Author Topic: LEAP Puts on Sub Prime Auto Lenders  (Read 9247 times)

Nell-e

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Re: LEAP Puts on Sub Prime Auto Lenders
« Reply #20 on: March 28, 2018, 01:26:34 PM »
Morningstar, did you read this write-up? https://www.hvst.com/attachments/13770/Credit-Acceptance-Corporation_Thesis_11-Feb-18.pdf

Author calls out that Loans Receivable (an asset) are written off after 10 years.

I went to CACC 10-K and found the following passage:
We record the amount advanced to the Dealer as a Dealer Loan, which is classified within Loans receivable in our consolidated balance sheets. 

Am I missing something?


LongHaul

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Re: LEAP Puts on Sub Prime Auto Lenders
« Reply #21 on: March 28, 2018, 02:15:18 PM »
Morningstar, did you read this write-up? https://www.hvst.com/attachments/13770/Credit-Acceptance-Corporation_Thesis_11-Feb-18.pdf

Author calls out that Loans Receivable (an asset) are written off after 10 years.

I went to CACC 10-K and found the following passage:
We record the amount advanced to the Dealer as a Dealer Loan, which is classified within Loans receivable in our consolidated balance sheets. 

Am I missing something?

I saw the same thing.  Pg 52 of the 2017 10-K

I have to correct something I wrote earlier regarding 10 year writeoffs.
As far as recording provisions in the 10-K  (pg 52) they do say: "If such difference is unfavorable, a provision for credit losses is recorded immediately as a current period expense."

I must admit I was really confused by how they account for the loans with the NAV, discounting at yields at the time of assignment, accretion, etc.  I didn't understand it.   Maybe I am dumb or maybe one just cannot fully understand it and one just has to trust mgmt.

The other interesting thing is in 2017 Finance charges divided by average gross loans receivable was ~22%. 
So to me these dealers were willing to borrow money for 22% from CACC.   That is a steep interest rate.  You can quibble with the 22% rate as CACC has some collections expense and write offs but it still seems like the dealers are borrowing at a very high rate.   Doesn't make any sense to me why they would do that.

Cigarbutt

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Re: LEAP Puts on Sub Prime Auto Lenders
« Reply #22 on: March 28, 2018, 03:04:43 PM »
"The other interesting thing is in 2017 Finance charges divided by average gross loans receivable was ~22%. 
So to me these dealers were willing to borrow money for 22% from CACC.   That is a steep interest rate.  You can quibble with the 22% rate as CACC has some collections expense and write offs but it still seems like the dealers are borrowing at a very high rate.   Doesn't make any sense to me why they would do that."

My understanding is that the financial incentives that drive dealers to enroll with CACC are based on:
1-dealers would not realize the sale absent the financing option.
2-dealers probably figure that they will make more with CACC with the upfront advance and the eventual recovery after CACC is made whole (80%-20% split) than the more traditional selling of the loan receivable at a small discount.

1-above is compounded on the probable proposition that the price tag for the financed option ends up somehow higher than the cash option (even with the interest component removed).

I understand also that CACC has seen increased competition at the dealer level and that may signal looser standards across the board but not necessarily more so with CACC. To let go of market share at this point may not be a bad thing.

CACC has done this "dealer loan/advance program" for some time and I submit that the underlying individual loans is the area to look for potential weakness.


LongHaul

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Re: LEAP Puts on Sub Prime Auto Lenders
« Reply #23 on: March 28, 2018, 07:30:18 PM »
But I think they would pay substantially less to a floor plan lender like Nextgear.
https://www.nextgearcapital.com/news/top-5-floor-planning-mistakes-by-dealers/

abitofvalue

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Re: LEAP Puts on Sub Prime Auto Lenders
« Reply #24 on: March 31, 2018, 08:31:15 PM »
There probably should be a CACC thread.. (there may be one.. havent checked).

For those new to the company - dealer loans and purchase loans are both loans to consumers. In both cases, CACC is buying an auto loan from a dealer.  The difference is in a purchase loan, CACC buys the loan and that ends the dealers involvement. In a dealer loan, CACC buys the loan but also agrees to share profits with the dealer once it has recouped its investment.  Because it has this "profit share" component, it pays less for a dealer loan.. the idea being dealer is going to get some back-end payments (dealer holdbacks). Purchase loans are what all the other auto lenders do for the most part. In good times the proportion of purchase loans increases. These are higher risk (no profit share) and likely have lower returns (more competition)

The accounting is confusing because unlike the vast vast majority of companies, CACC uses level yield accounting. What this means is that the company projects out future cash-flows on loans and adjusts the amount of finance charges booked in each period. Basically, it makes an assumption when loan is made and then adjusts it throughout its life. Given the moving parts, comparisons to other auto lenders are hard / impossible.  Don't understand every little nuance of this but thats the jist.

In terms of the interest rate.. yes the 22% sounds about right.. might even be lower than actual interest rate charged as they are only booking the cash-flows they expect to receive. Keep in mind, CACC is lending to ppl who have no other choice. In general default / repossession rates are probably around 45-50% of loans (by number of loans) so the interest rate tends to be high

The business is ripe for abuse because the borrowers are the bottom of the economic ladder, typically unsophisticated and unlikely to have resources to fight them. Some have argued that CACC is a collection company, disguised as a lender.. others say its providing cars for ppl who have no other alternative so a great company.  The right comp might be a payday lender. Yes the ROE's etc look great but there is a ton of regulatory risk (esp if the CFPB / State AGs actually want to act).


 

DRValue

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Re: LEAP Puts on Sub Prime Auto Lenders
« Reply #25 on: April 01, 2018, 03:14:36 AM »
https://www.consumeraffairs.com/finance/credit_acceptance_corp.html

Consumer reviews for CACC.

2 things about reviews.
You mostly hear the bad ones. Satisfied customers just go about their day.
You only hear one side.

But from reading some of them cacc are extremely aggressive. Feels like only a matter of time before it's picked up politically or by a regulator.
Not Investment Advice. Do Your Own Research.

Spekulatius

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Re: LEAP Puts on Sub Prime Auto Lenders
« Reply #26 on: April 01, 2018, 03:38:16 AM »
https://www.consumeraffairs.com/finance/credit_acceptance_corp.html

Consumer reviews for CACC.

2 things about reviews.
You mostly hear the bad ones. Satisfied customers just go about their day.
You only hear one side.

But from reading some of them cacc are extremely aggressive. Feels like only a matter of time before it's picked up politically or by a regulator.

This is a complaint website. The rating is meaningless, even the highest rated Lenders (credit unions etc) are rated 1 1/2 stars. That said, it seems like CACC is extraordinary quick to repo the cars.
To be a realist, one has to believe in miracles.

DRValue

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Re: LEAP Puts on Sub Prime Auto Lenders
« Reply #27 on: April 01, 2018, 04:16:53 AM »
It's a review website. Plenty of businesses on there have more than the 1 star.
Not Investment Advice. Do Your Own Research.

Cigarbutt

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Re: LEAP Puts on Sub Prime Auto Lenders
« Reply #28 on: April 01, 2018, 06:03:12 AM »
From abitofvalue:
"Some have argued that CACC is a collection company, disguised as a lender.. others say its providing cars for ppl who have no other alternative so a great company.  The right comp might be a payday lender. Yes the ROE's etc look great but there is a ton of regulatory risk (esp if the CFPB / State AGs actually want to act)."

I think that's a very relevant way to put it. The regulatory risk is a definite threat but timing is hard to predict and, if regulators "act", the most likely scenario is a relative one time hit and then "more reasonable" ROEs. Unlikely to be life-threatening for an established auto lender and even maybe a long term positive in terms of the regulatory scale that large players like CACC would maintain.

LongHaul

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Re: LEAP Puts on Sub Prime Auto Lenders
« Reply #29 on: April 01, 2018, 06:58:14 AM »
In terms of the interest rate.. yes the 22% sounds about right.. might even be lower than actual interest rate charged as they are only booking the cash-flows they expect to receive. Keep in mind, CACC is lending to ppl who have no other choice. In general default / repossession rates are probably around 45-50% of loans (by number of loans) so the interest rate tends to be high

I partially agree with this but the dealer is really in a crucial role.  Often the dealer owns the relationship and the choice whether to make a loan with their own money or sell the loan.  So if you have done all the work getting the customer, etc. why would a dealer just sell the loan and allow someone else to make ~20% per year after provisions.  I wouldn't.  The dealer are very street smart types.  My point being that CACC doesn't deserve to make 20% just because the dealer can charge 20% on the loan, Unless the dealer is desperate for cash.  And a lot of the underwriting is meeting the person and following up on them and working with the borrower.  Someone comes in and throws a wrapper on your desk and want to borrow money - how do you put that in a loan app?  Super specialized, tough business.  I wouldn't touch it. 

The point is that the dealer is really the lender, if it a good loan the dealer would keep it.  Bad loan - stuff the lender if he is being stupid.  There are a lot of floorplan lenders and other lenders who will charge much less than 20%.  To me the 20% is fantasy land stuff for CACC.

Also - as a side point.  CACC is growing the loan book very fast while defaults are rising.  That is the opposite of what a disciplined lender would do.