The Issue No. 5: $CACC Pt. 1
A controversial subprime auto lender with incredible long term business and share price performance
Introduction
In this week’s Issue I am going to dive into Credit Acceptance Corporation ($CACC), and provide an update of the story so far. There’s a tonne of information to go over (over 5,000 words in this one piece alone on my last count), so I plan to cover the whole analysis in 2 parts.
I hold shares in the company, having purchased a stake in November 2020. I have not added any additional shares since that time. I am not advocating buying or selling the shares. However it is a business worth studying. Not only for it’s stunning history of success, but also for the entrepreneurial achievements that have been made along the way.
I’ll also be covering the material points of the two large State Attorney General cases that have been filed against the company since 2020. Get ready for some legalese.
As a starting point, you may like to read some of my previous writing and view my YT video on the company as a primer.
However, I believe God doesn’t hold it against you if you plagiarise yourself, so you won’t mind if I use my own material to bring you up to date:
Lending money at extraordinary interest rates has been a profitable business since time immemorial. The money lenders of the Roman Republic, the Medici’s of Medieval Italy, and the great banking houses of the Dutch Republic all built their fortunes on lending money. The Mafia’s most enduring business has been loansharking afterall. They had the added benefit of being able to use extralegal methods to collect.
It is a business which endures constant controversy. The subprime and consumer credit industries have been plagued with figures who aren’t burdened with integrity, and who play fast and loose with the law and lending standards. Despite the awful reputation of payday lenders and the like, the fact remains that lending money is the basis of any advanced economy. It is an essential business which must be transacted for any community to prosper and yet the risk of that capital needs to be priced adequately as well.
Credit Acceptance (CACC) is one of a small number of players that dominates the subprime auto-lending business. Don Foss, the founder of Credit Acceptance, cut his teeth in the used car business originally founding a string of car dealerships. One of Don’s earliest marketing gimmicks was to offer financing to ANY buyer. Before the advent of dedicated subprime auto-lenders, many used car dealers would find it impossible to finance purchases from traditional lending institutions. This is for a very large number of reasons, but in short, the United States has an extremely punitive credit-score system (FICO) which permeates virtually every element of a citizens life. Employers, landlords, and Colleges will take a person’s credit score into account when making decisions about them. Those who get stuck with poor credit-scores essentially get excluded from financial services, and fall prey to predatory lenders. Don began Credit Acceptance with a simple idea in mind. There was an extremely large demand for used cars which was remaining untapped due to the lack of credit for these subprime borrowers.
Overtime Credit Acceptance came upon another extremely powerful idea. By getting the auto-dealer to participate in the riskiness of the loan, you could essentially decentralise the due diligence process needed for effective lending. A Credit Acceptance loan will payout to the dealer as the borrower makes their car repayments. This incentivises a number of outcomes. The dealer will not sell a car to someone that they know cannot reasonably be expected to repay. The dealer will also not sell a lemon to a borrower. Typically these loans are being taken out by a person with poor credit, but who is gainfully employed. A dealer would not sell a lemon to a borrower because they need the borrower to make it to work so they can make their repayments. The continental United States is an extremely spread-out country and a car is an absolute necessity to function properly in society.
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