May 13, 2016
VIA EDGAR
Michael Volley
Staff Accountant
Division of Corporation Finance
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Staff Accountant
Division of Corporation Finance
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: | Credit Acceptance Corporation |
Form 10-K for the Fiscal Year Ended December 31, 2015 | |
Filed February 12, 2016 | |
Response Dated March 21, 2016 | |
File No. 000-20202 |
Dear Mr. Volley:
This letter is in response to the April 29, 2016 comment letter of the Staff of the U.S. Securities and Exchange Commission (the “Staff”) with respect to the above referenced annual report on Form 10-K for the fiscal year ended December 31, 2015 of Credit Acceptance Corporation (the “Company”) and the Company’s response, dated March 21, 2016, to the Staff’s comment letter, dated March 7, 2016.
Set forth below in bold is the comment from the April 29, 2016 comment letter followed by the Company’s response.
Form 10-K For the Fiscal Year Ended December 31, 2015
Note 2 - Summary of Significant Accounting Policies - Loans Receivable and Allowance for Credit Losses, page 52
1. | Please refer to comment 1. In order to better understand how you determine your yield and allowance for credit losses on pooled dealer loans that have previously had increased yields due to increases in cash flows expected to be collected arising from changes in estimates after assignment, please provide us with a detailed example that clearly describes your accounting. Your example should: |
• | Present a period of time with increased expected cash flows resulting in an increased yield followed by a period of decreased expected cash flows, and |
• | Detail the yield and the allowance for loan losses for the pool at each relevant period end with a description of how the amount was determined. |
Please provide us with a detailed response that will allow for a complete understanding of your accounting and consider providing any additional information deemed necessary.
To illustrate how we determine our yield and allowance for credit losses on dealer loans, we have provided an example based on the following assumptions:
• | A dealer assigned one consumer loan to us and received an advance of $7,955 for this assignment. We record this advance as a loan to the dealer in Month 0. |
• | Contractual future net cash flows were $12,712 at Month 0, which consisted of principal and interest payments of $16,214 on the consumer loan less dealer holdback payments of $3,502. |
• | Future net cash flows are forecasted over a period of 120 months and were $12,200 at Month 0, which consisted of forecasted collections of $13,533 on the consumer loan less forecasted dealer holdback payments of $1,333. |
• | The forecasted future net cash flows were revised upward in Month 3. |
• | The forecasted future net cash flows were revised downward in Month 4, but remain above our initial expectation. |
• | The forecasted future net cash flows were revised downward again in Month 5 and are now below our initial expectations. |
• | The forecasted future net cash flows were revised upward in Month 6, but remain below our initial expectations. |
• | The forecasted future net cash flows were revised upward again in Month 7 and are now above our initial expectations, but remain below our highest expectation. |
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The forecasted net cash flow streams for this example are as follows:
Forecasted Net Cash Flows as of | Forecasted Net Cash Flows as of | |||||||||||||||||
Month | Month 0 | Month 1 | Month 2 | Month 3 | Month 4 | Month 5 | Month 6 | Month 7 | Month | Month 0 | Month 1 | Month 2 | Month 3 | Month 4 | Month 5 | Month 6 | Month 7 | |
0 | (7,955) | (7,955) | (7,955) | (7,955) | (7,955) | (7,955) | (7,955) | (7,955) | 61 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | |
1 | 302 | 350 | 350 | 350 | 350 | 350 | 350 | 350 | 62 | 3 | 3 | 3 | 4 | 3 | 3 | 3 | 4 | |
2 | 315 | 315 | 350 | 350 | 350 | 350 | 350 | 350 | 63 | 4 | 4 | 4 | 4 | 4 | 3 | 3 | 4 | |
3 | 327 | 327 | 327 | 350 | 350 | 350 | 350 | 350 | 64 | 4 | 4 | 4 | 4 | 4 | 3 | 4 | 4 | |
4 | 341 | 341 | 341 | 352 | 200 | 200 | 200 | 200 | 65 | 4 | 4 | 4 | 4 | 4 | 3 | 4 | 4 | |
5 | 337 | 337 | 337 | 347 | 340 | 0 | 0 | 0 | 66 | 4 | 4 | 4 | 4 | 4 | 3 | 4 | 4 | |
6 | 350 | 350 | 350 | 361 | 353 | 336 | 700 | 700 | 67 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | |
7 | 345 | 345 | 345 | 355 | 348 | 331 | 341 | 350 | 68 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | |
8 | 312 | 312 | 312 | 321 | 315 | 299 | 308 | 317 | 69 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | |
9 | 325 | 325 | 325 | 335 | 328 | 312 | 321 | 331 | 70 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | |
10 | 416 | 416 | 416 | 429 | 420 | 399 | 411 | 423 | 71 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | |
11 | 392 | 392 | 392 | 404 | 396 | 376 | 387 | 399 | 72 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | |
12 | 353 | 353 | 353 | 363 | 356 | 338 | 349 | 359 | 73 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | |
13 | 349 | 349 | 349 | 359 | 352 | 334 | 344 | 355 | 74 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | |
14 | 336 | 336 | 336 | 346 | 339 | 322 | 332 | 342 | 75 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | |
15 | 330 | 330 | 330 | 340 | 334 | 317 | 326 | 336 | 76 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | |
16 | 333 | 333 | 333 | 343 | 336 | 319 | 328 | 338 | 77 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | |
17 | 320 | 320 | 320 | 329 | 323 | 307 | 316 | 325 | 78 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | |
18 | 323 | 323 | 323 | 332 | 326 | 309 | 319 | 328 | 79 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | |
19 | 311 | 311 | 311 | 320 | 314 | 298 | 307 | 316 | 80 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | |
20 | 277 | 277 | 277 | 285 | 279 | 265 | 273 | 282 | 81 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | |
21 | 285 | 285 | 285 | 294 | 288 | 274 | 282 | 290 | 82 | 4 | 4 | 4 | 4 | 4 | 3 | 4 | 4 | |
22 | 361 | 361 | 361 | 372 | 365 | 346 | 357 | 367 | 83 | 4 | 4 | 4 | 4 | 4 | 3 | 4 | 4 | |
23 | 339 | 339 | 339 | 349 | 342 | 325 | 335 | 345 | 84 | 4 | 4 | 4 | 4 | 4 | 3 | 4 | 4 | |
24 | 304 | 304 | 304 | 313 | 307 | 291 | 300 | 309 | 85 | 4 | 4 | 4 | 4 | 4 | 3 | 4 | 4 | |
25 | 302 | 302 | 302 | 311 | 305 | 290 | 299 | 308 | 86 | 4 | 4 | 4 | 4 | 4 | 3 | 3 | 4 | |
26 | 290 | 290 | 290 | 299 | 293 | 278 | 287 | 295 | 87 | 3 | 3 | 3 | 4 | 4 | 3 | 3 | 4 | |
27 | 288 | 288 | 288 | 297 | 291 | 276 | 284 | 293 | 88 | 3 | 3 | 3 | 4 | 3 | 3 | 3 | 3 | |
28 | 288 | 288 | 288 | 297 | 291 | 276 | 285 | 293 | 89 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | |
29 | 278 | 278 | 278 | 287 | 281 | 267 | 275 | 283 | 90 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | |
30 | 209 | 209 | 209 | 216 | 211 | 201 | 207 | 213 | 91 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | |
31 | 181 | 181 | 181 | 186 | 183 | 174 | 179 | 184 | 92 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | |
32 | 160 | 160 | 160 | 165 | 162 | 154 | 158 | 163 | 93 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | |
33 | 165 | 165 | 165 | 170 | 167 | 158 | 163 | 168 | 94 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | |
34 | 210 | 210 | 210 | 216 | 212 | 202 | 208 | 214 | 95 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | |
35 | 195 | 195 | 195 | 201 | 197 | 187 | 193 | 198 | 96 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | |
36 | 170 | 170 | 170 | 175 | 171 | 163 | 168 | 173 | 97 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | |
37 | 163 | 163 | 163 | 168 | 164 | 156 | 161 | 165 | 98 | 2 | 2 | 2 | 3 | 2 | 2 | 2 | 3 | |
38 | 149 | 149 | 149 | 154 | 151 | 143 | 147 | 152 | 99 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | |
39 | 138 | 138 | 138 | 143 | 140 | 133 | 137 | 141 | 100 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | |
40 | 134 | 134 | 134 | 138 | 135 | 128 | 132 | 136 | 101 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | |
41 | 121 | 121 | 121 | 124 | 122 | 116 | 119 | 123 | 102 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | |
42 | 112 | 112 | 112 | 115 | 113 | 107 | 110 | 114 | 103 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | |
43 | 93 | 93 | 93 | 96 | 94 | 89 | 92 | 95 | 104 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | |
44 | 75 | 75 | 75 | 77 | 75 | 72 | 74 | 76 | 105 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | |
45 | 65 | 65 | 65 | 67 | 65 | 62 | 64 | 66 | 106 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | |
46 | 70 | 70 | 70 | 72 | 71 | 67 | 69 | 71 | 107 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | |
47 | 55 | 55 | 55 | 57 | 56 | 53 | 54 | 56 | 108 | 2 | 2 | 2 | 2 | 2 | 1 | 2 | 2 | |
48 | 38 | 38 | 38 | 39 | 38 | 37 | 38 | 39 | 109 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | |
49 | 25 | 25 | 25 | 26 | 26 | 24 | 25 | 26 | 110 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | |
50 | 17 | 17 | 17 | 17 | 17 | 16 | 16 | 17 | 111 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | |
51 | 10 | 10 | 10 | 10 | 10 | 10 | 10 | 10 | 112 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | |
52 | 5 | 5 | 5 | 5 | 5 | 5 | 5 | 5 | 113 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | |
53 | 5 | 5 | 5 | 6 | 6 | 5 | 5 | 6 | 114 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | |
54 | 6 | 6 | 6 | 6 | 6 | 6 | 6 | 6 | 115 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | |
55 | 6 | 6 | 6 | 6 | 6 | 6 | 6 | 6 | 116 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | |
56 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 117 | 3 | 3 | 3 | 3 | 3 | 2 | 2 | 3 | |
57 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 118 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | |
58 | 5 | 5 | 5 | 5 | 5 | 4 | 4 | 5 | 119 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | |
59 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 4 | 120 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | |
60 | 3 | 3 | 3 | 4 | 3 | 3 | 3 | 3 |
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The following table details how we would account for this example over the first seven months of the loan:
Loan Receivable Balance | Income Statement | Net Cash Flows | Yield (Monthly) | |||||||||||||||||
Month | Gross | Allowance | Net | Revenue | Provision | Actual | PV of Future | Initial | Revised | Revenue | ||||||||||
(A) | (B) | (C) | (D) | (E) | (F) | (G) | (H) | (I) | (J) | |||||||||||
0 | 7,955 | — | 7,955 | (7,955 | ) | 7,955 | 2.35 | % | 2.35 | % | ||||||||||
1 | 7,792 | — | 7,792 | 187 | — | 350 | 7,840 | 2.35 | % | 2.39 | % | 2.39 | % | |||||||
2 | 7,628 | — | 7,628 | 186 | — | 350 | 7,709 | 2.35 | % | 2.42 | % | 2.42 | % | |||||||
3 | 7,463 | — | 7,463 | 185 | — | 350 | 7,790 | 2.35 | % | 2.64 | % | 2.64 | % | |||||||
4 | 7,460 | — | 7,460 | 197 | — | 200 | 7,469 | 2.35 | % | 2.36 | % | 2.36 | % | |||||||
5 | 7,636 | (697 | ) | 6,939 | 176 | 697 | — | 6,939 | 2.35 | % | 1.71 | % | 2.35 | % | ||||||
6 | 7,099 | (130 | ) | 6,970 | 163 | (567 | ) | 700 | 6,970 | 2.35 | % | 2.22 | % | 2.35 | % | |||||
7 | 6,913 | — | 6,913 | 164 | (130 | ) | 350 | 6,997 | 2.35 | % | 2.44 | % | 2.44 | % |
Note: Amounts may not recalculate exactly due to rounding.
Calculation of the Allowance for Credit Losses
• | The Allowance for Credit Losses (B) is calculated as the amount necessary, if any, to reduce the Gross Loan Receivable Balance (A) to the Present Value of Future Cash Flows (G). |
• | The Present Value of Future Cash Flows (G) is calculated by discounting future net cash flows at the Initial Yield (H). |
Calculation of Yields
• | The Initial Yield (H) is calculated as the rate necessary to discount future net cash flows at Month 0 to the Gross Loan Receivable Balance (A) at Month 0. |
• | The Revised Yield (I) is calculated as the rate necessary to discount future net cash flows to the Gross Loan Receivable Balance (A). |
• | The Revenue Yield (J) is calculated as the greater of the Initial Yield (H) or the Revised Yield (I). |
Calculation of Revenue
• | Revenue (D) for the current month is calculated by multiplying the prior month Net Loan Receivable Balance (C) by the prior month Revenue Yield (J). |
We provided the simple example above for ease of illustration. Our typical dealer loan is complicated by multiple consumer loan assignments per month over multiple years.
For dealer loans with consumer loan assignments in multiple months, the Initial Yield in the example above is replaced with a weighted average of the initial yields for each month’s consumer loan assignments (referred to as “Weighted Average Initial Yield” or “WAIY”), which is calculated as follows:
Current Month WAIY | = | Prior Month WAIY | x | Prior Month Net Loan Receivable Balance | + | Initial Yield on Current Month Assignments | x | Amount Advanced on Current Month Assignments |
Prior Month Net Loan Receivable Balance | + | Amount Advanced on Current Month Assignments |
* * * * *
In connection with the above response, the Company acknowledges that:
• | the Company is responsible for the adequacy and accuracy of the disclosure in the filing; |
• | Staff comments or changes to disclosure in response to Staff comments do not foreclose the U.S. Securities and Exchange Commission from taking any action with respect to the filing; and |
• | the Company may not assert Staff comments as a defense in any proceeding initiated by the U.S. Securities and Exchange Commission or any person under the federal securities laws of the United States. |
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If you have any questions concerning the foregoing, please contact me at (248) 353-2700 ext. 4575.
Sincerely,
/s/ Kenneth S. Booth
Kenneth S. Booth
Chief Financial Officer
Credit Acceptance Corporation
cc: John Spitz, Division of Corporation Finance, U.S. Securities and Exchange Commission
Brett Roberts, Credit Acceptance Corporation
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