Credit Acceptance Corporation

Reality Check

Credit Acceptance Corporation

NASDAQ: CACC Part III March 22, 2018

The CARite Connection

Authors

Aaron Greenspan Christine Richard (Orion Research, LLC)

Disclosures

Aaron Greenspan is President & CEO of Think Computer Corporation and owns CACC put options in his personal capacity.

Orion Research LLC produces research for clients for a fee. Persons associated with and clients of Orion Research LLC may have long or short positions in the securities referred to in this research.

Special thanks to Bassem Banafa.

Legal Notices

Copyright ? 2018 Think Computer Corporation. All Rights Reserved. PlainSite is a registered trademark of Think Computer Corporation.

Cover image copyright ? 2018 Judith K. and Simon K. Greenspan. Used with permission.

This report is not legal or investment advice. Trade at your own risk.

About PlainSite?

PlainSite is a legal research initiative jointly run by Think Computer Corporation, a for-profit computer software company, and Think Computer Foundation, a 501(c)(3) non-profit organization. The PlainSite website at hosts information regarding nearly ten million court dockets, as well as millions of documents and government records from federal and state entities. Think Computer Foundation, which also sponsors activities for individuals with disabilities in the Cleveland area, is funded in part by donations from Think Computer Corporation.

Visit the Credit Acceptance Corporation PlainSite profile at .

Contact

For PlainSite Pro Investor paid early access to future reports, questions, or comments, contact us by e-mail at realitycheck@.

Executive Summary

Credit Acceptance Corporation (NASDAQ: CACC) founder Don Foss, who built a $6 billion subprime auto lender from a single Detroit used car lot, retired as Chairman of the company's Board of Directors in early 2017. More than two decades before his retirement, Foss began investing substantial time and money into creating what eventually became CARite, a chain of used car dealerships that offers in-house leasing in addition to traditional used car sales. Hundreds of millions of dollars later, CARite is floundering and Credit Acceptance views Foss's conflicts of interests as toxic.

Should Credit Acceptance shareholders care what Foss has been up to outside of his official Credit Acceptance responsibilities? We believe there are a number of reasons why they should:

? Foss has spent millions of dollars--obtained by selling his stock to Credit Acceptance--to finance and control CARite dealerships that originate loans for Credit Acceptance, but also compete with it.

? Foss has, at times, disguised his involvement in various dealerships by investing in them through a network of companies operated by former Credit Acceptance executives.

? Since at least as early as 2011, and while he still had significant influence as an officer of Credit Acceptance, Foss has employed a convicted felon to assist him in building his secretive corporate network, who works with Foss to this day.

? Foss is purported to have used a variety of methods over the years to assure that dealerships to which he was connected received outsized advances and large amounts of dealer holdback--even as questions have been raised about the quality of the loans generated at those dealerships.

? Foss's business arrangements call into question the integrity of Credit Acceptance's business model, which is supposed to incentivize and reward dealers for long-term loan performance, but instead appears to fund and reward bad loans from dealerships with undisclosed connections to the company's founder.

? Finally, we suggest that the $89 million loan transfer Credit Acceptance reported in Q4 2017 could be related to the company's termination of certain CARite dealerships, raising further questions about corporate governance and disclosure.

Subprime auto lending has always been a risky business. For decades, Credit Acceptance has purported to have figured out a way to mitigate that risk with its proprietary business model. In fact, it appears that the company founder's private deals have been propping up the appearance of a successful model while facilitating a much different one.

i

Credit Acceptance Corporation: Part III

Table of Contents

Executive Summary..............................................................................................................................................i Introduction............................................................................................................................................................ 1 The Used Car Salesman "At The Top"..................................................................................................... 2

A Surprise Loss............................................................................................................................................ 2 Foss's Financing Operation Behind the Curtain........................................................................ 4 Stabilizing Pools............................................................................................................................................ 6 Deal Volume and Speed Count.......................................................................................................... 7 "Warranty = A Deliverable Deal"..................................................................................................... 7 A Plan to Go Public, Again..................................................................................................................... 8 The Plan Falls Apart................................................................................................................................... 9 Horvath Holdings as a "Beard".........................................................................................................10 The Convicted Felon Overseeing the Business.......................................................................11 CARite and Credit Acceptance Dealerships............................................................................13 Foss Forced to Sell, But Did He?......................................................................................................15 Other Unresolved Issues...............................................................................................................................17 Credit Acceptance's Unusual Q4 2017 Earnings Call..........................................................17 The Fallout From DBRS's $1.4 Billion Discrepancy...............................................................18 The Missing Ratings Agency................................................................................................................20 Future CFPB Action Possible..............................................................................................................21 Fraudulent Collections...........................................................................................................................21 Conclusion.............................................................................................................................................................22 Appendix E: Don Foss's Longstock Entities........................................................................................23

Reality Check

ii

Introduction

In his long and celebrated career, Donald A. Foss has started used car dealerships, a publicly traded subprime auto lender called Credit Acceptance Corporation, and most

recently, a branded dealership chain with its own captive financing arm. This most recent creation, CARite, comprises a number of used car dealerships in Connecticut, Florida, Indiana, Kentucky, Michigan, Mississippi, NewYork, Ohio, Pennsylvania, and Tennessee. Some of these locations have had more success than others; the desolate dealership depicted on the cover of this report in Cleveland, Ohio is in the midst of closing as of mid-February 2018. When asked why, the employee answering the phone stated,"it was underperforming--it just wasn't selling enough cars."

The full story behind Foss and CARite is just slightly more complicated than that. Many Credit Acceptance shareholders may not even know what CARite is, but research into connections between the two companies suggests that they should.

A sign at the entrance to CARite's Cleveland location on Febru-

ary 23, 2018. The cars had already been removed from the lot. Don Foss opened his first used car dealership in

Photograph: Judith K. and Simon K. Greenspan

1967 and five years later created Credit Accep-

tance to offer loans to his subprime customers.

By 1981, Credit Acceptance was extending credit through other dealerships. As we

describe in previous parts of this report, the Credit Acceptance model was unique

in that the company provided an advance to a dealer at loan origination and then

shared additional payments made by the borrower with the dealer over the life of the

loan, based on performance.

In theory, these payments, known as dealer holdback, align the interests of dealers with those of Credit Acceptance and the end borrowers. The Credit Acceptance business model has been lauded as addressing the predatory and illegal lending practices that are rife in the subprime auto market by incentivizing dealers to responsibly structure loans that customers will be able to pay back. The idea proved wildly successful; Foss's financing business eventually usurped his used car business, with Credit Acceptance offering dealer financing to thousands of dealerships nationwide, and eventually internationally.

Meanwhile, Foss kept a hand in running his own dealerships. In this way, Foss was both the head of Credit Acceptance--now a multi-billion-dollar publicly traded com-

1

Credit Acceptance Corporation: Part III

pany making hundreds of thousands of loans annually--and a partner sharing in the profits of numerous car dealerships that structured consumer loans and were eligible to receive dealer holdback payments if those loans performed well. If anyone knew the system and how to work it, it was Don Foss.

Credit Acceptance Don Foss has been described as "at the top of Credit Acceptance has historically disclosed a small

the industry." Photograph: SubPrime

amount of information about this lending arrange-

ment, noting that consumer loans are extended

to affiliated dealers "on the same terms as those with non-affiliated Dealers." These

affiliated dealers have included dealers "owned or controlled by" Foss and members

of Foss's family. Further research indicates that it is far from clear that terms were "the

same" or that the extent of these relationships was ever fully acknowledged.

In addition, at various times, both the Credit Acceptance and Foss personally provided dealer floorplan financing to a select group of dealerships.1 In other words, certain dealerships, including some with connections to Foss, were able to finance vehicles on the way in the door and on the way out the door with help from Credit Acceptance and its founder.

Credit Acceptance does not disclose how many of its partner dealerships earn dealer holdback, but it appears that the majority do not. That is concerning because holdback payments offer concrete proof that the Credit Acceptance business model is working: that dealers are actually structuring responsible loans and being rewarded for doing so.

According to interviews and reviews of court filings involving Foss-related entities, Foss's dealerships were some of Credit Acceptance's largest volume dealerships. More recently, under Foss's leadership, CARite carried on that trend. It is therefore instructive to consider how he conducted business at his dealerships, structured the loans he transferred to Credit Acceptance, and profited from them.

The Used Car Salesman "At The Top"

A Surprise Loss

Foss's business practices and conflicts were central to a 1998 class action securities lawsuit filed against Credit Acceptance, Don Foss, CEO Brett Roberts and then-Pres-

1 Uniform Commercial Code (UCC) lending records show that both Credit Acceptance and Don Foss were creditors to Larry Lees Auto Finance Center, Inc., later renamed to Detroit II Automobiles, Inc.

Reality Check

2

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download