicle, and comply with applicable state and federal laws and regulations.

The typical Dealer servicing agreement may be terminated by us or by the Dealer upon written notice.  We may terminate the Dealer servicing agreement immediately in the case of an event of default by the Dealer.  Events of default include, among other things:

the Dealer's refusal to allow us to audit its records relating to the Consumer Loans assigned to us;
the Dealer, without our consent, is dissolved; merges or consolidates with an entity not affiliated with the Dealer; or sells a material part of its assets outside the course of its business to an entity not affiliated with the Dealer; or
the appointment of a receiver for, or the bankruptcy or insolvency of, the Dealer.

While a Dealer can cease assigning Consumer Loans to us at any time without terminating the Dealer servicing agreement, if the Dealer elects to terminate the Dealer servicing agreement or in the event of a default, we have the right to require that the Dealer immediately pay us:

any unreimbursed collection costs on Dealer Loans;
any unpaid advances and all amounts owed by the Dealer to us; and
a termination fee equal to 15% of the then outstanding amount of the Consumer Loans assigned to us.

Upon receipt of such amounts in full, we reassign the Consumer Loans and our security interest in the financed vehicles to the Dealer.

In the event of a termination of the Dealer servicing agreement by us, we may continue to service Consumer Loans assigned by Dealers accepted prior to termination in the normal course of business without charging a termination fee.

Consumer Loan Assignment.  Once a Dealer has enrolled in our programs, the Dealer may begin assigning Consumer Loans to us.  For legal purposes, a Consumer Loan is considered to have been assigned to us after the following has occurred:

the consumer and Dealer have signed a Consumer Loan contract; and
we have received the executed Consumer Loan contract and supporting documentation in either physical or electronic form.


6


For accounting and financial reporting purposes, a Consumer Loan is considered to have been assigned to us after the following has occurred:

the Consumer Loan has been legally assigned to us; and
we have made a funding decision and generally have provided funding to the Dealer in the form of either an advance under the Portfolio Program or one-time purchase payment under the Purchase Program.

A Consumer Loan is originated by the Dealer when a consumer enters into a contract with a Dealer that sets forth the terms of the agreement between the consumer and the Dealer for the payment of the purchase price of the vehicle.  The amount of the Consumer Loan consists of the total principal and interest that the consumer is required to pay over the term of the Consumer Loan.  Consumer Loans are written on a contract form provided by us.  Although the Dealer is named in the Consumer Loan contract, the Dealer generally does not have legal ownership of the Consumer Loan for more than a moment and we, not the Dealer, are listed as lien holder on the vehicle title.  Consumers are obligated to make payments on the Consumer Loan directly to us, and any failure to make such payments will result in our pursuing payment through collection efforts.

All Consumer Loans submitted to us for assignment are processed through our Credit Approval Processing System (“CAPS”).  CAPS allows Dealers to input a consumer’s credit application and view the response from us via the Internet.  CAPS allows Dealers to: (1) receive a quick approval from us; (2) interact with our proprietary credit scoring system to optimize the structure of each transaction prior to delivery; and (3) create, electronically execute and print Consumer Loan documents.  All responses include the amount of funding (advance for a Dealer Loan or purchase price for a Purchased Loan), as well as any stipulations required for funding.  The amount of funding is determined using a formula which considers a number of factors including the timing and amount of cash flows expected on the related Consumer Loan and our target return on capital at the time the Consumer Loan is submitted to us for assignment.  The estimated future cash flows are determined based upon our proprietary credit scoring system, which considers numerous variables, including attributes contained in the consumer’s credit bureau report, data contained in the consumer’s credit application, the structure of the proposed transaction, vehicle information and other factors, to calculate a composite credit score that corresponds to an expected collection rate.  Our proprietary credit scoring system forecasts the collection rate based upon the historical performance of Consumer Loans in our portfolio that share similar characteristics.  The performance of our proprietary credit scoring system is evaluated monthly by comparing projected to actual Consumer Loan performance.  Adjustments are made to our proprietary credit scoring system as necessary.  For additional information on adjustments to forecasted collection rates, please see the Critical Accounting Estimates section in Item 7 of this Form 10-K, which is incorporated herein by reference.

While a Dealer can submit any legally compliant Consumer Loan to us for assignment, the decision whether to provide funding to the Dealer and the amount of any funding is made solely by us.  Through our Dealer Service Center, we perform all significant functions relating to the processing of the Consumer Loan applications and bear certain costs of Consumer Loan assignment, including the cost of assessing the adequacy of Consumer Loan documentation, compliance with underwriting and legal guidelines and the cost of verifying employment, residence and other information provided by the Dealer.

We audit Consumer Loan files for legal and underwriting guidelines on a daily basis in order to assess whether our Dealers are operating in accordance with the terms and conditions of our Dealer servicing agreement.  We occasionally identify breaches of the Dealer servicing agreement and depending upon the circumstances, and at our discretion, we may:

change pricing or charge the Dealer fees for future Consumer Loan assignments;
reassign the Consumer Loans back to the Dealer and require repayment of the related advances and/or purchase payments; or
terminate our relationship with the Dealer.

Consumer Loans that have been assigned to us can be reassigned back to the Dealer, at the Dealer’s discretion, as follows:

an individual Consumer Loan may be reassigned within 180 days of assignment. We require repayment of the related advance or purchase payment and, if requested more than 90 days after assignment, payment of a fee; and
all Consumer Loans assigned under the Portfolio Program may be reassigned through termination of the Dealer servicing agreement, as described under "Dealer Servicing Agreement," above.


7


Our business model allows us to share the risk and reward of collecting on the Consumer Loans with the Dealers, more so with the Portfolio Program than the Purchase Program. Such sharing is intended to motivate the Dealer to assign better quality Consumer Loans, follow our underwriting guidelines, comply with various legal regulations, meet our credit compliance requirements and provide appropriate service and support to the consumer after the sale. In addition, our Dealer Service Center works closely with Dealers to assist them in resolving any documentation deficiencies or funding stipulations. We believe this arrangement causes the interests of the Dealer, the consumer and us to all be aligned.

We measure various criteria for each Dealer against other Dealers in their geographic area as well as the top performing Dealers. Dealers are assigned a Dealer rating based upon the performance of their Consumer Loans in both the Portfolio and Purchase Programs as well as other criteria. The Dealer rating is one of the factors used to determine the amount paid to Dealers as an advance or to acquire a Purchased Loan.  We provide each Dealer under the Portfolio Program with a monthly statement summarizing all activity that occurred on their Consumer Loan assignments.

Servicing.  Our largest group of collectors services Consumer Loans that are in the early stages of delinquency. Collection efforts typically consist of placing a call to the consumer within one day of the missed payment due date, although efforts may begin later for some segments of accounts. Consumer Loans are segmented into dialing pools by various phone contact profiles in an effort to efficiently contact the consumer. We utilize text messaging as an additional means to contact the consumer. Our collectors work with consumers to attempt to reach a solution that will help them avoid becoming further past due and get them current where possible.

The decision to repossess a vehicle is based on policy-based criteria. When a Consumer Loan is approved for repossession, we continue to service the Consumer Loan while it is being assigned to a third party repossession contractor, who works on a contingency fee basis. Once a vehicle has been repossessed, the consumer can negotiate to redeem the vehicle, whereupon the vehicle is returned to the consumer in exchange for paying off the Consumer Loan balance; or, where appropriate or if required by law, the vehicle is returned to the consumer and the Consumer Loan is reinstated in exchange for a payment that reduces or eliminates the past due balance. If this process is unsuccessful, the vehicle is sold at a wholesale automobile auction. Prior to sale, the vehicle is typically inspected by a representative at the auction who provides repair and reconditioning recommendations. Alternatively, our remarketing representatives may inspect the vehicle directly.  Our remarketing representatives then authorize any repair and reconditioning work in order to maximize the net sale proceeds at auction.

If the vehicle sale proceeds are not sufficient to satisfy the balance owing on the Consumer Loan, the Consumer Loan is serviced by either: (1) our internal collection team, in the event the consumer is willing to make payments on the deficiency balance; or (2) where permitted by law, our external collection team, if it is believed that legal action is required to reduce the deficiency balance owing on the Consumer Loan. Our external collection team generally assigns Consumer Loans to third party collection attorneys who work on a contingency fee basis.

Collectors service Consumer Loans through our servicing platform, which consists of the following two systems:

The collection system, which assigns Consumer Loans to collectors through a predictive dialer and records all collection activity, including:
details of past phone conversations with the consumer;
collection letters sent;
promises to pay;
broken promises;
repossession orders; and
collection attorney activity.  

The servicing system, which maintains a record of all transactions relating to Consumer Loan assignments and is a primary source of data utilized to:
determine the outstanding balance of the Consumer Loans;
forecast future collections;
analyze the profitability of our program; and
evaluate our proprietary credit scoring system.


8


Ancillary Products

We provide Dealers the ability to offer vehicle service contracts to consumers through our relationships with Third Party Providers (“TPPs”). A vehicle service contract provides the consumer protection by paying for the repair or replacement of certain components of the vehicle in the event of a mechanical failure. The retail price of the vehicle service contract is included in the principal balance of the Consumer Loan. The wholesale cost of the vehicle service contract is paid to the TPP, net of an administrative fee retained by us. We recognize our fee as part of finance charges on a level-yield basis based upon forecasted cash flows. The difference between the wholesale cost and the retail price to the consumer is paid to the Dealer as a commission. Under the Portfolio Program, the wholesale cost of the vehicle service contract and the commission paid to the Dealer are charged to the Dealer’s advance balance. TPPs process claims on vehicle service contracts that are underwritten by third party insurers. We bear the risk of loss for claims on certain vehicle service contracts that are reinsured by us. We market the vehicle service contracts directly to our Dealers. Our agreement with one of our TPPs allows us to receive profit sharing payments depending on the performance of the vehicle service contracts.

VSC Re Company (“VSC Re”), our wholly-owned subsidiary, is engaged in the business of reinsuring coverage under vehicle service contracts sold to consumers by Dealers on vehicles financed by us.  VSC Re currently reinsures vehicle service contracts that are offered through one of our TPPs.  Vehicle service contract premiums, which represent the selling price of the vehicle service contract to the consumer, less fees and certain administrative costs, are contributed to trust accounts controlled by VSC Re.  These premiums are used to fund claims covered under the vehicle service contracts.  VSC Re is a bankruptcy remote entity.  As such, our exposure to fund claims is limited to the trust assets controlled by VSC Re and our net investment in VSC Re.

We provide Dealers the ability to offer Guaranteed Asset Protection (“GAP”) to consumers through our relationships with TPPs. GAP provides the consumer protection by paying the difference between the loan balance and the amount covered by the consumer's insurance policy in the event of a total loss of the vehicle due to severe damage or theft. The retail price of GAP is included in the principal balance of the Consumer Loan. The wholesale cost of GAP is paid to the TPP, net of an administrative fee retained by us. We recognize our fee as part of finance charges on a level-yield basis based upon forecasted cash flows. The difference between the wholesale cost and the retail price to the consumer is paid to the Dealer as a commission. Under the Portfolio Program, the wholesale cost of GAP and the commission paid to the Dealer are charged to the Dealer’s advance balance. TPPs process claims on GAP contracts that are underwritten by third party insurers. Our agreement with one of our TPPs allow us to receive profit sharing payments depending on the performance of the GAP contracts.

Under our Purchase Program, we provide Dealers that meet certain criteria the ability to offer vehicle service contracts and GAP to consumers through the Dealers’ relationships with TPPs. The retail price of the vehicle service contract and/or GAP is included in the principal balance of the Consumer Loan and is paid to the Dealer. Under this arrangement, we do not receive an administrative fee and the Dealers’ TPPs process claims.

We provided Dealers in certain states the ability to purchase GPS-SID through our relationship with a TPP.  Through this program, Dealers could install GPS-SID on vehicles financed by us that can be activated if the consumer fails to make payments on their account, and can result in the prompt repossession of the vehicle.  Dealers purchased GPS-SID directly from the TPP.  The TPP paid us a fee for each device sold, at which time the fee revenue was recognized in other income within our consolidated statements of income. Effective during the second quarter of 2019, we no longer provide Dealers the ability to purchase GPS-SID through this program. We allowed Dealers to install previously purchased GPS-SID on vehicles financed by us until September 1, 2019.

Competition

The market for consumers who do not qualify for conventional automobile financing is large and highly competitive.  The market is currently served by “buy here, pay here” dealerships, banks, captive finance affiliates of automobile manufacturers, credit unions and independent finance companies both publicly and privately owned.  Many of these companies are much larger and have greater resources than us.  We compete by offering a profitable and efficient method for Dealers to finance consumers who would be more difficult or less profitable to finance through other methods.  In addition, we compete on the basis of the level of service provided by our Dealer Service Center and sales personnel.


9


Customer and Geographic Concentrations

No single Dealer accounted for more than 10% of total revenues during any of the last three years.  Additionally, no single Dealer’s Loans receivable balance accounted for more than 10% of total Loans receivable balance as of December 31, 2019 or 2018.  The following tables provide information regarding the five states that were responsible for the largest dollar volume of Consumer Loan assignments and the related number of active Dealers during 2019, 2018 and 2017:
 
For the Year Ended December 31, 2019
(Dollars in millions)
Consumer Loan Assignments

Active Dealers (2)
 
Dollar Volume (1)

% of Total

Number

% of Total
Michigan
$
359.9


9.5
%

838


6.3
%
Ohio
265.2


7.0
%

898


6.7
%
New York
245.6


6.5
%

778


5.8
%
Texas
201.5


5.3
%

918


6.9
%
New Jersey
188.7


5.0
%

363


2.7
%
All other states
2,511.3


66.7
%

9,604


71.6
%
Total
$
3,772.2


100.0
%

13,399


100.0
%
 
For the Year Ended December 31, 2018
(Dollars in millions)
Consumer Loan Assignments
 
Active Dealers (2)
 
Dollar Volume (1)
 
% of Total
 
Number
 
% of Total
Michigan
$
364.1

 
10.1
%
 
804

 
6.4
%
Ohio
260.1

 
7.2
%
 
858

 
6.8
%
New York
229.4

 
6.4
%
 
726

 
5.8
%
Texas
196.7

 
5.5
%
 
847

 
6.8
%
Indiana
167.4

 
4.7
%
 
428

 
3.4
%
All other states
2,378.1

 
66.1
%
 
8,865

 
70.8
%
Total
$
3,595.8

 
100.0
%
 
12,528

 
100.0
%
 
For the Year Ended December 31, 2017
(Dollars in millions)
Consumer Loan Assignments
 
Active Dealers (2)
 
Dollar Volume (1)
 
% of Total
 
Number
 
% of Total
Michigan
$
285.7

 
10.0
%
 
792

 
6.9
%
Ohio
209.8

 
7.3
%
 
777

 
6.7
%
Texas
189.7

 
6.6
%
 
847

 
7.3
%
New York
176.4

 
6.1
%
 
690

 
6.0
%
Maryland
132.0

 
4.6
%
 
291

 
2.5
%
All other states
1,879.5

 
65.4
%
 
8,154

 
70.6
%
Total
$
2,873.1

 
100.0
%
 
11,551

 
100.0
%

(1)
Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program.  Payments of Dealer Holdback and accelerated Dealer Holdback are not included.
(2)
Active Dealers are Dealers who have received funding for at least one Loan during the year.

Geographic Financial Information

For the three years ended December 31, 2019, 2018 and 2017, all of our revenues were derived from the United States.  As of December 31, 2019 and 2018, all of our long-lived assets were located in the United States.


10


Seasonality

Our business is seasonal with peak Consumer Loan assignments and collections occurring during the first quarter of the year.  Historically, this seasonality has not had a material impact on our interim results. However, upon adoption of the current expected credit loss ("CECL") impairment model on January 1, 2020, this seasonality is expected to have a material impact on our interim results, as we will be required to recognize a significant provision for credit losses expense at the time of assignment. For additional information, see Note 2 to the consolidated financial statements contained in Part II - Item 8 of this Form 10-K, which is incorporated herein by reference.

Regulation

Our business is subject to laws and regulations, including the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and various other state and federal laws and regulations.  These laws and regulations, among other things, require licensing and qualification; limit interest rates, fees and other charges associated with the Consumer Loans assigned to us; require specified disclosures by Dealers to consumers; govern the sale and terms of ancillary products; and define the rights to repossess and sell collateral.  Failure to comply with these laws or regulations could have a material adverse effect on us by, among other things, limiting the jurisdictions in which we may operate, restricting our ability to realize the value of the collateral securing the Consumer Loans, making it more costly or burdensome to do business or resulting in potential liability.  The volume of new or modified laws and regulations has increased in recent years and has increased significantly in response to issues arising with respect to consumer lending.  From time to time, legislation and regulations are enacted which increase the cost of doing business, limit or expand permissible activities or affect the competitive balance among financial services providers.  Proposals to change the laws and regulations governing the operations and taxation of financial institutions and financial services providers are frequently made in the U.S. Congress, in the state legislatures and by various regulatory agencies.  This legislation may change our operating environment in substantial and unpredictable ways and may have a material adverse effect on our business.

In July 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted and a number of its provisions became effective in July 2011.  The Dodd-Frank Act restructured and enhanced the regulation and supervision of the financial services industry and created the Bureau of Consumer Financial Protection (the “Bureau”).  We are subject to supervision by the Bureau. The Bureau has rulemaking and enforcement authority over certain non-depository institutions, including us.  The Bureau is specifically authorized, among other things, to take actions to prevent companies providing consumer financial products or services and their service providers from engaging in unfair, deceptive or abusive acts or practices in connection with consumer financial products and services, and to issue rules requiring enhanced disclosures for consumer financial products or services.  Under the Dodd-Frank Act, the Bureau also may restrict the use of pre-dispute mandatory arbitration clauses in contracts between covered persons and consumers for a consumer financial product or service.  The Bureau also has authority to interpret, enforce and issue regulations implementing enumerated consumer laws, including certain laws that apply to our business.  Further, the Bureau has issued rules allowing it to supervise non-depository “larger participants” in certain markets for consumer financial services and products. On June 10, 2015, the Bureau released its larger participant rule defining which nonbank automotive finance companies will be subject to supervision. The rule provides that nonbank auto finance companies that make, acquire or refinance 10,000 or more loans or leases in a year will come under Bureau supervision. The rule was officially published in the Federal Register on June 30, 2015, and became effective on August 31, 2015.

The Dodd-Frank Act and regulations promulgated thereunder, including by the Bureau, are likely to affect our cost of doing business, may limit or expand our permissible activities, may affect the competitive balance within our industry and market areas and could have a material adverse effect on us. Our management continues to assess the Dodd-Frank Act’s probable impact on our business, financial condition and results of operations, and to monitor developments involving the entities charged with promulgating regulations thereunder.  However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and on us in particular, is uncertain at this time.

In addition to the Bureau, other state and federal agencies have the ability to regulate aspects of our business. For example, the Dodd-Frank Act provides a mechanism for state attorneys general to investigate us. Separately, state attorneys general and certain state regulators have authority under their respective rules and laws, to investigate and/or regulate aspects of the business. In addition, the Federal Trade Commission has jurisdiction to investigate aspects of our business. We expect that regulatory investigations by both state and federal agencies will continue and that the results of these investigations could have a material adverse impact on us.


11


We are cooperating with the following inquiries and cannot predict the eventual scopes, durations or outcomes at this time. As a result, we are unable to estimate the reasonably possible loss or range of reasonably possible loss arising from these investigations.

On May 7, 2019, we received a subpoena from the Office of the New York State Attorney General, relating to the Company’s origination and collection policies and procedures in the state of New York.
On April 22, 2019, we received a civil investigative demand from the Bureau of Consumer Financial Protection (the “Bureau”) seeking, among other things, certain information relating to the Company’s origination and collection of Consumer Loans, TPPs and credit reporting. 
On August 14, 2017, we received a subpoena from the Attorney General of the State of Mississippi, relating to the origination and collection of non-prime auto loans in the state of Mississippi. The Company cooperated with the inquiry. On April 23, 2019, the Attorney General of the State of Mississippi, on behalf of the State of Mississippi, filed a complaint in the Chancery Court of the First Judicial District of Hinds County, Mississippi, alleging that the Company engaged in unfair and deceptive trade practices in subprime auto lending, loan servicing, vehicle repossession and debt collection in the State of Mississippi in violation of the Mississippi Consumer Protection Act. The complaint seeks injunctive relief, including civil penalties and disgorgement, and payment of the State’s attorney’s fees and costs. The Company intends to vigorously defend itself in this matter.
On March 18, 2016, we received a subpoena from the Attorney General of the State of Maryland, relating to the Company’s repossession and sale policies and procedures in the state of Maryland. 
On December 9, 2014, we received a civil investigative subpoena from the U.S. Department of Justice pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 directing us to produce certain information relating to subprime automotive finance and related securitization activities.
On December 4, 2014, we received a civil investigative demand from the Office of the Attorney General of the Commonwealth of Massachusetts relating to the origination and collection of non-prime auto loans in Massachusetts. On November 20, 2017 we received a second civil investigation demand from the Office of the Attorney General seeking updated information on its original civil investigation demand, additional information related to the Company's origination and collection of Consumer Loans, and information regarding securitization activities. In connection with this inquiry, we were informed by representatives of the Office of the Attorney General that it believes that the Company may have engaged in unfair and deceptive acts or practices related to the origination and collection of auto loans, which may have caused some of the Company’s representations and warranties contained in securitization documents to be inaccurate.  The investigation relating to the origination, collection and securitization of non-prime auto loans and securities transactions by the Office of the Attorney General remains ongoing.

In addition, governmental regulations which would deplete the supply of used vehicles, such as environmental protection regulations governing emissions or fuel consumption, could have a material adverse effect on us.

Our Dealers must also comply with credit and trade practice statutes and regulations.  Failure of our Dealers to comply with these statutes and regulations could result in consumers having rights of rescission and other remedies that could have a material adverse effect on us.

The sale of vehicle service contracts and GAP by Dealers in connection with Consumer Loans assigned to us from Dealers is also subject to state laws and regulations.  As we are the holder of the Consumer Loans that may, in part, finance these products, some of these state laws and regulations may apply to our servicing and collection of the Consumer Loans.  Although these laws and regulations do not significantly affect our business, there can be no assurance that insurance or other regulatory authorities in the jurisdictions in which these products are offered by Dealers will not seek to regulate or restrict the operation of our business in these jurisdictions.  Any regulation or restriction of our business in these jurisdictions could materially adversely affect the income received from these products.

We believe that we maintain all material licenses and permits required for our current operations and are in substantial compliance with all applicable laws and regulations. Our agreements with Dealers provide that the Dealer shall indemnify us with respect to any loss or expense we incur as a result of the Dealer’s failure to comply with applicable laws and regulations.


12


Team Members

Our team members are organized into three operating functions: Originations, Servicing and Support.

Originations. The originations function includes team members that are responsible for marketing our programs to prospective Dealers, enrolling new Dealers and supporting active Dealers.  Originations also includes team members responsible for processing new Consumer Loan assignments.

Servicing.  The servicing function includes team members that are responsible for servicing the Consumer Loans.  The majority of these team members are responsible for collection activities on delinquent Consumer Loans.

Support.  The support function includes team members that are responsible for information technology, finance, human resources, analytics, credit reporting, corporate legal and compliance activities.

As of December 31, 2019, we had 2,016 full and part-time team members.  Our team members have no union affiliations and we believe our relationship with our team members is in good standing.  The table below presents team members by operating function:
 
 
Number of Team Members
As of December 31,
Operating Function
 
2019
 
2018
 
2017
Originations
 
577

 
584

 
517

Servicing
 
812

 
884

 
810

Support
 
627

 
572

 
490

Total
 
2,016

 
2,040

 
1,817


Available Information

Our Internet address is creditacceptance.com.  We make available free of charge on our Internet web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”).

ITEM 1A.    RISK FACTORS
 
Our inability to accurately forecast and estimate the amount and timing of future collections could have a material adverse effect on results of operations.

Substantially all of the Consumer Loans assigned to us are made to individuals with impaired or limited credit histories or higher debt-to-income ratios than are permitted by traditional lenders.  Consumer Loans made to these individuals generally entail a higher risk of delinquency, default and repossession and higher losses than loans made to consumers with better credit.  Since most of our revenue and cash flows from operations are generated from these Consumer Loans, our ability to accurately forecast Consumer Loan performance is critical to our business and financial results.  At the time of assignment, we forecast future expected cash flows from the Consumer Loan.  Based on these forecasts, which include estimates for wholesale vehicle prices in the event of vehicle repossession and sale, we make an advance or one-time purchase payment to the related Dealer at a level designed to maximize economic profit, a non-GAAP financial measure.  We continue to forecast the expected collection rate of each Consumer Loan subsequent to assignment.  These forecasts also serve as a critical assumption in our accounting for recognizing finance charge income and determining our allowance for credit losses.  Please see the Critical Accounting Estimates – Finance Charge Revenue & Allowance for Credit Losses section in Item 7 of this Form 10-K, which is incorporated herein by reference.  Actual cash flows from any individual Consumer Loan are often different from cash flows estimated at the time of assignment.  There can be no assurance that our forecasts will be accurate or that Consumer Loan performance will be as expected.  In periods with changing economic conditions, accurately forecasting the performance of Consumer Loans is more difficult.  In the event that our forecasts are not accurate, our financial position, liquidity and results of operations could be materially adversely affected.


13


We may be unable to execute our business strategy due to current economic conditions.

Our financial position, liquidity and results of operations depend on management’s ability to execute our business strategy.  Key factors involved in the execution of our business strategy include achieving our desired Consumer Loan assignment volume, continued and successful use of CAPS and pricing strategy, the use of effective credit risk management techniques and servicing strategies, continued investment in technology to support operating efficiency and continued access to funding and liquidity sources.  Although our pricing strategy is intended to maximize the amount of economic profit we generate, within the confines of capital and infrastructure constraints, there can be no assurance that this strategy will have its intended effect.  Please see the Consumer Loan Volume section in Item 7 of this Form 10-K, which is incorporated herein by reference.  Our failure or inability to execute any element of our business strategy could materially adversely affect our financial position, liquidity and results of operations.

We may be unable to continue to access or renew funding sources and obtain capital needed to maintain and grow our business.

We use debt financing to maintain and grow our business.  We currently utilize the following primary forms of debt financing: (1) a revolving secured line of credit; (2) revolving secured warehouse (“Warehouse”) facilities; (3) asset-backed secured financings (“Term ABS”); and (4) senior notes.  We cannot guarantee that the revolving secured line of credit or the Warehouse facilities will continue to be available beyond their current maturity dates, on acceptable terms, or at all, or that we will be able to obtain additional financing on acceptable terms or at all.  The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, our financial position, our results of operations, and the capacity for additional borrowing under our existing financing arrangements.  If our various financing alternatives were to become limited or unavailable, we may be unable to maintain or grow Consumer Loan volume at the level that we anticipate and our operations could be materially adversely affected.

The terms of our debt limit how we conduct our business.

The agreements that govern our debt contain covenants that restrict our ability to, among other things:
incur and guarantee debt;
pay dividends or make other distributions on or redeem or repurchase our stock;
make investments or acquisitions;
create liens on our assets;
sell assets;
merge with or into other companies; and
enter into transactions with stockholders and other affiliates.

Some of our debt agreements also impose requirements that we maintain specified financial measures not in excess of, or not below, specified levels.  In particular, our revolving credit facility requires, among other things, that we maintain (i) as of the end of each fiscal quarter, a ratio of consolidated funded debt less unrestricted cash and cash equivalents to consolidated tangible net worth at or below a specified maximum; (ii) as of the end of each fiscal quarter calculated for the two fiscal quarters then ending, consolidated net income of not less than a specified minimum; and (iii) as of the end of each fiscal quarter, a ratio of consolidated income available for fixed charges for the period of four consecutive fiscal quarters most recently ended to consolidated fixed charges for that period of not less than a specified minimum.  These covenants limit the manner in which we can conduct our business and could prevent us from engaging in favorable business activities or financing future operations and capital needs and impair our ability to successfully execute our strategy and operate our business.

A breach of any of the covenants in our debt instruments would result in an event of default thereunder if not promptly cured or waived. Any continuing default would permit the creditors to accelerate the related debt, which could also result in the acceleration of other debt containing a cross-acceleration or cross-default provision. In addition, an event of default under our revolving credit facility would permit the lenders thereunder to terminate all commitments to extend further credit under our revolving credit facility. Furthermore, if we were unable to repay the amounts due and payable under our revolving credit facility or other secured debt, the lenders thereunder could cause the collateral agent to proceed against the collateral securing that debt.  In the event our creditors accelerate the repayment of our debt, there can be no assurance that we would have sufficient assets to repay that debt, and our financial condition, liquidity and results of operations would suffer.


14


A violation of the terms of our Term ABS facilities or Warehouse facilities could have a material adverse impact on our operations.

Under our Term ABS facilities and our Warehouse facilities, (1) we have various obligations and covenants as servicer and custodian of the Consumer Loans contributed thereto and in our individual capacity and (2) the special purpose subsidiaries to which we contribute Consumer Loans have various obligations and covenants.  A violation of any of these obligations or covenants by us or the special purpose subsidiaries, respectively, may result in our being unable to obtain additional funding under our Warehouse facilities, the termination of our servicing rights and the loss of servicing fees, and may result in amounts outstanding under our Term ABS financings and our Warehouse facilities becoming immediately due and payable.  In addition, the violation of any financial covenant under our revolving secured line of credit facility is an event of default or termination event under certain of the Term ABS facilities and our Warehouse facilities.  The lack of availability from any or all of these Term ABS facilities and Warehouse facilities may have a material adverse effect on our financial position, liquidity, and results of operations.

The conditions of the U.S. and international capital markets may adversely affect lenders with which we have relationships, causing us to incur additional costs and reducing our sources of liquidity, which may adversely affect our financial position, liquidity and results of operations.

Periodically, there has been uncertainty in the global capital markets and the overall economy.  Such uncertainty can result in disruptions in the financial sector and affect lenders with which we have relationships.  Disruptions in the financial sector may increase our exposure to credit risk and adversely affect the ability of lenders to perform under the terms of their lending arrangements with us.  Failure by our lenders to perform under the terms of our lending arrangements could cause us to incur additional costs that may adversely affect our liquidity, financial condition and results of operations.  There can be no assurance that future disruptions in the financial sector will not occur that could have similar adverse effects on our business.

Our substantial debt could negatively impact our business, prevent us from satisfying our debt obligations and adversely affect our financial condition.
 
We have a substantial amount of debt, which could have negative consequences, including the following:
our ability to obtain additional financing for Consumer Loan assignments, working capital, debt refinancing or other purposes could be impaired;
a substantial portion of our cash flows from operations will be dedicated to paying principal and interest on our debt, reducing funds available for other purposes;
we may be vulnerable to interest rate increases, as some of our borrowings, including those under our revolving credit facility, bear interest at variable rates;
we could be more vulnerable to adverse developments in our industry or in general economic conditions;
we may be restricted from taking advantage of business opportunities or making strategic acquisitions; and
we may be limited in our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate.

Due to competition from traditional financing sources and non-traditional lenders, we may not be able to compete successfully.

The automobile finance market for consumers who do not qualify for conventional automobile financing is large and highly competitive.  The market is served by a variety of companies including "buy here, pay here" dealerships.  The market is also currently served by banks, captive finance affiliates of automobile manufacturers, credit unions and independent finance companies both publicly and privately owned.  Many of these companies are much larger and have greater financial resources than are available to us, and many have long standing relationships with automobile dealerships.  Providers of automobile financing have traditionally competed based on the interest rate charged, the quality of credit accepted, the flexibility of loan terms offered and the quality of service provided to dealers and consumers.  We may be unable to compete successfully in the automobile finance market or, due to the intense competition in this market, our results of operations, cash flows and financial condition may be adversely affected as we adjust our business in response to competitive pressures.  Increasing advance rates on Loans has the impact of reducing the return on capital we expect to earn on Loans.  Additionally, if we are unsuccessful in maintaining and expanding our relationships with Dealers, we may be unable to accept Consumer Loans in the volume and on the terms that we anticipate.


15


We may not be able to generate sufficient cash flows to service our outstanding debt and fund operations and may be forced to take other actions to satisfy our obligations under such debt.

Our ability to make payments of principal and interest on indebtedness will depend in part on our cash flows from operations, which are subject to economic, financial, competitive and other factors beyond our control.  We cannot assure you that we will maintain a level of cash flows from operations sufficient to permit us to meet our debt service obligations.  If we are unable to generate sufficient cash flows from operations to service our debt, we may be required to sell assets, refinance all or a portion of our existing debt or obtain additional financing.  There can be no assurance that any refinancing will be possible or that any asset sales or additional financing can be completed on acceptable terms or at all.

Interest rate fluctuations may adversely affect our borrowing costs, profitability and liquidity.

Our profitability may be directly affected by the level of and fluctuations in interest rates, whether caused by changes in economic conditions or other factors, which affect our borrowing costs.  Our profitability and liquidity could be materially adversely affected during any period of higher interest rates.  We monitor the interest rate environment and employ strategies designed to mitigate the impact of increases in interest rates.  We can provide no assurance, however, that our strategies will mitigate the impact of increases in interest rates.

The phaseout of the London Interbank Offered Rate ("LIBOR"), or the replacement of LIBOR with a different reference rate, could result in a material adverse effect on our business.

In July 2017, the United Kingdom Financial Conduct Authority (the authority that regulates LIBOR) announced that it would phase out LIBOR by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established or if alternative rates or benchmarks will be adopted. Our revolving secured line of credit, certain Warehouse facilities, and our interest rate cap agreements utilize LIBOR as a benchmark for calculating the applicable interest rates. Changes in the method of calculating LIBOR, the elimination of LIBOR or the replacement of LIBOR with an alternative rate or benchmark, such as the Secured Overnight Financing Rate, may require us to renegotiate or amend these facilities, which may adversely affect interest rates and result in higher borrowing costs. This could materially adversely affect our financial position, liquidity and results of operations.

Reduction in our credit rating could increase the cost of our funding from, and restrict our access to, the capital markets and adversely affect our liquidity, financial condition and results of operations.

Credit rating agencies evaluate us, and their ratings of our debt and creditworthiness are based on a number of factors.  These factors include our financial strength and other factors not entirely within our control, including conditions affecting the financial services industry generally.  As the financial services industry and the financial markets periodically face difficulties, there can be no assurance that we will maintain our current ratings.  Failure to maintain those ratings could, among other things, adversely limit our access to the capital markets and affect the cost and other terms upon which we are able to obtain financing.

We may incur substantially more debt and other liabilities.  This could exacerbate further the risks associated with our current debt levels.

We may be able to incur substantial additional debt in the future.  Although the terms of our debt instruments contain restrictions on our ability to incur additional debt, these restrictions are subject to exemptions that could permit us to incur a substantial amount of additional debt.  In addition, our debt instruments do not prevent us from incurring liabilities that do not constitute indebtedness as defined for purposes of those debt instruments.  If new debt or other liabilities are added to our current debt levels, the risks associated with our having substantial debt could intensify.

The regulation to which we are or may become subject could result in a material adverse effect on our business.

Reference should be made to Item 1. Business “Regulation” for a discussion of regulatory risk factors.


16


Adverse changes in economic conditions, the automobile or finance industries, or the non-prime consumer market could adversely affect our financial position, liquidity and results of operations, the ability of key vendors that we depend on to supply us with services, and our ability to enter into future financing transactions.

We are subject to general economic conditions which are beyond our control.  During periods of economic slowdown or recession, delinquencies, defaults, repossessions and losses may increase on our Consumer Loans and Consumer Loan prepayments may decline.  These periods are also typically accompanied by decreased consumer demand for automobiles and declining values of automobiles securing outstanding Consumer Loans, which weakens collateral coverage and increases the amount of a loss in the event of default.  Significant increases in the inventory of used automobiles during periods of economic recession may also depress the prices at which repossessed automobiles may be sold or delay the timing of these sales.  Additionally, higher gasoline prices, declining stock market values, unstable real estate values, resets of adjustable rate mortgages to higher interest rates, increasing unemployment levels, general availability of consumer credit or other factors that impact consumer confidence or disposable income could increase loss frequency and decrease consumer demand for automobiles as well as weaken collateral values of automobiles.  Because our business is focused on consumers who do not qualify for conventional automobile financing, the actual rates of delinquencies, defaults, repossessions and losses on these Consumer Loans could be higher than that of those experienced in the general automobile finance industry, and could be more dramatically affected by a general economic downturn.

We rely on Dealers to originate Consumer Loans for assignment under our programs.  High levels of Dealer attrition, due to a general economic downturn or otherwise, could materially adversely affect our operations.  In addition, we rely on vendors to provide us with services we need to operate our business.  Any disruption in our operations due to the untimely or discontinued supply of these services could substantially adversely affect our operations.  Finally, during an economic slowdown or recession, our servicing costs may increase without a corresponding increase in finance charge revenue.  Any sustained period of increased delinquencies, defaults, repossessions or losses or increased servicing costs could also materially adversely affect our financial position, liquidity and results of operations and our ability to enter into future financing transactions.

Technological advancements or changes to trends in the automobile industry such as new autonomous driving technologies or car- and ride-sharing programs could decrease consumer demand for automobiles.  Decreased consumer demand for automobiles could negatively impact demand for our financing programs as well as weaken collateral values of automobiles, which could materially adversely affect our financial position, liquidity and results of operations.

Litigation we are involved in from time to time may adversely affect our financial condition, results of operations and cash flows.

As a result of the consumer-oriented nature of the industry in which we operate and uncertainties with respect to the application of various laws and regulations in some circumstances, we are subject to various consumer claims, litigation and regulatory investigations seeking damages, fines and statutory penalties, based upon, among other things, usury, disclosure inaccuracies, wrongful repossession, violations of bankruptcy stay provisions, certificate of title disputes, fraud and breach of contract.  As the assignee of Consumer Loans originated by Dealers, we may also be named as a co-defendant in lawsuits filed by consumers principally against Dealers.  We may also have disputes and litigation with Dealers.  The claims may allege, among other theories of liability, that we breached our Dealer servicing agreement.  We may also have disputes and litigation with vendors and other third parties. The claims may allege, among other theories of liability, that we breached a license agreement or contract. The damages, fines and penalties that may be claimed by consumers, regulatory agencies, Dealers, vendors or other third parties in these types of matters can be substantial. The relief requested by plaintiffs varies but may include requests for compensatory, statutory and punitive damages and injunctive relief, and plaintiffs may seek treatment as purported class actions. A significant judgment against us in connection with any litigation or arbitration could have a material adverse effect on our financial position, liquidity and results of operations.

For a description of significant litigation to which we are a party, see Note 16 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.


17


Changes in tax laws and the resolution of uncertain income tax matters could have a material adverse effect on our results of operations and cash flows from operations.

We are subject to income tax in many of the various jurisdictions in which we operate.  Increases in statutory income tax rates and other adverse changes in applicable law in these jurisdictions could have an adverse effect on our results of operations.  In the ordinary course of business, there are transactions and calculations where the ultimate tax determination is uncertain.  At any one time, multiple tax years are subject to audit by various taxing jurisdictions.  We provide reserves for potential payments of tax to various tax authorities related to uncertain tax positions.  Please see the Critical Accounting Estimates – Uncertain Tax Positions section in Item 7 of this Form 10-K, which is incorporated herein by reference.  We adjust these liabilities as a result of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities.  Such payments could have a material adverse effect on our results of operations and cash flows from operations. 

Our dependence on technology could have a material adverse effect on our business.

All Consumer Loans submitted to us for assignment are processed through our internet-based CAPS application, which enables our Dealers to interact with our proprietary credit scoring system.  Our Consumer Loan servicing platform is also technology based.  We rely on these systems to record and process significant amounts of data quickly and accurately and believe that these systems provide us with a competitive advantage.  All of these systems are dependent upon computer and telecommunications equipment, software systems and Internet access.  The temporary or permanent loss of any components of these systems through hardware failures, software errors, operating malfunctions, the vulnerability of the Internet or otherwise could interrupt our business operations, harm our business and adversely affect our competitive advantage.  In addition, our competitors could create or acquire systems similar to ours, which would adversely affect our competitive advantage.

Our systems, and the equipment, software and Internet access on which they depend, may be subject to cyber attacks, security breaches and other cybersecurity incidents. Although the cybersecurity incidents we have experienced to date have not had a material effect on our business, financial condition or results of operations, there can be no assurance that cybersecurity incidents will not have a material adverse effect on us in the future.

We rely on a variety of measures to protect our technology and proprietary information, including copyrights and a comprehensive information security program.  However, these measures may not prevent misappropriation or infringement of our intellectual property or proprietary information, which would adversely affect us.  In addition, our competitors or other third parties may allege that our systems, processes or technologies infringe their intellectual property rights.

Our ability to integrate computer and telecommunications technologies into our business is essential to our success.  Computer and telecommunications technologies are evolving rapidly and are characterized by short product life cycles.  We may not be successful in anticipating, managing or adopting technological changes on a timely basis.  While we believe that our existing information systems are sufficient to meet our current demands and continued expansion, our future growth may require additional investment in these systems.  We cannot assure that adequate capital resources will be available to us at the appropriate time.

Our use of electronic contracts could impact our ability to perfect our ownership or security interest in Consumer Loans.

Our systems permit origination and assignment of Consumer Loans in electronic form. We have engaged a TPP to facilitate the process of creating, establishing control of and storing electronic contracts in a manner that enables us to perfect our ownership or security interest in the electronic contracts by satisfying the requirements for “control” of electronic chattel paper under the Uniform Commercial Code.

Although the law governing the perfection of ownership and security interests in electronic contracts was enacted in 2001, the statutory requirements for the relevant control arrangements have not been meaningfully tested in court. In addition, market practices regarding control of electronic contracts are still developing. As a result, there is a risk that the systems employed by us or any TPP to maintain control of the electronic contracts may not be sufficient as a matter of law to give us a perfected ownership or security interest in the Consumer Loans evidenced by electronic contracts. In addition, technological failure, including failure in the security or access restrictions with respect to the systems, and operational failure, such as the failure to implement and maintain adequate internal controls and procedures, could also affect our ability to obtain or maintain a perfected ownership or security interest in the Consumer Loans evidenced by electronic contracts (or the priority of such interests). Our failure or inability to perfect our ownership or security interest in the Consumer Loans could materially adversely affect our financial position, liquidity and results of operations.


18


Reliance on third parties to administer our ancillary product offerings could adversely affect our business and financial results.

We have relationships with TPPs to administer vehicle service contracts and GAP underwritten by third party insurers and financed by us.  We depend on these TPPs to evaluate and pay claims in an accurate and timely manner.  We also have a relationship with a TPP to administer GPS-SID. If our relationships with these TPPs were modified, disrupted, or terminated, we would need to obtain these services from an alternative administrator or provide them using our internal resources.  We may be unable to replace these TPPs with a suitable alternative in a timely and efficient manner on terms we consider acceptable, or at all.  In the event we were unable to effectively administer our ancillary products offerings, we may need to eliminate or suspend our ancillary product offerings from our future business, we may experience a decline in the performance of our Consumer Loans, our reputation in the marketplace could be undermined, and our financial position, liquidity and results of operations could be adversely affected.

We are dependent on our senior management and the loss of any of these individuals or an inability to hire additional team members could adversely affect our ability to operate profitably.

Our senior management average over 16 years of experience with us.  Our success is dependent upon the management and the leadership skills of this team.  In addition, competition from other companies to hire our team members possessing the necessary skills and experience required could contribute to an increase in team member turnover.  The loss of any of these individuals or an inability to attract and retain additional qualified team members could adversely affect us.  There can be no assurance that we will be able to retain our existing senior management or attract additional qualified team members.

Our reputation is a key asset to our business, and our business may be affected by how we are perceived in the marketplace.

Our reputation is a key asset to our business.  Our ability to attract consumers through our Dealers is highly dependent upon external perceptions of our level of service, trustworthiness, business practices and financial condition.  Negative publicity regarding these matters could damage our reputation among existing and potential consumers and Dealers, which could make it difficult for us to attract new consumers and Dealers and maintain existing Dealers.  Adverse developments with respect to our industry may also, by association, negatively impact our reputation or result in greater regulatory or legislative scrutiny or litigation against us.

The concentration of our Dealers in several states could adversely affect us.

Dealers are located throughout the United States.  During the year ended December 31, 2019, our five largest states (measured by advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program) contained 28.4% of our Dealers. While we believe we have a diverse geographic presence, for the near term, we expect that significant amounts of Consumer Loan assignments will continue to be generated by Dealers in these five states due to the number of Dealers in these states and currently prevailing economic, demographic, regulatory, competitive and other conditions in these states. Changes to conditions in these states could lead to an increase in Dealer attrition or a reduction in demand for our service that could materially adversely affect our financial position, liquidity and results of operations.

Failure to properly safeguard confidential consumer and team member information could subject us to liability, decrease our profitability and damage our reputation.
 
In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and personally identifiable information of our consumers and team members, on our computer networks. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy.

If third parties or our team members are able to breach our network security, the network security of a third party that we share information with or otherwise misappropriate our consumers’ and team members' personal information, or if we give third parties or our team members improper access to our consumers’ and team members' personal information, we could be subject to liability.  This liability could include identity theft or other similar fraud-related claims.  This liability could also include claims for other misuses or losses of personal information, including for unauthorized marketing purposes.  Other liabilities could include claims alleging misrepresentation of our privacy and data security practices.


19


We rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to secure online transmission of confidential consumer and team member information.  Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may result in a compromise or breach of the algorithms that we use to protect sensitive consumer transaction data.  A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations.  We may be required to expend capital and other resources to protect against, or alleviate problems caused by, security breaches or other cybersecurity incidents.  Although we have experienced cybersecurity incidents from time to time that have not had a material effect on our business, financial condition or results of operations, there can be no assurance that a cyber attack, security breach or other cybersecurity incident will not have a material adverse effect on us in the future.  Our security measures are designed to protect against security breaches, but our failure to prevent security breaches could subject us to liability, decrease our profitability and damage our reputation.

A small number of our shareholders have the ability to significantly influence matters requiring shareholder approval and such shareholders have interests which may conflict with the interests of our other security holders.

As of December 31, 2019, based on filings made with the SEC and other information made available to us, Prescott General Partners, LLC and its affiliates beneficially owned 16.3% of our common stock, Jill Foss Watson beneficially owned 13.4% of our common stock and Donald Foss, our founder and former Chairman of the Board, beneficially owned 11.0% of our common stock. As a result, these few shareholders are able to significantly influence matters presented to shareholders, including the election and removal of directors, the approval of significant corporate transactions, such as any reclassification, reorganization, merger, consolidation or sale of all or substantially all of our assets, and the control of our management and affairs, including executive compensation arrangements. Their interests may conflict with the interests of our other security holders.

On January 3, 2017, Mr. Foss retired as an officer, director and employee of the Company and entered into a shareholder agreement with the Company. Under the shareholder agreement, Mr. Foss agreed, until the final adjournment of the tenth annual meeting of shareholders held by the Company after the date of the shareholder agreement, to cause all shares beneficially owned by him or any of his affiliates or associates to be voted in accordance with the recommendation of the Company’s Board of Directors with respect to election and removal of directors, certain routine matters and any other proposal to be submitted to the Company’s shareholders with respect to any extraordinary transaction providing for the acquisition of all of the Company’s outstanding common stock.

Reliance on our outsourced business functions could adversely affect our business.

We outsource certain business functions to third party service providers, which increases our operational complexity and decreases our control.  We rely on these service providers to provide a high level of service and support, which subjects us to risks associated with inadequate or untimely service.  In addition, if these outsourcing arrangements were not renewed or were terminated or the services provided to us were otherwise disrupted, we would have to obtain these services from an alternative provider or provide them using our internal resources.  We may be unable to replace, or be delayed in replacing these sources and there is a risk that we would be unable to enter into a similar agreement with an alternate provider on terms that we consider favorable or in a timely manner.  In the future, we may outsource additional business functions.  If any of these or other risks related to outsourcing were realized, our financial position, liquidity and results of operations could be adversely affected.

Our ability to hire and retain foreign information technology personnel could be hindered by immigration restrictions.

A significant portion of our information technology team is composed of foreign nationals whose ability to work for us depends on obtaining the necessary H-1B visas. The H-1B visa category allows U.S. employers to hire qualified foreign nationals to perform services in specialty occupations that require the attainment of at least a bachelor’s degree or its equivalent. Our ability to hire and retain these foreign nationals and their ability to remain and work in the United States are affected by various laws and regulations, including limitations on the number of available H-1B visas, which the U.S. government allocates by lottery. Changes in the laws or regulations affecting the availability, allocation and/or cost of H-1B visas, eligibility for the H-1B visa category, or otherwise affecting the admission or retention of skilled foreign nationals by U.S. employers, or any increase in demand for H-1B visas relative to the limited supply of those visas, may adversely affect our ability to hire or retain foreign information technology personnel and may, as a result, increase our operating costs and impair our business operations.


20


Natural disasters, acts of war, terrorist attacks and threats or the escalation of military activity in response to these attacks or otherwise may negatively affect our business, financial condition and results of operations.

Natural disasters, acts of war, terrorist attacks and the escalation of military activity in response to these attacks or otherwise may have negative and significant effects, such as imposition of increased security measures, changes in applicable laws, market disruptions and job losses.  These events may have an adverse effect on the economy in general.  Moreover, the potential for future terrorist attacks and the national and international responses to these threats could affect the business in ways that cannot be predicted.  The effect of any of these events or threats could have a material adverse effect on our business, financial condition and results of operations.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

Our headquarters is located in Southfield, Michigan, in an office building we purchased in 1993, which includes approximately 136,000 square feet of space. Additionally, in August 2018, we purchased a second office building in Southfield, which includes approximately 297,000 square feet of space, that was used to consolidate operations from our current and previous Southfield leased locations and that we intend to use to accommodate future growth. We have a mortgage loan from a commercial bank that is secured by a first mortgage lien on the second office property.

We lease approximately 54,000 square feet of office space in Southfield and approximately 31,000 square feet of office space in Henderson, Nevada. The lease for the Southfield space expires in July 2021. The lease for the Henderson space expires in December 2022. We have renewal options on both of our office space leases. Additionally, there currently is a significant amount of unoccupied office space available for lease in the markets where we operate.

ITEM 3.    LEGAL PROCEEDINGS

In the normal course of business and as a result of the consumer-oriented nature of the industry in which we operate, we and other industry participants are frequently subject to various consumer claims, litigation and regulatory investigations seeking damages, fines and statutory penalties. The claims allege, among other theories of liability, violations of state, federal and foreign truth-in-lending, credit availability, credit reporting, consumer protection, warranty, debt collection, insurance and other consumer-oriented laws and regulations, including claims seeking damages for alleged physical and mental harm relating to the repossession and sale of consumers' vehicles and other debt collection activities. As the assignee of Consumer Loans originated by Dealers, we may also be named as a co-defendant in lawsuits filed by consumers principally against Dealers. We may also have disputes and litigation with Dealers. The claims may allege, among other theories of liability, that we breached our Dealer servicing agreement. We may also have disputes and litigation with vendors and other third parties. The claims may allege, among other theories of liability, that we breached a license agreement or contract. The damages, fines and penalties that may be claimed by consumers, regulatory agencies, Dealers, vendors or other third parties in these types of matters can be substantial. The relief requested by plaintiffs varies but may include requests for compensatory, statutory and punitive damages and injunctive relief, and plaintiffs may seek treatment as purported class actions. An adverse ultimate disposition in any action to which we are a party
or otherwise subject could have a material adverse impact on our financial position, liquidity and results of operations.

For a description of significant litigation to which we are a party, see Note 16 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.

ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.

21


PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
Our common stock is traded on The Nasdaq Global Select Market® under the symbol “CACC”.

Holders
 
As of February 4, 2020, we had 255 shareholders of record and approximately 24,400 beneficial holders of our common stock based upon securities position listings furnished to us.

Stock Performance Graph
 
The following graph compares the percentage change in the cumulative total shareholder return on our common stock during the period beginning January 1, 2015 and ending on December 31, 2019 with the cumulative total return on the NASDAQ Composite Index and a peer group index based upon approximately 100 companies included in the Dow Jones U.S. Financial Services Index.  The comparison assumes that $100 was invested on January 1, 2015 in our common stock and in the foregoing indices and assumes the reinvestment of dividends. 
 
https://cdn.kscope.io/ceca5111ca4900e56c490393688bf662-stockpricechart2019a01.jpg
Stock Repurchases

The following table summarizes our stock repurchases for the three months ended December 31, 2019:

ISSUER PURCHASES OF EQUITY SECURITIES
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
October 1 through October 31, 2019
 

 
$

 

 
213,550

November 1 through November 30, 2019
 
309,526

 
430.40

 
309,526

 
904,024

December 1 through December 31, 2019
 
134,311

 
432.07

 
134,311

 
769,713

 
 
443,837

 
$
430.90

 
443,837

 
 

(1)
On November 7, 2019, our board of directors authorized the repurchase by us from time to time in the open market or in privately negotiated transactions of up to one million shares of our common stock. The authorization, which was announced on November 13, 2019, does not have a specified expiration date.

22


ITEM 6.    SELECTED FINANCIAL DATA

The selected financial data presented below are derived from our audited consolidated financial statements and should be read in conjunction with our consolidated financial statements as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017, and notes thereto, and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included elsewhere in this Form 10-K, and are incorporated herein by reference.
(Dollars in millions, except per share data)
 
Years Ended December 31,
 
 
2019
 
2018
 
2017
 
2016
 
2015
Income Statement Data:
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
Finance charges
 
$
1,369.4

 
$
1,176.8

 
$
1,011.5

 
$
874.3

 
$
730.5

Premiums earned
 
51.0

 
46.6

 
41.1

 
43.0

 
48.2

Other income
 
68.6

 
62.4

 
57.4

 
51.9

 
46.6

Total revenue
 
1,489.0

 
1,285.8

 
1,110.0

 
969.2

 
825.3

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
Salaries and wages
 
193.3

 
167.8

 
140.1

 
126.5

 
116.4

General and administrative
 
65.1

 
55.7

 
55.5

 
48.2

 
37.8

Sales and marketing
 
70.2

 
67.7

 
58.4

 
49.4

 
45.9

Provision for credit losses
 
76.4

 
56.9

 
129.3

 
90.2

 
41.5

Interest
 
196.2

 
156.6

 
120.2

 
97.7

 
76.0

Provision for claims
 
30.1

 
26.0

 
22.7

 
26.0

 
33.2

Loss on extinguishment of debt
 
1.8

 

 

 

 

Total costs and expenses
 
633.1

 
530.7

 
526.2

 
438.0

 
350.8

Income before provision for income taxes
 
855.9

 
755.1

 
583.8

 
531.2

 
474.5

Provision for income taxes
 
199.8

 
181.1

 
113.6

 
198.4

 
174.8

Net income
 
$
656.1

 
$
574.0

 
$
470.2

 
$
332.8

 
$
299.7

Net income per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
34.71

 
$
29.52

 
$
24.12

 
$
16.37

 
$
14.35

Diluted
 
$
34.57

 
$
29.39

 
$
24.04

 
$
16.31

 
$
14.28

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
 
18,900,256

 
19,446,067

 
19,497,719

 
20,331,769

 
20,891,695

Diluted
 
18,976,560

 
19,532,312

 
19,558,936

 
20,410,116

 
20,980,753

Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Loans receivable, net
 
$
6,685.2

 
$
5,763.3

 
$
4,619.6

 
$
3,886.6

 
$
3,101.5

All other assets
 
738.0

 
474.1

 
366.0

 
331.4

 
271.1

Total assets
 
$
7,423.2

 
$
6,237.4

 
$
4,985.6

 
$
4,218.0

 
$
3,372.6

Total debt
 
$
4,538.8

 
$
3,820.9

 
$
3,070.8

 
$
2,603.7

 
$
2,067.8

Other liabilities
 
529.1

 
425.6

 
379.0

 
440.6

 
376.7

Total liabilities
 
5,067.9

 
4,246.5

 
3,449.8

 
3,044.3

 
2,444.5

Shareholders' equity (1)
 
2,355.3

 
1,990.9

 
1,535.8

 
1,173.7

 
928.1

Total liabilities and shareholders' equity
 
$
7,423.2

 
$
6,237.4

 
$
4,985.6

 
$
4,218.0

 
$
3,372.6

(1)
No dividends were paid during the periods presented.


23


ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes contained in Item 8 of this Form 10-K, which is incorporated herein by reference.

Overview

We offer financing programs that enable automobile dealers to sell vehicles to consumers, regardless of their credit history.  Our financing programs are offered through a nationwide network of automobile dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing; from repeat and referral sales generated by these same customers; and from sales to customers responding to advertisements for our financing programs, but who actually end up qualifying for traditional financing.

For the year ended December 31, 2019, consolidated net income was $656.1 million, or $34.57 per diluted share, compared to $574.0 million, or $29.39 per diluted share, for the same period in 2018 and $470.2 million, or $24.04 per diluted share, for the same period in 2017.  The growth in 2019 consolidated net income was primarily due to an increase in the average balance of our Loan portfolio. The growth in 2018 consolidated net income was primarily due to an increase in the average balance of our Loan portfolio and an improvement in Consumer Loan performance, partially offset by an increase in our effective tax rate. The increase in our effective tax rate in 2018 was primarily due to the enactment of the Tax Cuts and Jobs Act (the “2017 Tax Act”) in December 2017, which resulted in a one-time reversal of $99.8 million of provision for income taxes in 2017.

The Financial Accounting Standards Board issued a new accounting standard (known as CECL) that will change how we account for our Loans effective January 1, 2020. The net Loan income (finance charge revenue less provision for credit losses) that we will recognize over the life of a Loan equals the cash we collect from the underlying Consumer Loan less the cash we pay to the Dealer. While the total amount of net Loan income we will recognize over the life of the Loan is not impacted by CECL, the timing of when we will recognize this income changes significantly. We believe that recognizing net Loan income on a level-yield basis over the life of the Loan based on expected future net cash flows matches the economics of our business. CECL diverges from economic reality by requiring us to recognize a significant provision for credit losses at the time of assignment for amounts we never expected to realize and finance charge revenue in subsequent periods that is significantly in excess of our expected yields. Given the significant change in timing of net Loan income recognition, we believe the amount of net income that we will report in 2020 under CECL will be significantly lower than what would be reported under current accounting principles generally accepted in the United States of America (“GAAP”). The ultimate financial statement impact of CECL will depend on Consumer Loan assignment volume and the percentage of Consumer Loans assigned to us as Purchased Loans, the size and composition of our Loan portfolio, the Loan portfolio’s credit quality and economic conditions at the time of adoption as well as any refinements to our models, methodologies and judgements. Using reasonable estimates for the preceding factors, we believe net income for the year ended December 31, 2020 will be approximately 30% to 60% lower under CECL than what would be reported under current GAAP, with the greatest impact occurring in the quarter of adoption (approximately 50% to 80% lower). To the extent those factors differ from our current estimates, the actual impact of CECL on 2020 net income could vary from this expectation, and such variance could be material. For additional information, see Note 2 to the consolidated financial statements contained in Part II - Item 8 of this Form 10-K, which is incorporated herein by reference.

Critical Success Factors

Critical success factors include our ability to accurately forecast Consumer Loan performance, access capital on acceptable terms, and maintain or grow Consumer Loan volume at the level and on the terms that we anticipate, with an objective to maximize economic profit.  Economic profit is a non-GAAP financial measure we use to evaluate our financial results and determine incentive compensation.  Economic profit measures how efficiently we utilize our total capital, both debt and equity, and is a function of the return on capital in excess of the cost of capital and the amount of capital invested in the business.


24


Consumer Loan Metrics

At the time a Consumer Loan is submitted to us for assignment, we forecast future expected cash flows from the Consumer Loan.  Based on the amount and timing of these forecasts and expected expense levels, an advance or one-time purchase payment is made to the related Dealer at a price designed to maximize economic profit.

We use a statistical model to estimate the expected collection rate for each Consumer Loan at the time of assignment.  We continue to evaluate the expected collection rate of each Consumer Loan subsequent to assignment.  Our evaluation becomes more accurate as the Consumer Loans age, as we use actual performance data in our forecast.  By comparing our current expected collection rate for each Consumer Loan with the rate we projected at the time of assignment, we are able to assess the accuracy of our initial forecast.  The following table compares our forecast of Consumer Loan collection rates as of December 31, 2019, with the forecasts as of December 31, 2018, as of December 31, 2017, and at the time of assignment, segmented by year of assignment:
 
 
Forecasted Collection Percentage as of (1)
 
Current Forecast Variance from
Consumer Loan Assignment Year
 
December 31, 2019
 
December 31, 2018
 
December 31, 2017
 
Initial
Forecast
 
December 31, 2018
 
December 31, 2017
 
Initial
Forecast
2010
 
77.8
%
 
77.7
%
 
77.6
%
 
73.6
%
 
0.1
 %
 
0.2
 %
 
4.2
 %
2011
 
74.8
%
 
74.7
%
 
74.7
%
 
72.5
%
 
0.1
 %
 
0.1
 %
 
2.3
 %
2012
 
73.9
%
 
73.8
%
 
73.8
%
 
71.4
%
 
0.1
 %
 
0.1
 %
 
2.5
 %
2013
 
73.5
%
 
73.5
%
 
73.5
%
 
72.0
%
 
0.0
 %
 
0.0
 %
 
1.5
 %
2014
 
71.7
%
 
71.7
%
 
71.7
%
 
71.8
%
 
0.0
 %
 
0.0
 %
 
-0.1
 %
2015
 
65.4
%
 
65.4
%
 
65.5
%
 
67.7
%
 
0.0
 %
 
-0.1
 %
 
-2.3
 %
2016
 
64.1
%
 
64.2
%
 
64.8
%
 
65.4
%
 
-0.1
 %
 
-0.7
 %
 
-1.3
 %
2017
 
64.8
%
 
65.5
%
 
65.6
%
 
64.0
%
 
-0.7
 %
 
-0.8
 %
 
0.8
 %
2018
 
65.1
%
 
65.0
%
 

 
63.6
%
 
0.1
 %
 

 
1.5
 %
2019
 
64.6
%
 

 

 
64.0
%
 

 

 
0.6
 %

(1)
Represents the total forecasted collections we expect to collect on the Consumer Loans as a percentage of the repayments that we were contractually owed on the Consumer Loans at the time of assignment.  Contractual repayments include both principal and interest. Forecasted collection rates are negatively impacted by canceled Consumer Loans as the contractual amount owed is not removed from the denominator for purposes of computing forecasted collection rates in the table.

Consumer Loans assigned in 2010 through 2013 and 2018 have yielded forecasted collection results materially better than our initial estimates, while Consumer Loans assigned in 2015 and 2016 have yielded forecasted collection results materially worse than our initial estimates.  For Consumer Loans assigned in 2014, 2017 and 2019, actual results have been close to our initial estimates.

For the year ended December 31, 2019, forecasted collection rates improved for Consumer Loans assigned in 2019, declined for Consumer Loans assigned in 2017 and were generally consistent with expectations at the start of the period for all other assignment years presented.

For the year ended December 31, 2018, forecasted collection rates improved for Consumer Loans assigned in 2018, declined for Consumer Loans assigned in 2016 and were generally consistent with expectations at the start of the period for all other assignment years presented.

The changes in forecasted collection rates impacted forecasted net cash flows (forecasted collections less forecasted Dealer Holdback payments) as follows:
(In millions)
 
For the years ended December 31,
Increase (decrease) in forecasted net cash flows
 
2019
 
2018
 
2017
Dealer Loans
 
$
(7.9
)
 
$
2.0

 
$
(5.6
)
Purchased Loans
 
22.5

 
40.3

 
41.7

Total Loans
 
$
14.6

 
$
42.3

 
$
36.1



25


In addition to the statistical model used to forecast collection rates, we use a model to forecast the timing of future net cash flows. During the fourth quarter of 2017, we updated our net cash flow timing model to incorporate more recent data. The revised forecast resulted in an expected cash flow stream with a lower net present value as compared to the prior forecast, as less cash flows were expected in earlier periods and more cash flows were expected in later periods.

The reduction in net present value was primarily the result of a change in the expected timing of cash flows from longer-term Consumer Loans. Due to our limited historical experience with longer-term Consumer Loans, our prior model relied on extrapolations from the historical performance of shorter-term Consumer Loans to predict the timing of future net cash flows on longer-term Consumer Loans. We used our additional historical experience on these longer-term loans to refine our estimate.

The revision to our net cash flow timing forecast did not impact the amount of undiscounted net cash flows we expected to receive. As a result, the dollar amount of future net portfolio revenue (finance charges less provision for credit losses) was not impacted by the revision. However, the revision did impact the period in which those net revenues are recorded as a portion of the impact of the revised timing estimate was recorded as a current period expense and a portion was recorded as a yield adjustment. For the fourth quarter of 2017, the revision increased provision for credit losses by $41.6 million, reduced finance charge revenue by $7.3 million and reduced net income by $30.8 million. The revision reduced the yield on our Loan portfolio by 90 basis points, which impacts the timing of revenue recognition in future periods.

The following table presents information on the average Consumer Loan assignment for each of the last 10 years:
 
 
Average
 Consumer Loan Assignment Year
 
Consumer Loan (1)
 
Advance (2)
 
Initial Loan Term
(in months)
2010
 
$
14,480

 
$
6,473

 
41
2011
 
15,686

 
7,137

 
46
2012
 
15,468

 
7,165

 
47
2013
 
15,445

 
7,344

 
47
2014
 
15,692

 
7,492

 
47
2015
 
16,354

 
7,272

 
50
2016
 
18,218

 
7,976
 
53
2017
 
20,230

 
8,746
 
55
2018
 
22,158

 
9,635
 
57
2019
 
23,139

 
10,174
 
57

(1)
Represents the repayments that we were contractually owed on Consumer Loans at the time of assignment, which include both principal and interest.
(2)
Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program.  Payments of Dealer Holdback and accelerated Dealer Holdback are not included.

Forecasting collection rates accurately at Loan inception is difficult.  With this in mind, we establish advance rates that are intended to allow us to achieve acceptable levels of profitability, even if collection rates are less than we initially forecast.


26


The following table presents forecasted Consumer Loan collection rates, advance rates, the spread (the forecasted collection rate less the advance rate), and the percentage of the forecasted collections that had been realized as of December 31, 2019.  All amounts, unless otherwise noted, are presented as a percentage of the initial balance of the Consumer Loan (principal + interest).  The table includes both Dealer Loans and Purchased Loans.
 
 
As of December 31, 2019
Consumer Loan Assignment Year
 
Forecasted
Collection %
 
Advance % (1)
 
Spread %
 
% of Forecast
Realized (2)
2010
 
77.8
%
 
44.7
%
 
33.1
%
 
99.8
%
2011
 
74.8
%
 
45.5
%
 
29.3
%
 
99.6
%
2012
 
73.9
%
 
46.3
%
 
27.6
%
 
99.3
%
2013
 
73.5
%
 
47.6
%
 
25.9
%
 
98.8
%
2014
 
71.7
%
 
47.7
%
 
24.0
%
 
98.0
%
2015
 
65.4
%
 
44.5
%
 
20.9
%
 
94.5
%
2016
 
64.1
%
 
43.8
%
 
20.3
%
 
84.8
%
2017
 
64.8
%
 
43.2
%
 
21.6
%
 
68.8
%
2018
 
65.1
%
 
43.5
%
 
21.6
%
 
44.9
%
2019
 
64.6
%
 
44.0
%
 
20.6
%
 
15.4
%

(1)
Represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program as a percentage of the initial balance of the Consumer Loans.  Payments of Dealer Holdback and accelerated Dealer Holdback are not included.
(2)
Presented as a percentage of total forecasted collections.

The risk of a material change in our forecasted collection rate declines as the Consumer Loans age.  For 2015 and prior Consumer Loan assignments, the risk of a material forecast variance is modest, as we have currently realized in excess of 90% of the expected collections.  Conversely, the forecasted collection rates for more recent Consumer Loan assignments are less certain as a significant portion of our forecast has not been realized.

The spread between the forecasted collection rate and the advance rate has ranged from 20.3% to 33.1% over the last 10 years. The spread was at the high end of this range in 2010, when the competitive environment was unusually favorable, and much lower during other years (2015 through 2019) when competition was more intense. The decrease in the spread from 2018 to 2019 was primarily the result of the performance of 2018 Consumer Loans, which has exceeded our initial estimates by a greater margin than those assigned to us in 2019.

27


The following table compares our forecast of Consumer Loan collection rates as of December 31, 2019 with the forecasts at the time of assignment, for Dealer Loans and Purchased Loans separately:
 
 
Dealer Loans
 
Purchased Loans
 
 
Forecasted Collection Percentage as of (1)
 
 
 
Forecasted Collection Percentage as of (1)
 
 
 Consumer Loan Assignment Year
 
December 31, 2019
 
Initial
Forecast
 
Variance
 
December 31, 2019
 
Initial
Forecast
 
Variance
2010
 
77.6
%
 
73.6
%
 
4.0
 %
 
78.7
%
 
73.1
%
 
5.6
%
2011
 
74.6
%
 
72.4
%
 
2.2
 %
 
76.4
%
 
72.7
%
 
3.7
%
2012
 
73.7
%
 
71.3
%
 
2.4
 %
 
75.9
%
 
71.4
%
 
4.5
%
2013
 
73.4
%
 
72.1
%
 
1.3
 %
 
74.4
%
 
71.6
%
 
2.8
%
2014
 
71.6
%
 
71.9
%
 
-0.3
 %
 
72.5
%
 
70.9
%
 
1.6
%
2015
 
64.8
%
 
67.5
%
 
-2.7
 %
 
69.3
%
 
68.5
%
 
0.8
%
2016
 
63.2
%
 
65.1
%
 
-1.9
 %
 
66.6
%
 
66.5
%
 
0.1
%
2017
 
64.2
%
 
63.8
%
 
0.4
 %
 
66.3
%
 
64.6
%
 
1.7
%
2018
 
64.7
%
 
63.6
%
 
1.1
 %
 
66.0
%
 
63.5
%
 
2.5
%
2019
 
64.4
%