Reality Check: Credit Acceptance Corporation

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By Bassem Banafa, Aaron Greenspan and Christine Richard

Executive Summary

Credit Acceptance Corporation (NASDAQ: CACC) is a Michigan-based lender and servicer of deep subprime auto loans. Its motto, "We change lives," reflects the second chance Credit Acceptance says it gives to consumers whose credit histories make it difficult for them to get credit elsewhere. Credit Acceptance reports that it originated over 300,000 loans in 2016 and over 250,000 loans in 2017 through Q3.

CACC Price Per ShareWall Street has embraced Credit Acceptance's business model as a unique way to profit from the extraordinarily high finance charges and fees imposed on subprime borrowers while offloading much of the loan performance risk to dealers. The company's shares have gained more than 2,000% over the last 10 years, outpacing Apple and Google. Its CEO is among the highest-paid executives in the nation, having agreed to a mostly-stock pay package that today may be worth as much as $114 million.

Credit Acceptance's loan performance disclosures belie a deeply flawed business model. In Detroit, Michigan thus far in 2017, nearly one in eight of all available civil lawsuits filed in the city involve Credit Acceptance suing borrowers. Overall, 72% of these lawsuits resulted in the company garnishing the wages or tax refunds of borrowers. In essence, Credit Acceptance is a new kind of hybrid: a debt collector that originates its own loans—a combination that has proved extraordinarily profitable for investors as the business of lending to troubled borrowers has surged since the financial crisis. The risks of that model have yet to be reckoned with. These include:

  • Facilitating price increases during the underwriting process, increasing the risk of Truth In Lending Act violations due to hidden finance charges
  • Profiting from the sale of Vehicle Service Contracts on which Credit Acceptance has undisclosed conflicts, such that these contracts appear to hasten defaults
  • Relying heavily on wage garnishment to collect, even as litigation is rushed with widespread inaccuracies in court filings, leading to a below-average collection rate and a tendency to abandon claims if borrowers obtain legal representation

Part I of this Reality Check examines the regulatory risks facing Credit Acceptance Corporation. Part II examines financial risks, as even in the absence of a regulatory crackdown, the company relies upon a fragile and complex financing structure.


Credit Acceptance Corporation is America's second-largest lender for deep subprime borrowers: those with a bad credit history or no credit history.1 According to the company's Q2 2017 Form 10-Q, 95% of loans had a FICO score of 650 or below or no score at all.2 The company, formerly known as Auto Finance Corporation, was incorporated on August 23, 1972 by Donald A. Foss, a used car salesman who built an empire of used car lots after starting with a single dealership in Detroit. The company's initial stated purpose was to "[lend] money to purchase used automobiles" and to "buy, sell and generally deal with commercial paper"—to borrow from capital markets and lend those funds to buyers of used vehicles.

Today, Credit Acceptance has a market capitalization of over $6 billion. On November 1, 2008, its stock closed at $13.10 per share. Nine years later, it trades at over $286, a 2,083% increase. By comparison, Apple, Inc. stock was worth $13.24 on November 1, 2008. Nine years later, it is worth a mere $170.15, having increased by only 1,185%. Whatever business Credit Acceptance is in, it has been growing at nearly twice the rate of the most valuable company on Earth, and the company responsible for the iPhone, the most profitable technology product in history.3

Foss, "the world's richest used car salesman,"4 sold some of his shares in Credit Acceptance in 2017 for a total of $128 million shortly after his retirement from the company. According to Bloomberg, "He's still the largest shareholder in Credit Acceptance with a $700 million stake," approximately half of his $1.3 billion net worth.5

Perceived Market Advantages

Solid Earnings History

Credit Acceptance has enjoyed an industry reputation as a solid player with "an outstanding track record in a very difficult business."6 As recently as November of 2016, Zacks Investment Research called CACC, "an intriguing choice for investors right now" owing to "solid earnings estimate revision activity over the past month, suggesting analysts are becoming a bit more bullish on the firm's prospects in both the short and long term."7,8 As of the writing of this report, Credit Acceptance does have a solid price-to-earnings ratio of 16.03, which is still lower than that of its much smaller competitor, Nicholas Financial, Inc. (NASDAQ: NICK).9 The company has also beat analysts' earnings forecasts in every quarter of 2017 thus far. It may therefore be tempting to view Credit Acceptance as a value play, even with its stock at stratospheric levels relative to its pre-2008 average price, which hovered below $10 per share.

An Underwriting System That Creates Smarter Loans

When a typical buyer purchases a used car from a dealer that works with Credit Acceptance, the loan is structured through the company's database driven website: the Credit Approval Processing System (CAPS). Credit Acceptance charges dealers $599 per month to access CAPS.10

CAPS allows dealers to upload a record of all their inventory and receive feedback from Credit Acceptance on potential profits across an entire lot. For each deal, a dealer can input information about a borrower (monthly income, co-signer information, bank data, etc.) and deal structure (down payment, interest rate, and loan term) and receive a response within 30 seconds with finalized profit/loss information for every vehicle available. Credit Acceptance markets CAPS to dealers as offering "Guaranteed Credit" and describes its system as "[t]he most powerful selling tool you can offer!" CAPS is integral to Credit Acceptance's claim that it approves "everyone."11

Dealers pay a $9,850 enrollment fee to begin using CAPS. Alternatively, a dealer can avoid the up-front fee by "agreeing to allow [Credit Acceptance] to retain 50% of their first accelerated Dealer Holdback payment."12,13 Either way, Credit Acceptance deducts the additional $599 CAPS monthly fee from dealer profits.

A Growing Dealer Network

Over time, the company has been able to sign up more and more car dealers nationwide. In Q4 2002, the company originated loans from 555 active dealers. During Q3 2017, Credit Acceptance originated loans from 7,737 active dealers.14

Unrecognized Risks

We were moved to ask a fundamental question about Credit Acceptance: is it a lender, or a debt collector? In other industries, these roles have been separated into different roles and companies by market forces. Lenders want to loan to high-quality borrowers so that they can collect on their loans, ideally in full plus interest, and are reluctant to settle for pennies on the dollar. On the flip side, debt collection agencies, who end up purchasing bad loans from lenders for such steeply reduced prices, are driven solely by the opportunity to collect: the cheaper the debt (and thus, the lower the average borrower quality), the greater the opportunity.

While publicly emphasizing its lending role, Credit Acceptance marries both sides of this equation into one entity. Yet as was demonstrated when Glass-Steagall came tumbling down, hybrid financial creatures born of risk-averse and aggressively risk-loving components are immediately dominated by their risk-loving side. In other words, Credit Acceptance is a debt collector on steroids, and thinks of itself as such.

Clause 2.02(a) of its Dealer Servicing Agreement states, "If Credit Acceptance accepts assignment of a Contract for administration, servicing and collection, Credit Acceptance's duties shall consist of holding the Contract Files, collecting payments due under the Contracts as set forth in subsection (b) of this Section 2.02 and applying the amounts collected..." Clause 2.02(b) continues, "Credit Acceptance shall use reasonable efforts to collect all payments called for under the terms and conditions of the Contracts as and when the same shall become due," after which the Agreement discusses Credit Acceptance's option to repossess vehicles. The market hype that it has found a magical lending formula or a way to ensure more accurate loan forecasting is just that: hype.15 The most important question about Credit Acceptance Corporation is how well its loans actually perform. It is a question that the company has gone to great lengths to avoid answering.16 In the words of Don Foss, "Well, you know, when you go public, the one thing I didn't realize is that you actually tell everybody what you do."17

How Credit Acceptance's "Portfolio Program" Works

The Credit Acceptance program is poorly understood according to one dealer we spoke with. "Very few general managers at the store level understand the program. There's no one dealer who understands it in its entirety."

Historically through 2015, about 90% of Credit Acceptance's reported unit volume has come from its "Portfolio Program," in which Credit Acceptance loans money to its "Dealer-Partners"—commonly called used car dealerships—in exchange for assignment of the loan and the right to service the loan, which involves a 20% servicing fee. The remaining small but increasing percentage of the company's business comes from buying loans that dealers have already made, which Credit Acceptance refers to as its "Purchase Program."18

The Credit Acceptance formula is so attractive to dealers because they receive an up-front advance from Credit Acceptance for each sale, regardless of whether the borrower pays back their loan. The dealer is also eligible to receive money from later loan payments, which Credit Acceptance calls "dealer holdback," though these payments are contingent on the dealer closing a group of 100 loans, called a "pool," and that dealer's loans—as a group—performing up to a certain standard.

Not every dealer is able to achieve the formation of a pool. While Credit Acceptance's dealer network has grown over the years, the number of loans each dealer produces has declined on average.19 In the future, the company may have trouble locating additional car dealerships interested in signing up as it gets closer to achieving market saturation.

Dealers are to some degree caught between the promise of easy money in the form of the advance and the restrictions set in place by the federal Truth In Lending Act.20 The Act is a powerful regulatory tool because violations trigger specific monetary penalties, outlined in § 1640. Sub-section (a)(2)(A)(iii) is of particular relevance, explaining that damages are "in the case of an individual action relating to an open end consumer credit plan that is not secured by real property or a dwelling, twice the amount of any finance charge in connection with the transaction, with a minimum of $500 and a maximum of $5,000, or such higher amount as may be appropriate in the case of an established pattern or practice of such failures." State laws may also have separate penalties. As explained below, these statutes and the market pressures of the subprime auto industry are often at odds.

Price Increases During the Underwriting Process

The process of underwriting subprime auto loans is fraught with risk: for the lender, who is taking a chance on a borrower with a history of failing to pay back loans, and for the borrower, who is often presented with a take-it-or-leave-it deal because of credit history and lack of options. "Generally, Credit Acceptance is a last-ditch effort," said one dealer who has used the Purchase Program. "If it doesn't work, I'm not selling them the car."

Under the Truth in Lending Act, consumers financing purchases are entitled to receive written standard disclosures about a loan. This information includes the loan amount, monthly payment, loan term and interest rate. Lenders are permitted to charge a higher interest rate, but not price, based on a borrower's credit risk, though most states cap the maximum allowable rate. In the deep subprime market in which Credit Acceptance operates, Credit Acceptance typically imposes the maximum rate allowed by state law, although as of 2015 its Funding Guidelines policy document outlined a company-wide Fixed Interest Rate of 23.99%, where allowable. Across the entire subprime market, unscrupulous dealers look for ways to increase profits by hiding finance charges in the price of the vehicle or in other fees.

Although it is hardly alone amongst subprime lenders,21 there are at least three ways that Credit Acceptance facilitates hidden finance charges, by providing opportunities for or directly advising dealers to do the following:

  • Buy cheap used car inventory to mark up for high risk borrowers
  • Put inventory on the lot with down payments visible, instead of sale prices
  • Manually override CAPS-suggested pricing during the application process
CAPS: Work The Deal
The CAPS system is Credit Acceptance's proprietary web-based lending tool for auto dealers. It helps dealers determine a loan's optimal pricing based on the lender's income and credit history. Deal add-on profits are shown here as integral parts of the loan from the dealer's profit perspective. Although CAPS is not publicly accessible, screen capture images are embedded in lawsuits and on-line training videos.
Price Override
The CAPS system features a "Manual" option for sales price (the last column on the right) that can be set once a buyer's FICO score is known.

A Credit Acceptance document entitled "Program Set-Up: The Owner's Guide" instructs dealers on how to successfully incorporate the company's lending program into their business. The process begins with an explanation of how to purchase inventory that will work best under the program. Specifically, it tells dealers that they should be buying inventory below Black Book Wholesale Average prices in order to assure a reasonable profit when selling to "higher-risk customers."

A dealer may have access to the occasional auction bargain, but dealers routinely purchase used cars that are worth less than average because of high mileage, wear and tear, or even a history of accidents—and then mark those vehicles up as if they are of higher quality. October 2017 records from ADESA, "a leader in the vehicle remarketing industry since 1989," show that repossessed Credit Acceptance vehicles sold at auction have frequent notes such as "Structural Damage,; AS IS," "INOP," "WONT START," "WONT STAY RUNNING WITH JUMP" and "BRAKE UNSAFE."

Next, Credit Acceptance advises the dealer to display down payments on car windows, implicitly suggesting that it should hide prices. This strategy ensures that consumers don't know the real price of the vehicle—or the price that the dealer would have accepted from a buyer paying all cash up-front. Some dealers have reported unintended consequences:22

"Sounded great because before we signed up the ONLY question anyone asked was 'how much down.' Well now all of a sudden everyone wants to know the total price. It's hard to look at someone with a straight face and tell them a price that's $2500 over high retail... We were like 1/3 to 1/2 less on each one. Customers are not seeming to respond too [sic] well."

"Unless you're selling for a significant amount over what the market dictates, you can't use Credit Acceptance," said another dealer who doesn't use the Portfolio Program, but has used the Purchase Program. A former Credit Acceptance employee confirmed that CAPS generally allows dealers to price vehicles at $2,500 (or higher) over the clean retail price. This is despite the fact that many cars sold should not qualify for "clean" pricing. "You buy rough," one former Credit Acceptance dealer told us.

Furthermore, when a dealer and borrower sit down to arrange financing, it is possible for the dealer to adjust the sale price even further upward based on the borrower's credit profile—a practice apparently common enough that Credit Acceptance added a long disclaimer directly on the CAPS pricing page:

"Please remember that federal and state law prohibit you from raising the selling price (the cash price) of the vehicle simply because the customer is buying the vehicle on credit. Cash and credit buyers must be offered the same selling price for the vehicle."

Indeed, unlike many software applications that confront users with errors that prevent further progress, CAPS is unusually permissive, typically only displaying warnings when the user inputs questionable data for practically any screen, unless a vehicle's VIN or mileage is completely missing. Other seemingly important problems, such as impossible income amounts or deliberately changed vehicle models that could increase a vehicle's price might result in a warning at best, allowing the process to continue.

Since Credit Acceptance requires car buyers to pursue disputes through arbitration and state court records are only sporadically available, there is limited public data on legal battles between the company, dealers, and borrowers that have arisen as a result of these practices. However, we do get a glimpse of how some borrowers have fought back in a June 2014 lawsuit.

Car buyer Corveta Houston purchased a 2005 Buick Lacrosse from Dealz Auto Trade, Inc. in Cleveland, Ohio in 2013. Ms. Houston alleged that Dealz neglected to inform her that her car had previously been in an accident, and priced it at $7,798, or 289% over the NADA "Rough Trade-In" price, according to her complaint.23 She argued that the price differential constituted a hidden finance charge, which pushed her true APR to over 41%.

Houston further alleged that CAPS itself was part of a civil conspiracy between Credit Acceptance and Dealz to charge an excessive price, violate the Truth In Lending Act, and commit usury. Her lawsuit also contained claims under Ohio's Consumer Sales Practices Act (for overcharging for the car relative to market price and engaging in deceptive practices), Ohio's Retail Installment Sales Act (for charging a usurious interest rate above the statutory maximum of 25%), common law fraud, and the FTC Holder Rule for Derivative Liability.

After Houston's case was filed and removed to federal court, Dealz filed its own counter-claim against Credit Acceptance over the CAPS issue, arguing that it should not be held liable for a product that was entirely Credit Acceptance's responsibility.24 The case was dismissed without a finding of wrongdoing after it settled in 2015.25

The Vehicle Service Contract

When a cash-strapped borrower purchases a high-mileage used car, the borrower can be understandably concerned about looming repair costs.26 It's an issue that should worry lenders as well, given that dealers told us the top reason a borrower stops paying on a car loan is because of mechanical breakdown.

The industry's answer to this situation is the Vehicle Service Contract (VSC), an agreement that the dealer will directly, or indirectly via a licensed repair center, fix certain problems with the car for a given number of years or until a certain number of miles have been driven.27 On Credit Acceptance loans, these contracts are pricey—around $1,500 for two years or 24,000 miles of coverage for most policies. Given that the average mileage on vehicles financed through Credit Acceptance is nearly 100,000 miles, and given the low quality of cars available below average wholesale price, repairs are a near-certainty. About half of Credit Acceptance deals involve VSCs.

Based on our analysis of Retail Installment Contracts (RICs) included as part of legal actions by Credit Acceptance against defaulted borrowers in Alabama, California, Michigan, Mississippi, New York, Ohio, and Virginia, we determined that roughly two-thirds of Credit Acceptance defaulted loans involved a VSC. These findings point to two possible conclusions. The first is that those most likely to default—people with weaker credit profiles—are disproportionately likely to be sold these high-priced contracts. This could be because the vehicles they purchase are disproportionately likely to break, and/or because dealers desire some a way to build an additional, undisclosed credit charge into their loans, despite the violation of federal and state Truth In Lending laws. The second is that these contracts, rather than preventing defaults by providing funds for consumers to cover repair costs, may actually be hastening defaults by fueling borrower frustration over rejected claims.

Retail Installment Contract
The Credit Acceptance Retail Installment Contract says little about actual VSC terms. This VSC's $1,780 price is part of the amount financed at an APR of 24.49%, even though the buyer can only afford a cash down payment of $1,074. The deal also includes a $250 "Documentation Fee" even though it is not clear that VSC documents were ever provided.

By adding an expensive VSC to a loan balance, dealers can boost the advances they receive from Credit Acceptance by hundreds of dollars. "Vehicle Service Contracts have been the golden egg for many years," according to a former Credit Acceptance dealer. Although the dealer sells the VSC, in an "Administrator Obligor" arrangement, meaning that the administrator of the contract is obligated to fulfill its terms, the car dealer has no role in preparing the legal terms of the contract or handling claims—it merely serves as a marketing channel. In many states, a special type of insurance license is required to serve as an Administrator Obligor.28

This arrangement is beneficial to car dealers, who have to perform virtually no work in order to earn their commission. They also sometimes have a legal monopoly on the sale of VSCs, which in some states may not be sold direct to consumers outside of a dealership. Dealers in the Credit Acceptance network can simply check a box on the CAPS screen that adds an overpriced VSC to the customer's loan—and adds a boost to the dealer's advance. As of 2015, Credit Acceptance approved VSCs from only four vendors: Wynn's Extended Care, Inc., Old United Casualty Company, Mechanical Protection Plan, and SouthwestRe.29 (Until 2009, Credit Acceptance also had an arrangement with Warrantech.)

This click of a mouse can sometimes turn an unprofitable loan into a profitable one for the car dealer. Accordingly, while VSCs are technically optional and vehicle purchase agreements do clearly state that purchasing a VSC is not necessary to purchase a car, the presence of the VSC line item can be necessary for the dealer to be willing to sell a vehicle at all. As a member of the website "Auto Dealer People" named Mary wrote on March 21, 2010:30

"CAC made it so that you have to put in a warranty in the calculations. (Warranties are optional) but if you take out the warranty you get far less profit and will be unable to make the deal
(The good point about selling cars with warranties is if you have a service department -You can service the cars under the warranty and make money) We made a ton of money servicing the warranty.
I used Wynns and never had a problem getting the warranty work paid for)"

A former Credit Acceptance employee we interviewed told us that he had advised dealerships that they were going to want to put a warranty on every subprime loan. Simultaneously, VSCs have prevented Credit Acceptance from expanding into a number of large dealerships. "Big stores won't sign with Credit Acceptance because they want to sell their own Vehicle Service Contracts," a former dealer said. "Dealers view these funds as their retirement money."

While some dealers have also argued that increasing the price of a loan by adding a VSC is not always desirable because it increases the overall risk that the consumer will default,31 it is important to remember that the dealer immediately assigns the loan to Credit Acceptance Corporation and gets paid its up-front advance regardless of the loan's future performance. Faced with a choice between a higher up-front profit or a small chance of a long-term payoff, many dealers will choose the former.

Itemization of the Amount Financed
One dealer managed to sell a $2,530.00 Vehicle Service Contract on a car priced at $6,500.00, representing one-third of the total amount financed. VSCs can be very lucrative for dealers.

On a typical sale, a car dealer earns anywhere from $29532 to $38533 in fixed profit on a 24 Month/24,000 Mile VSC usually priced between $1,380 to $1,580, though some dealers will charge in excess of $2,800 for the same exact product. (Dealers earn about $150 for the sale of GAP insurance coverage, which covers the difference between the loan balance due and insurance payments if a car is deemed a total loss in a collision.) About $100 of that amount goes to the Third Party Administrator, a portion is set aside to pay for claims and overhead, and the rest is passed on as profit to Credit Acceptance. In one notable instance, a San Francisco-area car dealer sold a VSC for $2,530 on a car worth $6,500.34 Since the price of the VSC is always bundled into the financed amount, that VSC represented one-third of the total amount financed.

With this background, it is difficult to consider the VSC as anything other than a veiled vehicle price increase. That is, in fact, how VSCs are marketed, and how some car dealers think of them. "What profitable opportunities did Wynn's Extended Care provide to you?" one car dealership owner, Travis Armstrong, was asked in a September 3, 2014 deposition. "I guess the ability to make my vehicles more valuable by having an extended warranty on them," he replied.35

For Credit Acceptance, the potential Truth In Lending Act liability is only the beginning of the problem posed by VSCs. The real issues begin when consumers actually try to get their used cars repaired under the terms of their contracts.

Playing the VSC Shuffle

Once a buyer has finally managed to drive off the lot with their new used car and VSC, it can sometimes be merely a matter of days before the car breaks down. Customers inevitably return to the dealership where the vehicle was purchased, but often the dealership will tell the customer that simply examining the car will cost several hundred dollars. Even when customers are able to get a vehicle examined, they are faced with VSC providers that resist paying out claims using a variety of suspect tactics.

Car buyer Penny Bradley's case highlights the lengths that VSC providers will go to in order to avoid honoring claims. Even though Bradley paid for her VSC, she was still denied coverage for a variety of reasons, one of which was that she never actually obtained a contract. In the view of the Third Party Administrator, she had merely signed an "application." Only once the provider acknowledges that the customer has a real "contract" can a claim be filed, the Administrator told her.36

Tijuana Johnson, a New Jersey car buyer who purchased a used 2007 Saturn in 2011, was told by her repair shop that Wynn's Extended Service had rejected her claim because it was still covered by the car manufacturer's original warranty—but the manufacturer's warranty program rejected her claim because Wynn's authorized repair shop had already disassembled the engine. Left in a state of limbo, she filed suit, which consumed the next six years and ultimately spanned several state and federal courts.37

What customers may not realize is that Credit Acceptance rates its dealers on a scale of 1 to 6, with lower ratings reflecting better historical loan performance, among a number of other factors. Dealer ratings are key to future profitability, as a dealer with a "2" rating will receive hundreds of dollars more as part of every loan advance relative to a dealer rated "4," even if those dealers originate the exact same loans. Dealers are thus incentivized to do everything possible to protect their ratings.

According to a former Credit Acceptance employee we interviewed, one factor that determines dealer rating is the dealer's "repair ratio," or the dollar amount of VSC-covered repairs as a percentage of the dollar amount of VSC products sold. The employee explained that a high repair ratio would be an indication that dealers are making loans on poor quality vehicles. A dealer's rating might therefore be penalized.

Yet Credit Acceptance also insists that in order to profit from its underwriting system, dealers should buy cars that are sold below Black Book wholesale price. Such purchasing directives come with the obvious risk that "bargain" vehicles might be of low quality and more likely to require repairs. Each dealer must therefore walk an impossibly fine line between profit margin and future repair likelihood to maintain a good rating. Practically speaking, the best way to do so is to refuse claims.

An article from NBC12 in Richmond, Virginia38 describes this scenario playing out:

"The Hopewell woman bought the car from Unique Auto Sales on Midlothian Turnpike in Richmond back on February 25. She also purchased a 24-month, 24,000-mile service contract from a third party.

Car The vehicle in question from the NBC12 story. Photograph: NBC12.

She said when the dealership delivered the car to her, the check engine light was on.

'I said, 'What's wrong with the car?' and they said, 'Oh, nothing. These things act kind of funny because of the computers and all,'' Lathrop said.

She says the dealership turned the light off and sent her on her way. Seventeen miles later, she stopped to get gas, and the check engine light came on again. Plus, it was hard to start. A diagnostic revealed a timing cam sensor was triggering the light.

She had it towed to an auto shop, where techs told her she needs a new timing belt...which would run about $1,200.

She went back to the dealership but says workers there told her she purchased the car 'as is.' When she pressed to see the manager, she says she was kicked off the property.

She says she also didn't have any luck when she contacted the service contract provider."

The article goes on to state that, "NBC12 also reached out to the service provider, Superior Protection Plan." A corporation search and a trademark search turn up no such company, and no such trademark. Who or what is Superior Protection Plan, and how would any customer (or television investigative journalist) know who is really behind the VSC?

A Google search for Superior Protection Plan yields few clues: the first page of results is full of complaints and scam warnings, as well as advertisements for extended automotive warranties and cookie-cutter websites of questionable origin. No company seems to want to take ownership of the phrase—in fact, Credit Acceptance's Funding Guidelines instruct dealers to avoid listing "Superior Protection Plan" on RICs, in favor of "SouthwestRe." This begs the next question: how did NBC12's journalist even know to contact "Superior Protection Plan" in the first place?

That question is perhaps answered by a lawsuit filed in the Circuit Court of St. Francis County, Arkansas by Carla Walker. Ms. Walker sued Credit Acceptance,39 alleging that the company "used deception and fraud upon Plaintiff in representing (or withholding) the amount she was financing." The lawsuit was removed to federal court in the Eastern District of Arkansas before being remanded back to state court.

Exhibit A to her complaint40 is a copy of a vehicle purchase agreement on a carbon paper form provided for the dealer not by Credit Acceptance, but by paper form company Reynolds and Reynolds.41 Both a VSC and GAP coverage are listed in addition to the vehicle's $13,309.85 base price, and the VSC is described only as "Superior Protection." Additionally, next to "DOCUMENT FEES," there is a discretionary $499.00 charge, set by the dealer regardless of any documents provided. There is no APR listed on the form, let alone Truth In Lending disclosures—only a total amount of $15,478.43. Credit Acceptance started Walker's initial balance at $32,804.84.

Good Documents Are Hard To Find

Walker may not have been given a copy of her standard Credit Acceptance RIC by her dealer, even though she signed it. As Penny Bradley testified,42 it is common practice for dealers to rush customers through paperwork, asking them to sign repeatedly without paying any attention to terms and conditions. In Walker's lawsuit, Credit Acceptance filed its copy of the RIC—but no paperwork explaining her VSC or GAP coverage—as an exhibit43 , noting that Walker agreed to a 28.99% APR and a $17,326.21 finance charge for a vehicle priced at $13,395.00. Only on the RIC was the true VSC provider actually listed: First Automotive Service Corporation, along with "24 Mos. \ 24,000 Miles" as the only terms.

Many Credit Acceptance car buyers never actually see the paperwork associated with their VSC aside from a small box on the RIC, a copy of which they may also never receive. The RIC used for Credit Acceptance deals is written and copyrighted by Credit Acceptance Corporation, which means that dealers simply use a template that Credit Acceptance hands to them; their only job is effectively to fill in the blanks with the help of CAPS. The VSC marketing materials and contracts, on the other hand, are produced by a third-party vendor, and the specific terms of the VSC are only very broadly referred to in the RIC, if at all. In many RICs, as was true for Carla Walker, no terms concerning which parts are covered, repair procedures, acceptable repair shops, etc. are specified. (As of the writing of this report, Ms. Walker's case is ongoing.)

VSC Desktopper
An 11" x 17" dealer "desktopper" for the "First Automotive Standard Vehicle Service Contract." It is unclear which First Automotive VSC product this brochure advertises since no First Automotive contract uses this precise terminology. The desktopper fails to mention First Automotive's parent company or the chain of insurance companies it uses. It also lacks contact information of any kind should the buyer have questions.

Failure to provide documentation is not just an inconvenience. In some states, it's very likely illegal. Georgia law § 33-39-9 requires insurance providers and their agents to provide access to documentation upon request within 30 days. New Mexico law §§ 59A-12A-4 and 59A-18-30 similarly require written agreements for insurance products.

With so little information, whom does one even call to get a copy of the contract? Even assuming that an average car buyer understands what an "obligor" is—a dubious assumption at best—according to the State of California Department of Insurance, "Some obligors are generally better at honoring their contracts than others. Therefore, the most important aspect of any contract is who the obligor is."44 In some cases, by the time a borrower realizes they never received the loan paperwork (including the car title) to begin with and need them, their subprime used car dealer has gone out of business.45 There's no one to call, and no contract to refer back to.

In Penny Bradley's case, the VSC was provided by Wynn's Extended Care, Inc. Her RIC listed a $1,580.00 charge for the "Cost of Optional Extended Warranty or Service Contact Paid to," but the adjacent line had nothing written in it. On top of the application-versus-contract issue, Wynn's ultimately refused to honor her warranty because it claimed that her used 2007 Honda Civic Hybrid counted as an "electric" car, which was ineligible for coverage. She sued.

In a deposition on August 29, 2014, Ms. Bradley was asked, "Other than Exhibit 2 [the VSC application], did you get any documents that had the name Wynn's on it?" Her answer: "No."46

We also got in touch with Samantha Rajapakse, a buyer of a used 2007 Chevrolet Trailblazer with 94,998 miles. She purchased the vehicle in 2014 from 1 Stop Auto Sales in Memphis, Tennessee for $20,134.24, of which she financed $10,893.36 through Credit Acceptance. Included in the financing was a $1,380.00 24 Month/24,000 Mile VSC. Ms. Rajapakse's RIC states, "Refer to the optional extended warranty or service contract for details about coverage and duration," suggesting the existence of a separate document. This wording was standard on Credit Acceptance RICs as early as 2012.

In 2016, Ms. Rajapakse sued Credit Acceptance Corporation in federal court in the Eastern District of Michigan pro se.47,48 In her complaint, she alleged that she had taken her truck to two Chevrolet dealerships near Memphis, and that neither dealer would honor her VSC. She also attempted to bring her vehicle to certified mechanics, who also would not honor the VSC. Her communications with Credit Acceptance, in writing and by phone, did not lead anywhere. She was unable to ascertain where the VSC would be honored, and Credit Acceptance never made it clear to her who was actually behind the VSC or what its terms were. In her complaint, she alleged that she was given a telephone number for a "warranty company unknown." The only name that offers a clue is printed on her RIC: First Automotive Service Corporation.

A Tangled Corporate Structure Obscures Accountability

First Automotive Service Corporation (FASC) was incorporated in New Mexico on January 18, 2000, after which it was registered as a foreign corporation in both Texas and Pennsylvania on February 3, 2000 and July 19, 2000, respectively.

A Google search for the company reveals that despite having at least three corporate entities, FASC does not appear to have its own dedicated website and is surprisingly hard to find in the real world with any degree of certainty. Instead, the generic-sounding brand "First Automotive"—which an average consumer might not directly associate with their stated VSC provider since two words are missing and brands commonly begin with "First"—appears on the Products sub-section of the Agents section of a website belonging to a different company called Southwest Re.

James B. Smith Company Chart
The James B. Smith group of companies is disclosed in Ohio Department of Insurance filings. Although Smith is responsible for and may also control a number of offshore entities, these companies are not treated as "related."

In turn, Southwest Re is also really a number of different and similarly-named companies. Southwest Re, Inc., Southwest Reinsure, Inc., Southwest Reinsure (NM), Inc., and Southwest Risk Management, Inc. are registered in various states as domestic and foreign corporations, including New Mexico, Florida, Pennsylvania, and Georgia. Twenty-odd other companies, including the three FASC entities, share the same Albuquerque P.O. Box, including Warranty Solutions, Inc. and Superior Autocare, Inc. With this information, it becomes slightly clearer that Southwest Re is actually in the automotive warranty business, but the key piece of information—almost guaranteed to be ignored by customers—is the registration mark symbol alongside the First Automotive logo on the Southwest Re website. A search of the United States Patent and Trademark Office (USPTO) trademark database reveals that trademark application number 86139923 for "FIRST AUTOMOTIVE" in the field of "Third-party extended warranty services, namely, vehicle service contracts on vehicles manufactured by others for mechanical breakdown and servicing," is actually registered to Helios Financial Holdings Corp. According to a 2014 interview with its owner, Jim Smith, Helios is the umbrella organization that owns Southwest Re and its many sister organizations.49 The trademark was only granted registration on August 29, 2014. If a car buyer searched for the link between February 1, 2000 (when Helios claims it began using the mark in commerce, over a year before it even existed) and that date, it would have been nearly impossible to tell who was behind the First Automotive brand.

As of October, 2017, the Southwest Re website—heavy on stock photography of smiling Caucasian families, generic icons and stretched-out graphics—contains a curious statement on a page designated for "Contract Holders." (The link to this page only becomes apparent on the home page after the visitor waits through two different animations that last roughly twenty-five seconds. It is the last link to appear.) Above a button labeled "MAKE REQUEST," the site states, "Perhaps you never received a complete copy of your contract from your dealer, or maybe you've misplaced it over time..." This is a stunning near-admission that indeed, perhaps many of Southwest Re's customers, who undoubtedly have no idea that they are Southwest Re customers, "never received a complete copy of [their] contract from [their] dealer." At the very least, the problem is so frequent that the company felt compelled to highlight it on its own website.

Other aspects of Southwest Re's operations raise serious questions as well. Its introductory video makes clear that the company considers car dealers its customers, and that it exists to help them boost and keep "their" profits—not to help fix cars. The company calls itself "a nationwide provider of premier F&I products and agent and dealer participation programs," selling, "highly profitable turnkey solutions for the F&I office." In this context, car repair seems like an afterthought.

In October 2017, under the heading "Claims Paid," the Contract Holders page stated, "Each month, we cover the cost of many claims. In September, we paid $4,600,000." The Internet Archive's cached copy of the same page from a year prior shows that in September of 2016, the company claims to have paid $4.9 million exactly.50 In July, 2016, the number was once again $4.6 million even.51 Yet in June, 2016, the figure was quite specific: $5,211,649.52 The fact that the statement "we paid" is not qualified by whom received payment, or what for, is enough to raise eyebrows after such a vague, generic assertion as "we cover the cost of many claims."53

Another box with the title "Contract Holders Say" and a generic faceless person icon states immediately below, with no quotation marks or any other kind of attribution, "My 10-year contract with SouthwestRe was a terrific experience." Combined with the site's amateur design, this non-quotation from no actual customer is an enormous red flag. At worst, it is boilerplate text mistakenly left in place by a website designer. (Only slightly more convincing testimonials attributed to individuals with names do appear elsewhere on the Southwest Re website.54 )

The VSC products page is also confusing given that the company nominally sells, or owns a company that sells, these very products. Under the heading "Our Exclusive Brands," there are descriptions of First Automotive and other Southwest Re warranty brands, but no product details. Only on the "Agents" side of the site do descriptions of each VSC product offering appear, with tiny pictures of brochures. Yet the site appears to omit contractual terms of any of the company's VSC agreements or even a complete brochure anywhere for marketing purposes.

For a warranty or insurance company, this is unusual. Standard car insurance policies, such as those offered by GEICO or Progressive, include on-line calculators that make terms and pricing transparent. Policy documents are e-mailed or downloadable instantly or within minutes of a policy becoming effective. There is no mystery as to whether your car has coverage, how much, and who is behind it. Yet with First Automotive, a brand corresponding to FASC, in turn a division of Southwest Re, in turn a division of Helios, everything is for some reason shrouded in mystery.

Contract Holders Denied Access To Documents

Perplexed as to how Samantha Rajapakse could be missing her VSC documents, we inquired with Ms. Rajapakse as to whether she had filled out the "Contract Copy Request" form on the Southwest Re website. Ms. Rajapakse replied to us by e-mail and included the transcript of her related e-mail inquiry to Stephen W. King of King & Murray PLLC, counsel for Credit Acceptance. Mr. King had attached a copy of the completed and signed RIC, but not the VSC agreement referenced therein. If Credit Acceptance had the documents, it was not offering to share.

As Credit Acceptance's lawyer responding to her formal complaint, Mr. King was clearly already aware of her allegations in federal court regarding the VSC. Nonetheless, he encouraged her to "follow the procedures set forth in the RIC / Arbitration Clause," without explaining the omission of the VSC documents. In a follow-up message referring to the RIC, Ms. Rajapakse explained to us what she had been led to believe: "[M]any of the customers like me gets [sic] this on our contract and nothing else. [This] is the only thing they have regarding the warranty."

We placed and recorded a call on Ms. Rajapakse's behalf on October 6, 2017 in order to get to the bottom of the issue. After contacting Southwest Re's toll-free telephone number, we were transferred by a receptionist to the "contract holder's department," where our call was answered by David in "Claims." We informed David that we were attempting to get a copy of a contract for a customer who filled out the form on their website and never got a response. David asked for the last eight digits of the vehicle's VIN number, which we provided, and he successfully located the VSC agreement in his database, which he informed us had already expired. We asked for a copy of the agreement anyway.

"Yeah, um, we're unable to send these out—we don't have these on our website yet," David responded. "So with these, uh, I don't direct people to the website; we're working on it with Credit Acceptance as a peer to get these added to our website, but we don't have a copy of these yet." This was confusing, but David went on. "So, I have a digital copy of ones that I have in my system but they are secured in there and I can't remove them to send them out anywhere."

"The contract holder is entitled to a copy of their contract," we pointed out.

"Yeah. I'm aware. I'm unable to send one out as a contract Administrator," David replied. "We don't have these on our website so the only other thing to do would be to direct them back to the selling dealer."

"The contract isn't with the dealer, it's with you," we pressed, attempting to clarify.

We went back and forth several times with David trying to establish how he could look up Ms. Rajapakse's VSC agreement but simultaneously not be able to provide it to her. "I have a digital copy embedded into my system," was the best clarification David could offer. David's supervisor, Jeff Walker (who refused to provide his own last name to us, because he said he was not required to)55 , also insisted that he could not and would not provide us with any documents, not even a blank contract with general terms, which he claimed to have. Mr. Walker referred us to Credit Acceptance, having denied that Ms. Rajapakse had a contract with his company at all. He stated that his company was merely the VSC "Administrator," even though the VSC "Company" listed on the RIC is clearly First Automotive Service Corporation. "We do not hold the contract," he stated. "The bottom line is, I can't send you a copy of the contract, I can't send you a blank page of the contract—I can't send you anything. I don't have the ability to. You have to contact Credit Acceptance."

Superior Protection Plan Contract
An example of the actual "Superior Protection Plan" VSC agreement showing "Credit Acceptance (CA)" as the Lien Holder, First Automotive Service Corporation (FASC) as the Administrator Obligor, and Dealers Assurance Company (DAC) as the insurer. FASC and DAC are both Southwest Re affiliate companies run by James B. Smith.

When we asked about the purpose of the Contract Copy Request form on the Southwest Re website, Mr. Walker responded curtly, "'Cause it's there to help out customers, is there anything else I can help you with, sir?" In the end, we were unable to obtain a copy of Ms. Rajapakse's VSC agreement from Southwest Re.

The complex corporate structure of the Helios/Southwest Re family of companies, along with numerous associated brands, make it far too difficult to ascertain basic facts about a large proportion of the VSC products sold with Credit Acceptance car loans. Furthermore, Southwest Re's explicit referral back to Credit Acceptance raises the question as to whether Southwest Re deliberately acts as an alter-ego of Credit Acceptance in regulated markets where Credit Acceptance may not want to risk its own legal exposure. Our call brought into question the very legitimacy of FASC VSC agreements in the first place: selected by Credit Acceptance to begin with: overpriced, rarely honored, valid for short periods, and based upon phantom terms and conditions frequently unavailable for contract holders to read.

If in fact Credit Acceptance is routing its customers to unusable VSC products, the ramifications could be significant. The company could have liability for tens or hundreds of thousands of fraudulently or improperly-structured loans, and could be forced to refund both principal and interest payments and/or waive late fees on those payments. Especially if there emerges any kind of proof that Credit Acceptance knew that the VSC products it had chosen (and thanks to CAPS, priced) for its customers were not designed to actually pay for necessary repair work, the resulting damage could force the company to record significant unexpected losses. After all, the numbers indicate that a substantial portion of buyers are uncomfortable with buying a used car that has no service contract of any kind.

As of September 26, 2017, James B. Smith agreed to sell the Southwest Re group of companies to one of Canada's largest insurance companies, Industrial Alliance Insurance and Financial Services, Inc., also known as iA Financial Group.56

The Credit Acceptance Corporation Business Model, Part I

Trouble with Insurance Regulators

Despite FASC's refusal to assist, we were able to obtain copies of FASC VSC documents both from the few number of lawsuits where VSC contracts were in the possession of the car buyer and attached to the complaint, and from the Nevada Department of Insurance57 going all the way back to January 2007. FASC documents featured various brand names such as "XTENDED CARE APPLICATION," "HENDRICK AUTOGUARD," "QUANTUM PROTECTION," and the elusive "SUPERIOR PROTECTION PLAN," each with corresponding logos at the top. Since none of these brands match the FASC dealer marketing materials we saw or were ever registered as a trademark with the USPTO, it would have been difficult for a car buyer to pin down each brand's backer without prior knowledge. Even today, internet searches for these brands reveal many confused borrowers.

In the unlikely event that a Credit Acceptance car buyer is able to actually get their hands on their own FASC agreement, one particular disclaimer sticks out:


At best, this is a confusing claim, because four insurance commissioners in Wisconsin, Utah, Missouri and New York have cited FASC, a licensed VSC provider, for violations of each state's respective insurance laws. On January 25, 2007, the Wisconsin Department of Insurance fined FASC $10,000.00 for "failing to file its financial statements." In August of the same year, the Wisconsin Department of Insurance again fined FASC for "failing to comply with an Order of the Commissioner."58 On July 17, 2007, FASC was fined $15,000 by the State of New York because "Respondent acted as a service contract provider without first obtaining an approval of a registration to do so from the Superintendent."59 Within 30 days of each violation, FASC should have reported the violations to the Insurance Commissioner of the State of Utah and the State of Missouri's Department of Insurance, Financial Institutions and Professional Registration—jurisdictions where it was licensed—but it didn't. Instead, it had to pay Utah a $250 "monetary penalty" in March, 200860 and Missouri a $1,000 "voluntary forfeiture" in January, 200961.

In addition, a Texas state court judge issued a permanent injunction against FASC on January 12, 2004 in response to a lawsuit filed by the Texas Department of Licensing and Regulation (TDLR).62 TDLR issued a press release the same day, stating that it had obtained,

"a permanent injunction ordering a New Mexico service contract provider to stop offering or selling extended warranties for automobiles in Texas for which it lacks proof of adequate financial security. Judge Suzanne Covington of the 201st District Court in Austin Monday ordered First Automotive Service Corp. (FASC) of Albuquerque to stop providing, offering, advertising, selling or marketing service contracts unless it can show that the policies will be properly backed."63

The injunction arose out of an investigation into a bankrupt company called Warranty Gold Ltd., which ultimately surrendered its license, and for which FASC once issued VSC contracts. TDLR obtained the injunction on the basis that FASC was lying to customers about its VSC contracts being insured by a company called Dealers Assurance Company (DAC). DAC said it had never heard of, let alone insured, FASC. Soon after, Southwest Re purchased DAC.

While insurance commissioners have targeted FASC repeatedly for its compliance failures, the plethora of service plan brands and corporate entities connected to them has masked the ultimate decision-maker not only from consumers, but from regulators as well. Credit Acceptance chooses the warranties for its dealer-partners. Credit Acceptance receives the bulk of the profits from the sale of each warranty. It even handles the day-to-day operational aspects of maintaining the warranty relationships with dealers. In response to one lawsuit discovery question, Armstrong Auto Sales, Inc. answered as follows: "Wynn's did not provide any training to Travis Armstrong or Armstrong Auto Sales, Inc. Any training would have been performed by Credit Acceptance Corporation ('CAC'). Wynn's provides a Dealer Kit and a rate sheet for dealerships to consult when marketing service contracts."64 During a deposition in the same case, the dealership owner also stated that Credit Acceptance is the first party to receive warranty paperwork—not the warranty provider. "This is what we would send in to Credit Acceptance, and then they send it to Wynn's to start their extended service plan."65

RIC VSC Clause
Credit Acceptance Corporation "may claim benefits" under VSC contracts "if the Vehicle is repossessed." This Alabama contract was used in a California transaction, but location aside, this clause appears in Credit Acceptance contracts nationwide going back years.

Credit Acceptance gets an additional bonus: if and when a car with a VSC agreement is repossessed, it is entitled to the balance of the amount remaining in the trust fund for that service contract—nearly $700.66 Even if the car buyer paid cash up-front, the refund does does not necessarily go back to the buyer.67,68 This is outlined in a confusingly worded clause in the RIC, buried among other terms and conditions. The clause gives Credit Acceptance an additional incentive to repossess vehicles, which court records show, it often does.

This is consistent with previous research on the VSC industry. In 2011, the Better Business Bureau of Eastern Missouri and Southern Illinois released a report entitled "Vehicle Service Contract Industry: How Consumers Lost Millions of Dollars."69 According to that report, based on a survey of 660 complainants, VSC agreements paid for claims only 6.55% of the time, leaving 93.45% of claims denied. On this basis, the Better Business Bureau, which received no response to its report from Missouri's Department of Insurance, concluded, "Lax oversight of the VSC industry has created a national scam that has been evolving for at least 25 years, costing consumers millions of dollars."

While it could be argued that the regulatory landscape for VSCs has fluctuated over time, FASC's track record is too abysmal to ignore. The implications for consumers are real, as complaints filed with state departments of insurance could have a real impact on both FASC's and Credit Acceptance's business practices were it clear how and where VSC products were regulated. Nor do recently-implemented (and optional) electronic contracts solve the key problem that VSC claims are rarely honored due to terms that are poorly understood, if they are visible at all. Given the large number of Credit Acceptance deals that depend upon VSCs, increased regulatory oversight, new legislation, and/or a class-action lawsuit able to recoup losses for affected consumers could each pose serious threats to Credit Acceptance's business model.

Regulatory Risks

Credit Acceptance Corporation's business practices expose it to considerable regulatory risk depending upon how government policies shift over the coming years.

The Garnishment Machine

Credit Acceptance Corporation Local Lawsuits
* As of November, 2017.

Many Credit Acceptance investors believe that the company's long history gives it experience in the subprime lending market and that the company uses its experience to underwrite better loans. The reality is that the company prioritizes learning as much as possible to maximize collections over information that might inform an objective lender about the customer's creditworthiness. The entirety of its underwriting process for borrowers without a FICO score consists of checking that wages reported on paystubs are accurate—not that they are sufficient to pay any particular amount.70 This is in keeping with industry standards (where verification may not happen at all), and is perhaps why subprime loans are sometimes referred to as "liar loans." According to Bloomberg, "Jeff Brown, Ally Financial Inc.'s chief executive, said verifying income isn't the norm. Ally, he said, checked incomes on 65 percent of its subprime car loans. GM Financial's AmeriCredit unit checked roughly the same percentage."71

Michigan 36th District Court Data Availability Credit Acceptance Garnishment Docket Entries in Michigan 36th District Court
Credit Acceptance Garnishment Entries Relative to Michigan 36th District Court Courtwide Garnishment Entries Total Garnishment Fees Paid in Michigan 36th District Court Credit Acceptance Garnishment Cases
We downloaded the entirety of the Michigan 36th District Court docketing system since 1995, comprising nearly 800,000 cases, in order to determine how many could be attributed to Credit Acceptance Corporation. The dockets provide useful insights into the company's business model.

Court records reveal that Credit Acceptance's true business model is based upon an ugly foundation of wage and income tax refund garnishment. Between 1995 and 2006, it applied to garnish either wages or income tax refund deposits in 81.94% of the 17,480 Credit Acceptance cases for which data was available in Michigan's 36th District Court, which includes Detroit. Similarly, in the 18,284 Credit Acceptance cases for which data is available from 2007 through 2017, the company requested garnishment 63.43% of the time. Generally, three out of four Credit Acceptance borrowers who find themselves in court will end up with a garnishment order against them due to their car loan. Such orders can last for years, and sometimes, decades, following people from job to job. Yet garnishment only appears to result in a complete collection of funds about 30% of the time on average, depending on how many years a collector is willing to pursue funds.

Credit Acceptance Activity as Percent of Total Available Michigan 36th District Court Total Docket Credit Acceptance has never disclosed to its investors the extent to which its business model completely depends upon judges doling out garnishment orders in case after case after case after case, often without carefully reviewing the underlying loan documents.72 This is problematic, because any time a publicly-traded company depends on a government process to make money, it exposes itself to regulatory risk should that process suddenly change. Amendments to local court rules, state law, federal law concerning garnishment, and federal law concerning bankruptcy73 could all have a substantial impact on Credit Acceptance's ability to collect from defaulted borrowers. That is why internally, Credit Acceptance's computer systems track which states are more permissive of wage garnishments—another material fact not disclosed to investors.

The company's business model has severely impacted impoverished individuals all over the United States, but especially in Detroit, where between 2008 and 2016, the company's share of the Michigan 36th District Court's docket increased by nearly a factor of ten, from 1.39% to 11.37% of all civil lawsuits filed. In 2017, not yet over at the time of this report's writing, Credit Acceptance's share of the 36th District Court's docket is at an all time high of 11.97%74, surpassing even the company's share during high rates of litigation in the late 1990s. Still more incredible is the sheer number of lawsuits the company is involved in: at least 153,842 non-federal legal actions that we could find nationwide since 1995.75

Michigan 36th District Court Judgment Satisfaction Rate
Average Time Until Judgment Satisfaction in Michigan 36th District Court Garnishment Cases
Years Until Judgment Satisfaction in Michigan 36th District Court Credit Acceptance Garnishment Cases

It is highly unusual for one company to represent such an enormous percentage of any major city's court system activity. Perhaps even more alarming, the 36th District Court charges a recurring $15.00 garnishment fee (payable by check in person at the courthouse), which may make the court dependent on a major filer paying tens or hundreds of thousands of dollars in fees annually. As a result, Credit Acceptance Corporation has helped bring at least $2,349,450 in fee revenue into the coffers of the 36th District Court, out of $24,254,400 charged total during the time period we examined between 1995 and 2017. By 2017, for the first time ever, more than 30% of all of the periodic wage garnishment docket entries in the court's computer system were associated with Credit Acceptance cases filed that year.

The overall court filing statistics also reveal a stark change in Missouri. While Credit Acceptance was involved in an average of 924 Missouri lawsuits per year from 1995 through 2010—almost always as the plaintiff—by 2012, it was only involved in ten lawsuits filed that year, and of those, it was a defendant in seven. From 2013 on, Credit Acceptance virtually disappeared from the Missouri court system. It is possible that the company was reacting to the $1.2 million judgment in the case of Carrie Peel, a car buyer from Independence, Missouri. Or it is possible that other changes in state law convinced management to pull out of the state. Either way, investors were never told about the change.

Perhaps even more astounding is the fact that a 1995 Credit Acceptance garnishment judgment on which the company finally finished collecting in 2017, twenty-two years later, is by no means an outlier. A scatter plot of the company's Detroit dockets containing "JUDGMENT SATISFIED" entries clearly shows that in essence, the company will never stop collecting so long as it can find a customer, and long after it has told Wall Street that a loan has been written off. Plenty of cases from the 1990s were satisfied after 20 years, and many are likely still being collected on today thanks to constantly renewed garnishment judgments and the efforts of persistent lawyers.

That Credit Acceptance may be having trouble collecting of late is hardly out of keeping with industry trends. A Q2 2017 Equifax analysis of subprime auto debt stated, "Performance of recent deep subprime vintages is awful."76 While Credit Acceptance says it doesn't change the terms of loans to mitigate poor collections, it does enter into separate debt collection agreements with completely different terms.

According to a lawyer who has represented Credit Acceptance borrowers in New York, borrowers are frequently approached about settling the balance of their debts once their repossessed vehicle is sold. Borrowers are told that the next step is for the company to take them to court and seek wage garnishment. As a result, borrowers often agree to payment plans, but are disappointed to see that even after a car is sold, their loan balance is little changed. That's because vehicles often sell at auction for amounts far below the elevated prices that borrowers have paid.

One former employee said he was aware of debt restructuring companies calling Credit Acceptance and asking for deals to be restructured so that individuals could keep their cars and continue paying. He believed terms were changed, including interest rate reductions, though this contradicts the company's public stance.

The Credit Acceptance Corporation Business Model, Part II

It goes without saying that Credit Acceptance is abusing the legal system, and it backs off quickly when borrowers hire counsel. Even if each lawsuit were perfectly crafted and justified, there would still be reason to question the company's litigation volume. At such a massive scale, it is inevitable that there will be problems with the final work product in a large number of cases.

"Reasonable Efforts:" Going To State Courts On Bad Math

Credit Acceptance sued Shelley Williams in the Circuit Court of Mobile County, Alabama on May 12, 2014.77 The company's lawyers had already filed over 120 lawsuits in Mobile County that year by the time they got to hers, but Williams's case ended up being different. Unlike most of the other car buyer-borrower-defendants who ended up with judgments against them, Ms. Williams ultimately hired a lawyer, fought back, and won.

By the time Williams's lawyer, Judson E. Crump, entered her case, she had already lost. The court entered a default judgment against her on July 22, 2014 in the amount of $19,371.69 plus court costs—approximately double her 2003 Volkswagen Passat $10,990 cash price at purchase. Crump filed a Motion for Relief from Judgment and Stay of Garnishment on her behalf on October 3, 2014. On November 21, 2014, Judge Rick Stout granted the motion and dismissed the case in its entirety—a remarkable turn of events.

Crump's legal magic trick was checking Credit Acceptance's math. Credit Acceptance's 2014 complaint against Williams knowingly asserted that Williams continued to owe interest on the full amount of her balance starting from January 1, 2012, even though she had made payments as recently as 2013. In addition, Credit Acceptance sought compounding interest of $6,639.34 starting from January 1, 2012 on an amount of $11,071.61 that it was only reasonably able to calculate for the first time starting on August 15, 2013, after the car was repossessed. As Crump noted in his motion, "The 'Affidavit of Account' upon which this Court relied in entering the default judgment in this matter, was obviously false. Rule 60(b)(3) of the Alabama Rules of Civil Procedure authorizes this Court to relieve a party from a judgment entered against it for 'fraud, misrepresentation, or misconduct of an adverse party.'" In Alabama alone, Credit Acceptance has filed upward of 4,000 lawsuits, many using the same Birmingham law firm of Zarzaur & Schwartz, P.C.

Dot Matrix Photocopy
The Installment Sale Contract for Cassie Cannon's car loan was printed on a dot matrix printer that placed each numeric figure in the space below the proper line. Such printers are common at car dealerships, and they are often mis-aligned. This contributes to confusion around pricing, and by the time a case gets to court, makes the work of lawyers and judges that much more difficult.

Alabama isn't the only locale where math errors are apparent. In the case of Cassie Cannon,78 filed in San Francisco Superior Court, errors were everywhere. To start, the car dealer, Valencia Auto, printed her Installment Sale Contract on a mis-aligned dot-matrix printer. Consequently, each line of text, including each number, was printed in the space below the designated line, making the document hopelessly confusing to read. For example, instead of a $100.00 "Document Preparation Fee," it appeared that Ms. Cannon was being charged a $100.00 "Smog Fee Paid To State," which in contrast to the former fee would be statutory and non-negotiable.

Furthermore, Credit Acceptance filed a Declaration Regarding Interest Computation that similarly computed interest from September 27, 2008, "the date of default." Yet the story told by the Credit Acceptance Customer Payment History Report, filed separately as an attachment to another Declaration,79 isn't nearly as clear. To start with, the Balance column is computed incorrectly for some days where multiple transactions appear and is therefore unreliable. In addition, it appears that on September 27, 2008, a Western Union payment bounced, resulting in a subsequent Not Sufficient Funds (NSF) fee and corresponding a transaction reversal. Subsequent payments after the date of default appear on the Customer Payment History, also made via Western Union, but they are not accompanied by NSF fee entries, implying that they cleared. Even so, there are more inexplicable transaction reversals with no accompanying reference number or memo field that nullify each subsequent payment. It is not clear if these reversals were automated or manually entered, but at the end of the day it didn't matter. On June 19, 2013, the judge ruled in Credit Acceptance's favor to the tune of $13,510.68.80

Whether Credit Acceptance's conduct in these cases was fraud, misrepresentation or merely negligent misconduct, the company's enormous litigation volume obviously increases the likelihood that its cases might suffer from defective mathematical calculations. These types of errors caught the attention of Human Rights Watch, which produced a 2016 report entitled, "Rubber Stamp Justice: US Courts, Debt Buying Corporations, and the Poor." The report specifically singles out Credit Acceptance:81

"Several years ago the state district court in Southfield, Michigan began asking its clerks to scrutinize garnishment requests submitted by debt buyers to make sure they were free from errors. 'My court administrator was clearly troubled by these cases,' Judge William Richards told Human Rights Watch. 'She saw some problems and really took it on herself to try and engender some reforms. Our court was more aggressive than most at screening requests for garnishment. At one point we were doing 9,000 garnishments per year and one clerk was screening all of them.'"

"In 2005, the court returned numerous garnishment requests loaded with apparent mistakes to the attorney who had filed them on behalf of debt buyer Credit Acceptance Corporation. 'He filed 60 or 70 garnishment requests in a single day,' Judge Richards recalled. 'There were thousands of dollars' worth of errors.' Some of the garnishment requests appeared to relate to judgments that were void or already satisfied while others appeared to include excessive interest. The court's clerk asked Credit Acceptance's attorney to correct errors and provide additional supporting documentation. Rather than accede to these requests, the attorney sued the court on behalf of his client. He argued that the court's clerks had no right to request additional documentation in support of his garnishment requests."

In the end, Credit Acceptance won its case before the Michigan Supreme Court. The result according to Judge Williams (as told to Human Rights Watch) is that, "with his court administrator and clerks barred from taking the work on, he said, there is no practical way to apply meaningful scrutiny to the garnishment requests."

Harassing Debt Collection Calls That Never Stop

The typical legal strategy of the few plaintiffs' attorneys who have made it a significant part of their career to go after Credit Acceptance has been to focus on the Telephone Consumer Protection Act of 1991 (TCPA), 47 U.S.C. § 227(b)(3). While there are clearly broader issues with Credit Acceptance's business practices, the fact that these suits are so narrowly tailored to violations of this particular law has more to do with the potential monetary rewards per violation (e.g. per robocall) than it does with actual justice for the individuals filing. After all, if someone is receiving non-stop robocalls from Credit Acceptance's collections department, it generally means that a lot had to go wrong with their car and/or loan for them to get to that point.

Employees describe the Credit Acceptance collections department as a "typical collections job," with "[n]ine hour days with an hour lunch break. Solely spent on a dialer system" with "the best 5am."82 One noted, "very few of those gaming the system were terminated even when proof of such gaming was provided..."

Given the preponderance of lawsuits and CFPB complaints surrounding Credit Acceptance's telephonic debt collection practices, the company has considerable exposure in this area.

Talley Complaint Page 1 Talley Complaint Page 2 Talley Complaint Page 3
Randolph Talley, Jr. was prisoner number 134414 at the Central Michigan Correctional Facility when he filed this complaint in federal court in 2013 regarding a violent Credit Acceptance Corporation contractor that allegedly used racial epithets and left him bleeding on the pavement. From a judge's perspective, it would likely appear to be another incomprehensible hand-written pro se complaint, and in fact, Judge Denise Page Hood dismissed the lawsuit two days after it was filed because Talley had filed at least three lawsuits previously in 1993 and 1995, making Talley a "three-striker." While unverified, Talley's heartbreaking story sounds similar to numerous other accounts by Credit Acceptance customers describing completely out-of-control repo contractors.

Out-of-Control Contractors

In addition to telephone harassment, Credit Acceptance has an enormous problem with out-of-control contractors hired to repossess cars. That's according to Credit Acceptance, which sued one of them in federal court in 2016 when the contractor started repossessing cars and keeping them.83

Credit Acceptance customers have reported repo men who have damaged vehicles, garage doors, air conditioning units, municipal poles,84 and in one notable instance, a customer alleged that repo men working for Credit Acceptance committed blatant assault that could be fairly described as a hate crime.85

According to its Q3 2015 earnings call transcript, the company repossesses vehicles attached to about 35% of its loans.86 Episodes such as these could lead to significant damage to the company's reputation.

Pending Investigations

The Credit Acceptance business model has caught the attention of a number of state Attorneys General over the years. So far, since 2014, six different states have begun to investigate the company,87,88,89 as well as one agency of the New York City government90 and two federal agencies.91

Agency Year Action
United States Department of Justice (USDOJ) 2014 Credit Acceptance received a civil investigative subpoena from USDOJ related to its subprime lending practices according to a December 9, 2014 filing.
Federal Trade Commission (FTC) 2017 Credit Acceptance informed investors of an ongoing FTC probe in February, 2017.
Kansas Attorney General 2016 Credit Acceptance signed a Consent Judgment with the Kansas Attorney General on August 15, 2016, alleging that the company's warranty disclaimer violated the Kansas Consumer Protection Act, K.S.A. § 50-639(a)(1). The company was required to send letters to consumers correcting its Kansas Retail Installment Contract language.
Maine Attorney General 2014 Credit Acceptance signed an Assurance of Discontinuance with the Maine Attorney General on April 1, 2014 for violating the Unfair Trade Practices Act, 5 M.R.S. §§ 205-A through 214. The company agreed to cease business dealings with certain dealers.
Maryland Attorney General 2016 Credit Acceptance received a subpoena from the Maryland Attorney General on March 18, 2016 regarding its "repossession and sales policies."
Massachusetts Attorney General 2014 Credit Acceptance received a civil investigative demand on December 4, 2014.
Mississippi Attorney General 2017 Credit Acceptance received a subpoena on August 14, 2017 from the Mississippi attorney general "relating to the origination and collection of non-prime vehicle installment contracts in the state of Mississippi."
New York Attorney General 2015 Credit Acceptance received a subpoena on September 18, 2015 from the New York Attorney General's Civil Rights Bureau.
New York City Department of Consumer Affairs (DCA) 2017 A May 24, 2017 press release states, "DCA will also for the first time be seeking consumer restitution from...financing companies" including Credit Acceptance Corp. for "Deceptive Financing and Illegal Sales Practices."

New York City DCA Petition Excerpt
The New York City Department of Consumer Affairs recently filed a Petition before the Office of Administrative Trials and Hearings alleging serious wrongdoing by Credit Acceptance Corporation and other used car dealers and lenders. Among the allegations specific to Credit Acceptance are illegal price increases, rushing tactics and withholding of key loan documents.
The recent case of the New York City DCA92 is particularly interesting as it highlights several problematic business practices discussed in this report. Specifically, the DCA expressed concern over Credit Acceptance's repeated price hikes in the instance of one consumer loan, and the fact that loan documents were not provided as they should have been. On November 29, 2017, the case settled for $300,000 across all parties involved, with the DCA referring to Credit Acceptance and other similar companies as "predatory" lenders in its press release.93

In addition, subprime auto lender J.D. Byrider recently found itself named in a lawsuit filed by Massachusetts Attorney General on September 26, 2017 in Suffolk County Superior Court, in which the government alleged that the company originated credit-damaging loans to consumers that were "set up to fail."94

The Consumer Financial Protection Bureau

When the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was passed, the National Automobile Dealers Association lobbied for an exemption to the Consumer Financial Protection Bureau (CFPB)'s regulatory authority. The result is a half-measure that requires car dealerships to actually service vehicles in order to qualify for exemption, per the terms of 12 U.S.C. § 5519.95 To the extent that Credit Acceptance dealer-partners do not service cars themselves, dealers may therefore fall under the jurisdiction of the CFPB.

The CFPB started taking action against "Buy-Here-Pay-Here" auto lenders in 2014.96 Effective August 31, 2015, the CFPB implemented a new rule codified at 12 C.F.R. § 1001 and 12 C.F.R. § 1090 entitled, "Defining Larger Participants of the Automobile Financing Market and Defining Certain Automobile Leasing Activity as a Financial Product or Service," which allowed the Bureau to begin regulating major auto lenders. Accordingly, its jurisdiction likely now extends to Credit Acceptance.

As of October 2017, the CFPB had received 655 complaints specifically concerning Credit Acceptance Corporation. Many of the complaints relate to the company's debt collection calls. Other complaint sub-categories include, "Used obscene/profane/abusive language," "Debt was paid," "Debt is not mine," "Fraudulent loan," "Account status incorrect," "Information is not mine," "Seized/Attempted to seize property," "Billing problem," and "Debt was discharged in bankruptcy."

Given the Trump Administration's extremely skeptical stance on the CFPB and the recent resignation of Richard Cordray as the Bureau's Director, its regulatory power in the immediate future may be purely theoretical. Already, a rumored lawsuit against Santander Consumer USA, Inc., the largest subprime auto lender in the United States, may have been delayed due to the controversial installment of Mick Mulvaney as CFPB Director, which is pending review by the United States District Court for the District of Columbia.97,98 Mulvaney is alleged to have ties to Santander lobbyists.99

Securities Law Meets Patent Law

Figure 8
Figure 9
Figures 8 and 9 from the presently invalidated United States Patent 6,950,807 B2, assigned to Credit Acceptance Corporation. As a business method patent, it had almost no chance of holding up in court or before the Patent Trial Appeal Board given recent changes in legal precedent concerning abstract concepts and financial business methods especially.

Credit Acceptance likes to boast about its patented CAPS system. In fact, right on the home page, its Investor Relations website states, "Our Guaranteed Credit Approval program provides automotive dealers with the opportunity to deliver credit approvals to consumers within 30 seconds through the Internet using our patented Credit Approval Processing System (CAPS®.)"100 This statement almost certainly violates SEC Rule 10b-5, 17 C.F.R. § 240.10b-5.

This is because this statement is true only in the most technical sense. While CAPS was once patented as U.S. Patent 6,950,807 B2: System and Method for Providing Financing, that patent is now completely invalid. After a bruising battle before the newly-formed Patent Trial and Appeal Board (PTAB), plaintiff Westlake Services LLC first convinced the USPTO to invalidate claims 1-9, 13, and 34-42101, and then the remaining claims 10-12 and 14-33102.

Credit Acceptance appealed once to the United States Court of Appeals for the Federal Circuit from the district court action underlying the PTAB proceedings, but voluntarily abandoned the appeal in the middle. It also appealed to the Federal Circuit from the second of the two PTAB actions. On June 9, 2017, the Federal Circuit handed Credit Acceptance a defeat, cementing its patent's doom.103

Still, the fight is not over. Westlake Services LLC, also an auto lending business, is continuing to pursue Credit Acceptance in court, alleging that Credit Acceptance filed "sham litigation" while attempting to monopolize the market with an invalid patent.104 The case is ongoing.

In short, competitors are now completely free to copy the Credit Acceptance business model (which they could nearly do before by making minor changes to their business methods to avoid infringement). The questions that investors should be asking are why Credit Acceptance feels so comfortable brazenly lying to investors, and whether copying the company's business model is actually a good idea in the first place.


The stock market has become extraordinarily complacent about corporate wrongdoing. Our research has shown that Credit Acceptance Corporation is reliant on the judicial system to enable its business, yet its model appears to necessitate routine legal violations in order to be sustainable. Furthermore, its public narrative does not match its actual operations. With its vaunted patent-ineligible CAPS technology, Credit Acceptance creates an enivronment in which its used car dealer-partners can and sometimes do commit fraud, charge usurious rates of interest, and sell largely useless VSC products that quickly become the pretext for designed-to-fail loans.105 The company then abuses court systems nationwide (that already favor wealthy corporate litigants) to wring wage garnishment orders out of judges based on faulty interest rate calculations and mathematical errors—which it has sued over to prevent the courts from examining—repossesses the cars it helped sell on fraudulent terms, pockets the balance of the remaining dollars in trust for the aforementioned VSCs, destroys the credit of its borrowers, and then begins the cycle anew with their repossessed and in some cases dangerous vehicles.

The fact is that many Credit Acceptance customers are worse off than they were before coming into contact with the company. The lengths to which Credit Acceptance has gone to exploit its customers has in the past undeniably resulted in short-term gains for investors. In the long term, however, Credit Acceptance is exposed to legislative, regulatory and judicial uncertainty that combined could interrupt or fundamentally alter its business model. That the company refused to answer any of the substantive questions106 we posed to it for this report, despite being publicly traded, does not suggest that its management is acting in good faith.

More broadly, the Credit Acceptance story reveals the importance of transparency in our economy. Car buyers have repeatedly fallen prey to multiple finance charges hidden in standardized Truth In Lending Act paperwork. The company's disclosures in SEC filings have historically fallen far short of the level of detail necessary to understand its business. Limitations in court database systems have even contributed to the curtailed perspective that has prevented policymakers from fully understanding the scope of damage wrought by the company. To avoid future stories like this one, policies must be put in place to ensure that public is better informed. When companies "change lives," it should be for the better.

Appendix A: Re-Examination of the Offshore Re-Insurance Industry

Perhaps the most surprising page on the Southwest Re website is a PDF document entitled "REINSURANCE COMPANY FORMATION, Checklist and Instructions."107 The Southwest Re logo appears in the top right corner of the first four pages, but the remainder of the document is actually a compilation of forms to be sent to several different entities, including a company called Caribbean Management Services Limited, as well as the Financial Services Commission of the Turks and Caicos Islands (TCI).

Southwest Re's actual purpose is the business of setting up reinsurance companies for car dealerships.108 The company even assumed control of the domain name on January 11, 2005.109

A reinsurance company is simply an insurance company that insures other insurance companies. Just as a car owner pays an auto insurance company premiums to cede the risk of getting in a car accident, an insurance company pays a reinsurance company premiums to cede the risk of having to pay out claims on insurance policies.

These entities are referred to as PORCs: Producer-Owned Reinsurance Companies. The PORCs that Southwest Re specializes in creating are located offshore for several reasons. First, the Turks and Caicos Islands—the most popular locale for offshore insurance companies in the world according to data from the National Association of Insurance Commissioners (NAIC)—offer lower capital requirements to form a reinsurance company than any locale within the United States. Second, locating a company in the TCI allows the owner to legally claim no tax or a lower tax rate than would otherwise be possible. Since 2003, when the IRS last seriously examined the issue of PORCs, there has been remarkably little scrutiny from U.S. regulators, despite PORCs being identified under the heading of "Abusive Tax Avoidance Transactions" in a November 4, 2004 IRS Exempt Organizations division "Fiscal Year 2004 Accomplishments" briefing.110 Third, corporate filings from offshore jurisdictions such as TCI, Bermuda, St. Kitts and Nevis, and the British Virgin Islands, are virtually impossible to request. Fourth, regulators are extremely lax in offshore jurisdictions. And fifth, possibly through its own offshore entity (which may be Caribbean Management Services Limited), Southwest Re has a thriving business as a third-party administrator of the companies that it facilitates the creation of. Unsurprisingly, Credit Acceptance also has its own TCI subsidiary, CAC (TCI) Ltd.111

According to 2016 Ohio Department of Insurance documents,112 James B. Smith's insurance company, Dealers Assurance Company (DAC), has reinsurance agreements with 259 offshore firms, 240 of which are located in the TCI with names such as Drive Away Confident Reinsurance Co. Ltd. and Sweet Gum Reinsurance Company, Ltd. Each one of these reinsurance companies likely belongs to a different car dealership or dealership owner located in the United States, and since so many are selling Southwest Re products, they are likely to be Credit Acceptance dealer-partners.

What this means on a practical level is that in many cases, with no specific disclosure to the car buyer or any government agency, the ultimate insurers of FASC/Southwest Re VSC products selected and priced by Credit Acceptance and sold by car dealerships are the car dealerships themselves. That is, unless the dealership has not elected to create its own reinsurance company, in which case Credit Acceptance steps in with its own reinsurance company domiciled in Washington, D.C., VSC Re Company.113

As of December 31, 2013, VSC Re was re-insuring over $40 million of VSC premiums insured by Dealers Assurance Company, making Credit Acceptance DAC's largest client by far. Credit Acceptance's SEC disclosures explain only that VSC Re Company is a subsidiary of Credit Acceptance, and that "VSC Re currently reinsures vehicle service contracts that are underwritten by one of our third party insurers."114 That "one" third party is presumably Southwest Re.

Whether the ultimate insurer of the VSC agreement is the car dealership or Credit Acceptance, James B. Smith wins either way. According to filings in a lawsuit between Southwest Reinsure, Inc. and TCI-based reinsurance company Saffa Reinsurance Co., Ltd., Southwest Re provides a sweeping array of "corporate administration," "tax return preparation and filing," "trust account establishment" and "financial reporting" services to its PORC clients, effectively running them from top to bottom on behalf of the dealerships.115 This is consistent with the PDF on the Southwest Re website, which asks car dealers to provide the type and amount of information that a corporate agent would need to incorporate a company offshore.

In the end, the pile of no-tax or low-tax offshore money becomes working capital for the car dealership, supplemented by the reinsurance premiums that the PORC receives in exchange for assuming the risk of the VSC products paying out more claims than expected. So long as Credit Acceptance car buyers can't get their claims for car service paid, however, that risk doesn't seem very large at all. Some PORCs are even themselves reinsured.

The involvement of hundreds of offshore reinsurance companies in the Credit Acceptance business model, as well as Credit Acceptance's own massive reinsurance company, VSC Re, not to mention its TCI subsidiary, gives its entire enterprise the distinct flavor of fraud. Not only is the VSC a largely useless product practically designed to fail, but it also is the basis for multiple levels of reinsurance madness that in a different era was an IRS "abusive tax avoidance" enforcement priority.

At Southwest Re, James B. Smith is well aware that his business model is, to say the least, aggressive. In a revealing March, 2014 presentation at the "Agent Summit" at Caesars Palace in Las Vegas, NV, Southwest Re CFO Bill Bigley made a number of remarkable statements. His slides describe the PORC industry as having been born from obscure lawsuits and IRS regulatory rulings. As his slides state,

"[A] lawyer came to the rescue. His name is Kirk Borchardt and on behalf of one of his clients, he requested a revenue ruling that would allow an 'administrator' to file a tax return as an insurance company. The [IRS] subsequently released TAM9601001, which allowed service contract administrators to file a tax return as an 'insurance company'... Kirk subsequently became the CEO of Dealers Assurance Company (DAC), our affiliated carrier."

More recently, Bigley described that,

"In 2013...we took a controversial position that our 953(d) electing companies did not have to provide this information. Our position was very sound because once our clients' [sic] made the election for their [reinsurance company] to be taxed as a U.S. corporation, then the company was no longer a 'foreign' corporation. We took this position even though the IRS original instructions were contradictory to this interpretation and to the regulations themselves, which some people criticized us for. Fortunately, our position was later vindicated..."116

The statements from the 2014 presentation are hardly Southwest Re's most controversial move. From 2011 until late 2016, both Southwest Reinsure, Inc. and James Bradford Smith personally were named in a separate lawsuit filed by Security Life Insurance Company of America.117 Southwest Re had agreed to set up an offshore TCI reinsurance scheme for Security Life, and the companies had signed a number of agreements when things started to go wrong. In April 2006, Smith suddenly moved Security Life's $1.28 million trust account from INA Trust FSB to Ohio-based Fifth Third Bank. Security Life stopped receiving statements.

After inquiring about the situation, Security Life was told that the new account was simply the successor to the old one. Paragraph 86 of the Amended Complaint filed April 4, 2012 states, "The [Southwest Re] employee who was responsible for sending monthly statements for the INA Trust Account, and who then told Security Life she would send monthly statements for the Fifth Third Trust Account, understood that the funds in those trust accounts were at all times 'pledged' to Security Life and that Security Life was the beneficiary of those accounts."

It wasn't. The lawsuit continues, "Security Life became aware that the assets...were being held at Fifth Third under a 2006 Trust Agreement, to which Security Life was not a party." The next two paragraphs elucidate further:

"The 2006 Trust Agreement is between Ideal as Grantor, Fifth Third as Trustee, and an SRI-affiliated company called First Automotive Risk Retention Group, Inc. ('First Automotive'), as Beneficiary. Security Life is not mentioned in the 2006 Trust Agreement and had no knowledge of that agreement, or the removal of Security Life as the Beneficiary of the trust assets, until March 2011. Smith signed the 2006 Trust Agreement as President of both Ideal and First Automotive. On information and belief, either Smith or Southwest Re, Inc., the holding company of which he is the sole shareholder, is the sole shareholder of First Automotive."

Smith allegedly appropriated a life insurance company's trust fund for use by FASC118 , a key provider of Credit Acceptance VSC products. From there, the situation devolved quickly. "On or about March 30, 2011, Security Life...once again requested that Fifth Third not permit any distributions or withdrawals from the Fifth Third Trust Account until Security Life was able to resolve its issues with Ideal/SRI and enter into a mutually acceptable plan for the handling of the assets held in trust."

Nonetheless, "Late in the day on April 1, 2011, Fifth Third notified Security Life, through its counsel, that a distribution request had been made, apparently by [Southwest Re] on behalf of Ideal and/or on behalf of First Automotive, and that all assets held in the Fifth Third Trust Account had been distributed. The withdrawal requests, once signed by Smith, were submitted to Fifth Third by an employee of [Southwest Re]." In other words, Smith was personally responsible.

Security Life sued for a declaratory judgment under the theory of alter ego liability, arguing that Smith's many companies were all really one and the same: fronts for James Bradford Smith. What Security Life may not have realized was the extent to which all of those companies existed to serve the interests of Credit Acceptance Corporation.

It remains to be seen whether IRS scrutiny of the "controversial" positions Southwest Re has assumed might increase in the future. If so, Southwest Re's entire business model may no longer be viable. With Credit Acceptance so dependent upon Southwest Re VSC products for profitability, and Southwest Re so tied up in the undisclosed and rather questionable affairs of its founder, James B. Smith, both companies could be exposed to considerable liability.

Appendix B: Court Data Methodology

With the exception of Alabama's Alacourt site, most of the court websites we used for this report allowed us to download a full result set as needed. In order to derive statistics regarding Credit Acceptance Corporation's presence in the Michigan 36th District Court, we developed three software programs in the PHP programming language to obtain, convert, and analyze court records in bulk.

Up through November 27, 2017, the first program scraped court cases from the 36th District Court's public Court Case Inquiry website at We determined that this website serves as a basic front-end for an IBM mainframe system that stores the actual case records. Due to limitations of the website's design, searches for any given entity result in a maximum of 1,000 results, with no ability to limit searches to a specific timeframe or re-order results. Since Credit Acceptance Corporation clearly had more than 1,000 cases filed in the court, we decided to download every possible case from the court since 1995 to find them all.

Case numbers in the 36th District are of the form XXYYYYYY, where XX represents the two-digit year (for example, 99 for 1999 or 17 for 2017) and YYYYYY represents a six-digit serial number starting at 100,000 for each year. We simply requested every single case number for each year from 1995 on until we reached cases filed on or around the last business day in December and began to observe invalid case number errors. Once we had assembled all of the files for each case available, we converted the HTML files to plain text in order to reduce file sizes and ensure accurate string parsing.

As indicated in the report, for earlier case years, fewer cases were available electronically, and for every year we deleted case files that appeared to contain error messages of various sorts and attempted to re-download those files at later times, depending upon server availability. (The court's server appeared to automatically reboot late on Sunday nights, rendering case files we attempted to obtain during those time periods temporarily unavailable.)

With all of the available text files available on our local area network, we then proceeded to analyze the files using several regular expressions based on standard strings we observed in the court dockets. The analysis software was designed to compile statistics for the court as a whole and a subset of cases pertaining to Credit Acceptance Corporation simultaneously.

Our regular expression to find Credit Acceptance Corporation cases searched for the broader case-insensitive string "CREDIT ACCEPTANCE," which potentially could have resulted in false positives (such as a hypothetical company called "General Credit Acceptance"). To mitigate this possibility, we manually reviewed the names of all companies found to match the expression, and did not observe non-Credit Acceptance Corporation matches.

In addition, while calculating the length of time between initial case filing and a "JUDGMENT SATISFIED" docket entry if applicable, we noted many incorrect dates, such as mistyped dates (e.g. 2050 instead of 2005) and system default dates (e.g. January 2, 1989). We manually corrected these errors by searching for time intervals that were negative or excessively large.

We compiled output from our custom software in Microsoft Excel, which we then used to analyze the data. The source code for our analysis software is available at

Appendix C: Unanswered Questions

We never received any response to the e-mail below or to follow-up phone calls placed to the Credit Acceptance Corporation Investor Relations department.

From: Christine Richard
Subject: Questions regarding upcoming report
Date: November 29, 2017 at 1:05 PM


I do research for investors and am working with a team that's writing a report on Credit Acceptance. We have a number of questions for management, which are listed below.

We plan to publish the report on Monday, at which point, it will be available to the public.

  1. Does CAPS allow dealers to change the price of the vehicle during the loan structuring process? In other words, can the price of the vehicle be overridden by the dealer? Does this create risk of Truth-in-Lending violations if the vehicle price is hiked after the underwriting process begins?
  2. Why have the price of Vehicle Service Contracts (VSC) attached to Credit Acceptance loans increased so much in recent years? Are the number of claims paid on these contracts increasing? Could you provide a percentage of claims paid and a dollar amount of claims paid for last year?
  3. Do dealers risk having their dealer rating penalized if they perform repair work under VSCs?
  4. When a car is repossessed and in need of repairs, does Credit Acceptance finance the repairs through an existing VSC on a vehicle?
  5. What is Credit Acceptance's full role regarding these VSCs? Does Credit Acceptance act as the agent? How much is it paid for this? Does Credit Acceptance take the risk/rewards of the VSC back on to its balance sheet via reinsurance? In what percentage of VSCs attached to its loans is Credit Acceptance the ultimate insurer of the risk?
  6. Is it correct that Credit Acceptance doesn't restructure a borrower's loan in any instance? In bankruptcy only? What about if a debt restructuring firm is working with a borrower? Will Credit Acceptance restructure the loan in that case?
  7. How many total lawsuits did Credit Acceptance file against borrowers nationwide last year?
  8. In what percentage of collections cases does Credit Acceptance directly begin with arbitration vs. pursuing garnishment through the courts? How much does Credit Acceptance recover on average as a percentage of the loan from arbitration and how much from court proceedings?
  9. We noticed a discrepancy in a number of DBRS reports concerning various Credit Acceptance securitizations, in which a new line item entitled "Eligible Purchased Contracts" appears at various points in 2017. Can you explain why additional assets appear to have been added to back these securities?
  10. Is it possible for you to send us copies of all the servicer reports for your securitizations?


Christine Richard
Orion Research, LLC


8 Zacks Investment Research has since rated CACC as a "Hold."

13 Dealer holdback is discussed on page 4.

17 "The Don Foss Story," Credit Acceptance Corporation Video

20 The Truth In Lending Act, 15 U.S.C. §§ 1601-1667f, begins with a statement of its purpose: "to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices."

23 Corveta Houston v. Dealz Auto Trade, Inc. et al, Cuyahoga County, Ohio Court of Common Pleas, Case No. CV 14 827795, Document 1

27 Under the Magnuson-Moss Warranty Act, 15 U.S.C § 2301, "service contracts," defined in section 8, are considered separate and apart from various kinds of warranties. Under the law, a "service contract" is "a contract in writing to perform, over a fixed period of time or for a specified duration, services relating to the maintenance or repair (or both) of a consumer product." VSCs are therefore different than automotive warranties, which are provided by a car's original manufacturer.

29 Credit Acceptance Corporation CAPS Funding Guidelines 2015

33 Corveta Houston v. Dealz Auto Trade, Inc. et al, Cuyahoga County, Ohio Court of Common Pleas, Case No. CV 14 827795, Document 1, Page 50

34 Credit Acceptance Corporation v. Nelson J. DeCuire et al, Superior Court of California, County of San Francisco, Case No. CGC 16 550042, Document 1

48 In 2015, Credit Acceptance began offering dealers the option of using electronic contracts in conjunction with CAPS 2.0, which when implemented changed procedures involving document availability. As before, documents may now be easier or harder to obtain depending upon individual dealer compliance with Credit Acceptance rules.

50 Southwest Re Website. Archived via the Internet Archive.

51 Southwest Re Website. Archived via the Internet Archive.

52 Southwest Re Website. Archived via the Internet Archive.

55 We called back and asked a receptionist.

72 We found passing references to "wage garnishment" with no detail in two SEC disclosures about vehicle repossessions from 2000 and 2009. See and, respectively.

73 According to the federal PACER database, Credit Acceptance Corporation is linked to over 37,200 bankruptcy cases.

74 If only available dockets are analyzed, Credit Acceptance comprises 12.01% of the 2017 docket. The comparable figure in 1996 was 15.35%, but only 49.76% of dockets are available on-line from that year, as opposed to 99.6% in 2017.

75 This figure includes 4,000 Alabama lawsuits that we know of, not represented in the corresponding graphs because Alabama's Alacourt system makes comprensive searches of the state's courts prohibitively expensive for researchers.

77 Credit Acceptance Corporation v. Williams et al, Circuit Court of Mobile County, Alabama, Case No. 02-CV-2014-901364.00

86 Less than one year later, in its Q2 2016 earnings call, in reference to "average age...of vehicles" and "repo rates," Credit Acceptance CEO Brett Roberts stated, "Neither of those are numbers that we'd disclose at this point."

95 Auto Dealer Law, August 9, 2011, "What Most Dealers Need to Know About the Consumer Finance Protection Bureau."

103 There is a small chance that the Oil States Energy Services, LLC Supreme Court decision could reverse the Federal Circuit's ruling if the Supreme Court finds the entire PTAB to be unconstitutional and retroactively nullifies its decisions.

105 These loans are then coupled with a massively complex offshore tax evasion scheme in which Credit Acceptance is both a knowing participant and an enabler, described in Appendix A.

106 See Appendix C.

109 Although a privacy guard service is set up to protect's WHOIS information against disclosure, visiting immediately redirects to the Southwest Re website at

112 Ohio Department of Insurance. (Search for "Dealers" in the Company Name field and choose a year to access public filings.)

113 According to previously undisclosed documents from the Washington D.C. Department of Insurance, Securities and Banking (DISB), VSC Re Company was incorporated within DISB itself as a "captive insurer" under Chapter 39A of the D.C. Code on October 28, 2008.

118 Technically, the funds were transferred to First Automotive's Risk Retention Group, a special type of insurance vehicle and yet another James B. Smith entity. It is safe to assume a connection between the Risk Retention Group and FASC.

References on PlainSite

Space Sort Descending Date Filed Court Case Number Title Tags Space
11/26/2017 District Of Columbia District Court 1:17-cv-02534-TJK English v. TRUMP et al Consumer Financial Protection BureauIn The NewsPresident Donald J. Trump

8/4/2017 Arkansas Eastern District Court 2:17-cv-00128 Walker v. Credit Acceptance Corporation

5/1/2017 Mississippi Southern District Court 3:17-cv-00318-TSL-RHW Credit Acceptance Corporation v. Thames et al

8/31/2016 Michigan Eastern District Court 2:16-cv-13144-MFL-SDD Rajapakse v. Credit Acceptance Corporation

2/1/2016 Missouri Western District Court 6:16-cv-03036-MDH Credit Acceptance Corporation v. Allied American Recovery, Missouri, LLC

9/24/2015 California Central District Court 2:15-cv-07490 Westlake Services LLC et al v. Credit Acceptance Corporation et al

3/30/2015 Missouri Eastern District Court 4:15-cv-00555-CEJ Credit Acceptance Corporation v. Niemeier

8/15/2014 USPTO Patent Trial and Appeal Board CBM2014-00176 Westlake Services, LLC d/b/a Westlake Financial Services of Los Angeles, CA v. C...

7/10/2014 Ohio Northern District Court 1:14-cv-01518-DAP Houston v. Dealz Auto Trade et al

12/13/2013 Virginia Western District Court 5:13-cv-00114-MFU-JGW Wynn's Extended Care, Inc. v. Bradley

10/11/2013 USPTO Patent Trial and Appeal Board CBM2014-00008 Westlake Services, LLC d/b/a/ Westlake Financial Services v. Credit Acceptance C...

8/14/2013 Michigan Eastern District Court 5:13-cv-13490-JEL-MKM Tyson v. John R Service Center Inc.

6/26/2013 Michigan Eastern District Court 2:13-cv-12798-DPH-PJK Talley v. Credit Acceptance Corporation et al

7/5/2012 Superior Court of California, County of San Francisco CGC 12 522093 Credit Acceptance Corporation v. Cassie Cannon Et Al

1/5/2012 New Jersey District Court 1:12-cv-00079-RMB-KMW JOHNSON v. WYNN'S EXTENDED CARE, INC. et al

8/5/2011 New Mexico District Court 1:11-cv-00689-MCA-KBM Southwest Reinsure, Inc. v. Saffa Reinsurance Co., Ltd.

5/26/2011 Minnesota District Court 0:11-cv-01358-MJD-SER Security Life Insurance Company of America v. Southwest Reinsure, Inc. et al

12/15/2003 District Court of Travis County, Texas D-1-GN-03-004724 Texas Department of Licensing and Regulation v. First Automotive Service Corpora...

18 Rows Total

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