Credit Acceptance (CACC) 10-Q 2008 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File Number 000-20202

CREDIT ACCEPTANCE CORPORATION

(Exact name of registrant as specified in its charter)

MICHIGAN
(State or other jurisdiction of incorporation or organization) 38-1999511
(IRS Employer Identification)

25505 WEST TWELVE MILE ROAD SOUTHFIELD, MICHIGAN	48034-8339
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: 248-353-2700

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero	Accelerated filerþ	Non-accelerated filero	Smaller reporting companyo
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of the latest practicable date.

The number of shares of Common Stock, par value $0.01, outstanding on October 30, 2008 was 30,570,755.

TABLE OF CONTENTS

PART I. — FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Income Statements – Three and nine months ended September 30, 2008 and 2007	1
Consolidated Balance Sheets – As of September 30, 2008 and December 31, 2007	2
Consolidated Statements of Cash Flows – Nine months ended September 30, 2008 and 2007	3
Notes to Consolidated Financial Statements	4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	35
ITEM 4. CONTROLS AND PROCEDURES	35
PART II. — OTHER INFORMATION
ITEM 6. EXHIBITS	36
SIGNATURES	37
INDEX OF EXHIBITS	38
EX-4.F.115
EX-4.F.116
EX-4.F.117
EX-31.A
EX-31.B
EX-32.A
EX-32.B

PART I. — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
(Dollars in thousands, except per share data)
Revenue:
Finance charges	$	75,617		$	56,743		$	210,119		$	162,240
Other income		4,490			4,315			15,771			14,455
Total revenue		80,107			61,058			225,890			176,695
Costs and expenses:
Salaries and wages		16,766			13,620			51,205			38,573
General and administrative		6,975			7,266			20,726			20,542
Sales and marketing		4,088			3,835			13,272			12,451
Provision for credit losses		8,383			5,931			31,792			13,602
Interest		10,954			9,030			31,702			26,781
Other expense		2			16			59			74
Total costs and expenses		47,168			39,698			148,756			112,023
Operating income		32,939			21,360			77,134			64,672
Foreign currency (loss) gain		(2	)		26			(15	)		64
Income from continuing operations before provision for income taxes		32,937			21,386			77,119			64,736
Provision for income taxes		12,606			7,917			28,828			23,387
Income from continuing operations		20,331			13,469			48,291			41,349
Discontinued operations
Gain (loss) from discontinued United Kingdom operations		504			(9	)		548			(280	)
Provision (credit) for income taxes		178			(1,282	)		218			(1,363	)
Gain from discontinued operations		326			1,273			330			1,083
Net income	$	20,657		$	14,742		$	48,621		$	42,432
Net income per common share:
Basic	$	0.68		$	0.49		$	1.61		$	1.41
Diluted	$	0.67		$	0.47		$	1.57		$	1.36
Income from continuing operations per common share:
Basic	$	0.67		$	0.45		$	1.60		$	1.38
Diluted	$	0.66		$	0.43		$	1.56		$	1.32
Gain from discontinued operations per common share:
Basic	$	0.01		$	0.04		$	0.01		$	0.04
Diluted	$	0.01		$	0.04		$	0.01		$	0.03
Weighted average shares outstanding:
Basic		30,310,053			30,015,048			30,223,586			30,069,639
Diluted		31,024,455			31,139,612			30,994,466			31,228,893

See accompanying notes to consolidated financial statements.

1

CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS

	As of
	September 30,			December 31,
	2008			2007
	(Unaudited)
(Dollars in thousands, except per share data)
ASSETS:
Cash and cash equivalents	$	934		$	712
Restricted cash and cash equivalents		82,993			74,102
Restricted securities available for sale		3,933			3,290
Loans receivable (including $16,067 and $16,125 from affiliates as of September 30, 2008 and December 31, 2007, respectively)		1,155,591			944,698
Allowance for credit losses		(119,184	)		(134,145	)
Loans receivable, net		1,036,407			810,553
Property and equipment, net		21,550			20,124
Income taxes receivable		10,012			20,712
Other assets		14,527			12,689
Total Assets	$	1,170,356		$	942,182
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Liabilities:
Accounts payable and accrued liabilities	$	79,845		$	79,834
Line of credit		82,900			36,300
Secured financing		602,429			488,065
Mortgage note and capital lease obligations		6,608			7,765
Deferred income taxes, net		78,848			64,768
Total Liabilities		850,630			676,732
Shareholders’ Equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued		—			—
Common stock, $.01 par value, 80,000,000 shares authorized, 30,570,110 and 30,240,859 shares issued and outstanding as of September 30, 2008 and December 31, 2007, respectively		306			302
Paid-in capital		9,983			4,134
Retained earnings		309,622			261,001
Accumulated other comprehensive (loss) income, net of tax of $105 and $(7) at September 30, 2008 and December 31, 2007, respectively		(185	)		13
Total Shareholders’ Equity		319,726			265,450
Total Liabilities and Shareholders’ Equity	$	1,170,356		$	942,182

See accompanying notes to consolidated financial statements.

2

CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

	Nine Months Ended
	September 30,
	2008			2007
(Dollars in thousands)
Cash Flows From Operating Activities:
Net income	$	48,621		$	42,432
Adjustments to reconcile cash provided by operating activities:
Provision for credit losses		31,792			13,602
Depreciation		3,969			2,998
Loss on retirement of property and equipment		—			170
Provision for deferred income taxes		14,192			5,728
Stock-based compensation		2,827			2,340
Change in operating assets and liabilities:
(Decrease) increase in accounts payable and accrued liabilities		(250	)		2,338
Decrease (increase) in income taxes receivable		10,700			(150	)
(Increase) decrease in other assets		(1,838	)		2,811
Net cash provided by operating activities		110,013			72,269
Cash Flows From Investing Activities:
Increase in restricted cash and cash equivalents		(8,891	)		(18,909	)
Purchases of restricted securities available for sale		(1,514	)		(550	)
Proceeds from sale of restricted securities available for sale		271			—
Maturities of restricted securities available for sale		551			652
Principal collected on Loans receivable		466,122			446,419
Advances to dealers and accelerated payments of dealer holdback		(430,423	)		(453,413	)
Purchases of Consumer Loans		(246,971	)		(81,395	)
Payments of dealer holdback		(46,482	)		(55,610	)
Net decrease in other receivables		23			290
Purchases of property and equipment		(5,395	)		(5,678	)
Net cash used in investing activities		(272,709	)		(168,194	)
Cash Flows From Financing Activities:
Borrowings under line of credit		573,900			470,900
Repayments under line of credit		(527,300	)		(472,000	)
Proceeds from secured financing		453,700			433,000
Repayments of secured financing		(339,336	)		(332,544	)
Principal payments under mortgage note and capital lease obligations		(1,157	)		(1,068	)
Repurchase of common stock		(66	)		(9,529	)
Proceeds from stock options exercised		2,102			2,129
Tax benefits from stock based compensation plans		990			2,166
Net cash provided by financing activities		162,833			93,054
Effect of exchange rate changes on cash		85			(250	)
Net increase (decrease) in cash and cash equivalents		222			(3,121	)
Cash and cash equivalents, beginning of period		712			8,528
Cash and cash equivalents, end of period	$	934		$	5,407
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest	$	31,662		$	25,939
Cash paid during the period for income taxes		2,033			14,552
Supplemental Disclosure of Non-Cash Transactions:
Property and equipment acquired through capital lease obligations	$	—		$	47

See accompanying notes to consolidated financial statements.

3

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

     The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of actual results achieved for full fiscal years. The consolidated balance sheet at December 31, 2007 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2007 for Credit Acceptance Corporation (the “Company”, “Credit Acceptance”, “we”, “our” or “us”). Certain prior period amounts have been reclassified to conform to the current presentation.

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

2. DESCRIPTION OF BUSINESS

     Since 1972, Credit Acceptance has provided auto loans to consumers, regardless of their credit history. Our product is offered through a nationwide network of automobile dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing; from repeat and referral sales generated by these same customers; and from sales to customers responding to advertisements for our product, but who actually end up qualifying for traditional financing.

     We refer to dealers who participate in our program and who share our commitment to changing consumers’ lives as “dealer-partners”. Upon enrollment in our financing program, the dealer-partner enters into a dealer servicing agreement with Credit Acceptance that defines the legal relationship between Credit Acceptance and the dealer-partner. The dealer servicing agreement assigns the responsibilities for administering, servicing, and collecting the amounts due on retail installment contracts (referred to as “Consumer Loans”) from the dealer-partners to us.

     We are an indirect lender from a legal perspective, meaning the Consumer Loan is originated by the dealer-partner and immediately assigned to us. If we discover a misrepresentation by the dealer-partner relating to a Consumer Loan assigned to us, we can demand that the Consumer Loan be repurchased for the current balance of the Consumer Loan less the amount of any unearned finance charge plus the applicable termination fee, which is generally $500. Upon receipt of such amount in full, we will reassign the Consumer Loan and our security interest in the financed vehicle to the dealer-partner.

     We have two primary programs: the Portfolio Program and the Purchase Program. Under the Portfolio Program, we advance money to dealer-partners (referred to as a “Dealer Loan”) in exchange for the right to service the underlying Consumer Loan. Under the Purchase Program, we buy the Consumer Loan from the dealer-partner (referred to as a “Purchased Loan”) and keep all amounts collected from the consumer. Dealer Loans and Purchased Loans are collectively referred to as “Loans”. The following table shows the percentage of Consumer Loans assigned to us under each of the programs:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Portfolio Program		69.2	%		74.5	%		68.4	%		86.0	%
Purchase Program		30.8	%		25.5	%		31.6	%		14.0	%

4

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(UNAUDITED)

2. DESCRIPTION OF BUSINESS – (Continued)

     Dealer-partners that enroll in our programs have the option to either pay an upfront, one-time enrollment fee of $9,850 or defer payment by agreeing to allow us to keep 50% of their first accelerated dealer holdback payment (“Portfolio Profit Express”). Portfolio Profit Express is paid to qualifying dealer-partners after a pool of 100 or more Consumer Loans has been closed. Dealer-partners that enrolled in our programs prior to 2008 have the option to assign Consumer Loans under either the Portfolio Program or the Purchase Program. During 2008, we changed our eligibility requirements for new dealer-partner enrollments to restrict access to the Purchase Program. For dealer-partners that enrolled in our programs during the first eight months of 2008, only dealer-partners that elected to pay the upfront, one-time enrollment fee are initially allowed to assign Consumer Loans under either program. Dealer-partners that elected the deferred option during this period are only granted access to the Purchase Program after the first Portfolio Profit Express payment has been made under the Portfolio Program. For all dealer-partners enrolling in our programs after August 31, 2008, access to the Purchase Program is only granted after the first Portfolio Profit Express payment has been made under the Portfolio Program.

     Portfolio Program

     As payment for the vehicle, the dealer-partner generally receives the following:

(i)	a down payment from the consumer;
(ii)	a cash advance from us; and
(iii)	after the advance has been recovered by us, the cash from payments made on the Consumer Loan, net of certain collection costs and our servicing fee (“dealer holdback”).

     We record the amount advanced to the dealer-partner as a Dealer Loan, which is classified within Loans receivable in our consolidated balance sheets. Cash advanced to dealer-partners is automatically assigned to the originating dealer-partner’s open pool of advances. At the dealer-partner’s option, a pool containing at least 100 Consumer Loans can be closed and subsequent advances assigned to a new pool. All advances due from a dealer-partner are secured by the future collections on the dealer-partner’s portfolio of Consumer Loans assigned to us. For dealer-partners with more than one pool, the pools are cross-collateralized so the performance of other pools is considered in determining eligibility for dealer holdback. We perfect our security interest in the Dealer Loans by taking possession of the Consumer Loans.

     The dealer servicing agreement provides that collections received by us during a calendar month on Consumer Loans assigned by a dealer-partner are applied on a pool-by-pool basis as follows:

• First, to reimburse us for certain collection costs;

• Second, to pay us our servicing fee;

• Third, to reduce the aggregate advance balance and to pay any other amounts due from the dealer-partner to us; and

• Fourth, to the dealer-partner as payment of dealer holdback.

     Dealer-partners have an opportunity to receive Portfolio Profit Express at the time a pool of 100 or more Consumer Loans is closed. The amount paid to the dealer-partner is calculated using a formula that considers the forecasted collections and the advance balance on the closed pool. If the collections on Consumer Loans from a dealer-partner’s pool are not sufficient to repay the advance balance, the dealer-partner will not receive dealer holdback.

     Since typically the combination of the advance and the consumer’s down payment provides the dealer-partner with a cash profit at the time of sale, the dealer-partner’s risk in the Consumer Loan is limited. We cannot demand repayment from the dealer-partner of the advance except in the event the dealer-partner is in default of the dealer servicing agreement. Advances are made only after the Consumer Loan is approved, accepted and assigned to us and all other stipulations required for funding have been satisfied. The dealer-partner can also opt to repurchase Consumer Loans assigned under the Portfolio Program at their own discretion.

5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(UNAUDITED)

2. DESCRIPTION OF BUSINESS – (Concluded)

     For accounting purposes, the transactions described under the Portfolio Program are not considered to be loans to consumers. Instead, our accounting reflects that of a lender to the dealer-partner. The classification as a Dealer Loan for accounting purposes is primarily a result of (i) the dealer-partner’s financial interest in the Consumer Loan and (ii) certain elements of our legal relationship with the dealer-partner. The cash amount advanced to the dealer-partner is recorded as an asset on our balance sheet. The aggregate amount of all advances to an individual dealer-partner, plus accrued income, less repayments comprises the amount of the Dealer Loan recorded in Loans receivable.

Purchase Program

     We began offering a Purchase Program on a limited basis in March of 2005. The Purchase Program differs from our traditional Portfolio Program in that the dealer-partner receives a single payment from us at the time of origination instead of a cash advance and dealer holdback. Purchase Program volume increased significantly beginning in 2007 as the program was offered to additional dealer-partners.

     For accounting purposes, the transactions described under the Purchase Program are considered to be originated by the dealer-partner and then purchased by us. The cash amount paid to the dealer-partner is recorded as an asset on our balance sheet. The aggregate amount of all amounts paid to purchase Consumer Loans from dealer-partners, plus accrued income, less repayments, comprises the amount of Purchased Loans recorded in Loans receivable.

3. SIGNIFICANT ACCOUNTING POLICIES

Restricted Cash and Cash Equivalents

     The carrying amount of restricted cash and cash equivalents approximate their fair value due to the short maturity of these instruments. The following table summarizes restricted cash and cash equivalents:

	As of		As of
	September 30,		December 31,
	2008		2007
(in thousands)
Cash collections related to secured financings	$	55,082	$	42,518
Cash held in trusts for future vehicle service contract claims (1)		27,911		18,266
Cash held in escrow related to settlement of class action lawsuit		—		13,318
Total restricted cash and cash equivalents	$	82,993	$	74,102

(1) The claims reserve associated with the trusts are included in accounts payable and accrued liabilities in the consolidated balance sheets.

Deferred Debt Issuance Costs

     As of September 30, 2008 and December 31, 2007, deferred debt issuance costs were $4.7 million (net of accumulated amortization of $4.7 million) and $3.3 million (net of accumulated amortization of $2.0 million), respectively, and are included in other assets in the consolidated balance sheets. Expenses associated with the issuance of debt instruments are capitalized and amortized as interest expense over the term of the debt instrument on a level-yield basis for term secured financings and on a straight-line basis for lines of credit and revolving secured financings.

6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(UNAUDITED)

3. SIGNIFICANT ACCOUNTING POLICIES – (Concluded)

New Accounting Pronouncements

     Fair Value Measurements.In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods of those fiscal years. However, on February 12, 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”), which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FSP FAS 157-2 defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of FSP FAS 157-2. We adopted the applicable portions of SFAS 157 on January 1, 2008 (See Note 7). The deferred portions of SFAS 157 will not have an impact on our financial statements. The adoption of the applicable portions of SFAS 157 for financial assets and liabilities did not have a material impact on our consolidated financial statements.

     Fair Value Option for Financial Assets and Liabilities.In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure financial assets and liabilities (except for those that are specifically exempted from SFAS 159) at fair value. The election to measure a financial asset or liability at fair value can be made on an instrument-by-instrument basis and is irrevocable. The difference between carrying value and fair value at the election date is recorded as a transition adjustment to opening retained earnings. Subsequent changes in fair value are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. At this time, we have not elected to measure any financial assets or liabilities at fair value under SFAS 159.

     Disclosures About Derivative Instruments and Hedging Activities.In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We are currently evaluating the impact that SFAS 161 will have on our consolidated financial statements.

7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(UNAUDITED)

4. LOANS RECEIVABLE

A summary of changes in Loans receivable is as follows (in thousands):

	Three Months Ended September 30, 2008
	Dealer Loans			Purchased Loans			Total
Balance, beginning of period	$	859,691		$	284,718		$	1,144,409
New loans (1)		109,027			61,697			170,724
Transfers (2)		(3,472	)		3,472			—
Dealer holdback payments		13,736			—			13,736
Net cash collections on loans		(122,400	)		(29,398	)		(151,798	)
Write-offs		(21,423	)		(15	)		(21,438	)
Recoveries		—			3			3
Other		(8	)		—			(8	)
Currency translation		(37	)		—			(37	)
Balance, end of period	$	835,114		$	320,477		$	1,155,591

	Three Months Ended September 30, 2007
	Dealer Loans			Purchased Loans			Total
Balance, beginning of period	$	813,192		$	60,249		$	873,441
New loans (1)		101,205			39,481			140,686
Transfers (2)		(1,731	)		1,731			—
Dealer holdback payments		16,661			—			16,661
Net cash collections on loans		(130,958	)		(8,850	)		(139,808	)
Write-offs		(4,956	)		(13	)		(4,969	)
Recoveries		—			5			5
Other		(86	)		—			(86	)
Currency translation		103			—			103
Balance, end of period	$	793,430		$	92,603		$	886,033

	Nine Months Ended September 30, 2008
	Dealer Loans			Purchased Loans			Total
Balance, beginning of period	$	804,245		$	140,453		$	944,698
New loans (1)		430,423			246,971			677,394
Transfers (2)		(5,571	)		5,571			—
Dealer holdback payments		46,482			—			46,482
Net cash collections on loans		(393,851	)		(72,502	)		(466,353	)
Write-offs		(46,519	)		(34	)		(46,553	)
Recoveries		—			18			18
Other		(10	)		—			(10	)
Currency translation		(85	)		—			(85	)
Balance, end of period	$	835,114		$	320,477		$	1,155,591

	Nine Months Ended September 30, 2007
	Dealer Loans			Purchased Loans			Total
Balance, beginning of period	$	724,645		$	29,926		$	754,571
New loans (1)		453,413			81,395			534,808
Transfers (2)		(3,710	)		3,710			—
Dealer holdback payments		55,610			—			55,610
Net cash collections on loans		(424,778	)		(22,279	)		(447,057	)
Write-offs		(12,139	)		(173	)		(12,312	)
Recoveries		—			24			24
Other		140			—			140
Currency translation		249			—			249
Balance, end of period	$	793,430		$	92,603		$	886,033

(1)	New Dealer Loans includes advances to dealer-partners and Portfolio Profit Express.
(2)	Transfers relate to Dealer Loans that are now considered to be Purchased Loans when we exercise our right to the dealer holdback of certain dealer-partners’ Consumer Loans once they are inactive and have originated less than 100 Consumer Loans.

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(UNAUDITED)

4. LOANS RECEIVABLE – (Continued)

A summary of changes in the allowance for credit losses is as follows (in thousands):

	Three Months Ended September 30, 2008
	Dealer Loans			Purchased Loans			Total
Balance, beginning of period	$	125,814		$	6,445		$	132,259
Provision for credit losses (1)		5,122			3,268			8,390
Write-offs		(21,423	)		(15	)		(21,438	)
Recoveries		—			3			3
Currency translation		(30	)		—			(30	)
Balance, end of period	$	109,483		$	9,701		$	119,184

	Three Months Ended September 30, 2007
	Dealer Loans			Purchased Loans			Total
Balance, beginning of period	$	128,425		$	857		$	129,282
Provision for credit losses (2)		5,505			126			5,631
Write-offs		(4,956	)		(13	)		(4,969	)
Recoveries		—			5			5
Currency translation		88			—			88
Balance, end of period	$	129,062		$	975		$	130,037

	Nine Months Ended September 30, 2008
	Dealer Loans			Purchased Loans			Total
Balance, beginning of period	$	133,201		$	944		$	134,145
Provision for credit losses (3)		22,878			8,773			31,651
Write-offs		(46,519	)		(34	)		(46,553	)
Recoveries		—			18			18
Currency translation		(77	)		—			(77	)
Balance, end of period	$	109,483		$	9,701		$	119,184

	Nine Months Ended September 30, 2007
	Dealer Loans			Purchased Loans			Total
Balance, beginning of period	$	127,881		$	910		$	128,791
Provision for credit losses (4)		13,108			214			13,322
Write-offs		(12,139	)		(173	)		(12,312	)
Recoveries		—			24			24
Currency translation		212			—			212
Balance, end of period	$	129,062		$	975		$	130,037

(1)	Does not include a provision for credit losses of $(11) related to other items.
(2)	Does not include a provision for credit losses of $300 related to other items.
(3)	Does not include a provision for credit losses of $141 related to other items.
(4)	Does not include a provision for credit losses of $280 related to other items.

9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(UNAUDITED)

4. LOANS RECEIVABLE – (Concluded)

     The increase in the provision for credit losses for the nine months ended September 30, 2008 compared to the same period in the prior year was primarily due to a reduction in estimated future collection rates during the second quarter of 2008. Our forecast as of March 31, 2008 assumed that Loans within our current portfolio would produce similar collection rates as produced by historical Loans with the same attributes and we expected net cash flows of $1.3 billion from our Loan portfolio. During the second quarter of 2008, we modified our forecasting methodology which now assumes that Loans originated in 2006, 2007 and 2008 will perform 100 to 300 basis points lower than historical Loans with the same attributes. As a result we reduced our estimate of future cash flows on these same Loans by $22.2 million, or 1.7%. Of the total reduction, $20.8 million was recorded as provision for credit losses during the second quarter of 2008. This new expectation is consistent with recent experience and included both the lower realized collection rates experienced during the second quarter of 2008 as well as lower expected recoveries on repossession sales as a result of a decline in used vehicle values that occurred during the second quarter of 2008. We did not modify our forecast related to 2005 and prior Loans as these Loans continue to perform as expected.

     During the first quarter of 2008, in conjunction with our implementation of a new forecasting methodology, we reevaluated our forecast of future collections on old, fully-reserved Dealer Loans. As a result, we wrote off $22.7 million of Dealer Loans and the related allowance for credit losses as we were no longer forecasting any future collections on these Dealer Loans. This write-off had no impact on net income for the first quarter of 2008 as all of these Dealer Loans were fully-reserved. During the third quarter of 2008, we wrote off $16.5 million of Loans to one individual dealer-partner in accordance with our write-off policy as we were no longer forecasting any future collections on these Loans. This dealer-partner has not assigned any Consumer Loans to us for several years. As of June 30, 2008 and December 31, 2007, we had an allowance for credit losses of $16.4 million and $16.2 million, respectively, on Loans to this dealer-partner.

10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(UNAUDITED)

5. DEBT

     We currently use four primary sources of debt financing: (i) a revolving secured line of credit with a commercial bank syndicate; (ii) revolving secured warehouse facilities with institutional investors; (iii) SEC Rule 144A asset-backed secured financings (“Term ABS 144A”) with qualified institutional investors; and (iv) a residual credit facility with an institutional investor. General information for each of our financing transactions in place as of September 30, 2008 is as follows (dollars in thousands):

	Wholly owned	Issue		Revolving Maturity	Financing		Interest Rate at
Financings	Subsidiary (1)	Number	Close Date	Date	Amount		September 30, 2008
Revolving Line of Credit	n/a	n/a	January 25, 2008	June 22, 2010	$	153,500	At the Company’s option, either Eurodollar rate plus 125 basis points (5.18%) or the prime rate minus 105 basis points (3.95%)
Revolving Secured Warehouse Facility (1)	CAC Warehouse Funding Corp. II	2003-2	August 27, 2008	August 26, 2009	$	325,000	Commercial paper rate plus 100 basis points (4.36%) or LIBOR plus 200 basis points (5.93%) (4)
Revolving Secured Warehouse Facility (1)	CAC Warehouse Funding III, LLC	2008-2	May 27, 2008	May 23, 2010	$	50,000	Commercial paper rate plus 77.5 basis points (4.14%) or LIBOR plus 177.5 basis points (5.70%) (4)
Term ABS 144A 2006-2 (1)	Credit Acceptance Funding LLC 2006-2	2006-2	November 21, 2006	November 15, 2007 (2)	$	100,000	Fixed rate (5.38%)
Term ABS 144A 2007-1 (1)	Credit Acceptance Funding LLC 2007-1	2007-1	April 12, 2007	April 15, 2008 (2)	$	100,000	Fixed rate (5.32%)
Term ABS 144A 2007-2 (1)	Credit Acceptance Funding LLC 2007-2	2007-2	October 29, 2007	October 15, 2008 (2)	$	100,000	Fixed rate (6.22%) (3)
Term ABS 144A 2008-1 (1)	Credit Acceptance Funding LLC 2008-1	2008-1	April 18, 2008	April 15, 2009 (2)	$	150,000	Fixed rate (6.37%) (3)
Residual Credit Facility (1)	Credit Acceptance Residual Funding LLC	2006-3	August 27, 2008	August 26, 2009	$	50,000	LIBOR plus 350 basis points (7.43%) or the commercial paper rate plus 250 basis points(5.86%) (4)

(1)	Financing made available only to a specified subsidiary of the Company.
(2)	Loans will amortize after the revolving maturity date based on the cash flows of the contributed assets.
(3)	Includes a floating rate obligation that has been converted to a fixed rate via an interest rate swap.
(4)	The LIBOR rate is used if funding is not available from the commercial paper market.

11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(UNAUDITED)

5. DEBT – (Continued)

     Additional information related to the amounts outstanding on each facility is as follows (dollars in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Revolving Line of Credit
Maximum outstanding balance	$	82,900	$	56,200	$	128,400	$	70,200
Average outstanding balance		56,282		39,699		59,038		41,286
Revolving Secured Warehouse Facility (2003-2) (1)
Maximum outstanding balance	$	264,061	$	261,000	$	297,211	$	293,500
Average outstanding balance		258,743		234,933		262,398		221,996
Revolving Secured Warehouse Facility (2008-2)
Maximum outstanding balance	$	50,000	$	—	$	50,000	$	—
Average outstanding balance		50,000		—		50,000		—

(1) Includes amounts owing after February 12, 2008 to an institutional investor that did not renew their participation in the facility. The amount due did not reduce the amount available on the Warehouse Facility. See “Revolving Secured Warehouse Facilities” for additional information.

	As of September 30,			As of December 31,
	2008			2007
Revolving Line of Credit
Balance outstanding	$	82,900		$	36,300
Letter(s) of credit		55			173
Amount available for borrowing		70,545			38,527
Interest rate		3.35	%		5.60	%
Revolving Secured Warehouse Facility (2003-2)
Balance outstanding	$	246,000		$	198,100
Amount available for borrowing		79,000			226,900
Contributed eligible Loans		324,123			254,294
Interest rate		4.36	%		5.76	%
Revolving Secured Warehouse Facility (2008-2)
Balance outstanding	$	50,000		$	—
Amount available for borrowing		—			—
Contributed eligible Loans		62,516			—
Interest rate		5.70	%		—
Term ABS 144A 2006-2
Balance outstanding	$	—		$	89,965
Contributed eligible Dealer Loans		—			129,950
Interest rate		—			5.38	%
Term ABS 144A 2007-1
Balance outstanding	$	56,429		$	100,000
Contributed eligible Dealer Loans		101,520			130,841
Interest rate		5.32	%		5.32	%
Term ABS 144A 2007-2
Balance outstanding	$	100,000		$	100,000
Contributed eligible Dealer Loans		125,008			132,695
Interest rate		6.22	%		6.22	%
Term ABS 144A 2008-1
Balance outstanding	$	150,000		$	—
Contributed eligible Loans		189,342			—
Interest rate		6.37	%		—
Residual Credit Facility
Balance outstanding	$	—		$	—
Certificate Pledged		—			28,513
Interest rate		5.86	%		6.56	%

12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(UNAUDITED)

5. DEBT – (Continued)

Line of Credit Facility

     During the first quarter of 2008, we increased the amount of our line of credit facility with a commercial bank syndicate from $75.0 million to $153.5 million. In addition, the maturity of the line of credit facility was extended from June 20, 2009 to June 22, 2010. There were no other material changes to the terms of the line of credit facility.

     Borrowings under the credit facility are subject to a borrowing-base limitation. This limitation equals 80% of the net book value of Loans, less a hedging reserve (not exceeding $1.0 million), the amount of letters of credit issued under the line of credit, and the amount of other debt secured by the collateral which secures the line of credit. Borrowings under the credit agreement are secured by a lien on most of our assets. We must pay annual and quarterly fees on the amount of the facility.

Revolving Secured Warehouse Facilities

     We have two revolving secured warehouse facilities that are provided to wholly owned subsidiaries of the Company. One is a $325.0 million facility with an institutional investor and the other is a $50.0 million facility with another institutional investor.

     During the first quarter of 2008, we extended the maturity of the $325.0 million facility from February 13, 2008 to February 11, 2009. The amount of the facility was reduced from $425.0 million to $325.0 million. The reduction in the amount of the facility is due to one of the two institutional investors (the “Nonextending Investor”) not renewing their participation in the facility. The amount owing to the Nonextending Investor has been reduced to zero. During the third quarter of 2008, we extended the maturity of the $325.0 million facility from February 11, 2009 to August 26, 2009 and increased the interest rate on borrowings under the facility from a floating rate equal to the commercial paper rate plus 65 basis points, to the commercial paper rate plus 100 basis points.

     The $325.0 million facility requires that certain amounts outstanding under the facility be refinanced within 360 days of the most recent refinancing. The most recent refinancing occurred in October of 2008. If such refinancing does not occur, the facility will cease to revolve, will amortize as collections are received and, at the option of the institutional investor, may be subject to acceleration and foreclosure.

     During the second quarter of 2008, we entered into a $50.0 million revolving warehouse facility with an institutional investor. This facility was fully drawn as of September 30, 2008.

     Under these facilities we can contribute Loans to our wholly owned subsidiaries in return for cash and equity in each subsidiary. In turn, each subsidiary pledges the Loans as collateral to institutional investors to secure financing that will fund the cash portion of the purchase price of the Loans. The financing provided to each subsidiary under the applicable facility is limited to the lesser of 80% of the net book value of the contributed Loans or the facility limit.

     The subsidiaries are liable for any amounts due under the applicable facility. Even though the subsidiaries and the Company are consolidated for financial reporting purposes, the financing is non-recourse to us. As the subsidiaries are organized as separate legal entities from the Company, assets of the subsidiaries (including the conveyed Loans) will not be available to satisfy the general obligations of the Company. All of each subsidiaries’ assets have been encumbered to secure its obligations to its respective creditors.

     Interest on borrowings under the facilities has been limited to a maximum rate of 6.75% through interest rate cap agreements. The subsidiaries pay us a monthly servicing fee equal to 6% of the collections received with respect to the conveyed Loans. The fee is paid out of the collections. Except for the servicing fee and holdback payments due to dealer-partners, we do not have any rights in any portion of such collections until all outstanding principal, accrued and unpaid interest, fees and other related costs are paid in full.

13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(UNAUDITED)

5. DEBT – (Continued)

Term ABS 144A Financings

     In 2007 and 2008, three of our wholly owned subsidiaries (the “Funding LLCs”), each completed a secured financing transaction. In connection with these transactions, we conveyed Loans on an arms-length basis to each Funding LLC for cash and the sole membership interest in that Funding LLC. In turn, each Funding LLC conveyed the Loans to a respective trust that issued notes to qualified institutional investors. Financial insurance policies were issued in connection with the 2007 transactions. The policies guarantee the timely payment of interest and ultimate repayment of principal on the final scheduled distribution date. In the 2007 transactions, the notes were initially rated “Aaa” by Moody’s Investor Service (“Moody’s”) and “AAA” by Standard & Poor’s Rating Services (“S&P”) based upon the financial insurance policy. Due to downgrades in the debt ratings of the insurers, at September 30, 2008 the 2007 transactions were rated “A-” by S&P and “A3” by “Moody’s. The 2008 transaction was rated “A” by S&P.

     Each financing has a specified revolving period during which we may be required, and are likely, to convey additional Loans to each Funding LLC. Each Funding LLC will then convey the Loans to their respective trust. At the end of the revolving period, the debt outstanding under each financing will begin to amortize.

     The financings create loans for which the trusts are liable and which are secured by all the assets of each trust. Such loans are non-recourse to us, even though the trusts, the Funding LLCs and the Company are consolidated for financial reporting purposes. Because the Funding LLCs are organized as separate legal entities from the Company, their assets (including the conveyed Loans) are not available to satisfy our general obligations. We receive a monthly servicing fee on each financing equal to 6% of the collections received with respect to the conveyed Loans. The fee is paid out of the collections. Aside from the servicing fee and payments due to dealer-partners, we do not receive, or have any rights in the collections. However, in our capacity as Servicer of the Loans, we do have a limited right to exercise a “clean-up call” option to purchase Loans from the Funding LLCs under certain specified circumstances. Alternatively, when a trust’s underlying indebtedness is paid in full, either through collections or through a prepayment of the indebtedness, the trust is to pay any remaining collections over to its Funding LLC as the sole beneficiary of the trust. The collections will then be available to be distributed to us as the sole member of the respective Funding LLC.

     The table below sets forth certain additional details regarding the outstanding Term ABS 144A Financings (dollars in thousands):

			Net Book Value of Dealer			Expected
Term ABS 144A	Issue		Loans Conveyed at			Annualized
Financing	Number	Close Date	Closing		Revolving Period	Rates (1)
Term ABS 144A 2007-1	2007-1	April 12, 2007	$	125,700	12 months (Through April 15, 2008)		7.2	%
Term ABS 144A 2007-2	2007-2	October 29, 2007	$	125,000	12 months (Through October 15, 2008)		8.0	%
Term ABS 144A 2008-1	2008-1	April 18, 2008	$	86,615	12 months (Through April 15, 2009)		6.9	%

(1) Includes underwriter’s fees, insurance premiums and other costs.

Residual Credit Facility

     Another wholly owned subsidiary, Credit Acceptance Residual Funding LLC (“Residual Funding”), has a $50.0 million secured credit facility with an institutional investor. This facility allows Residual Funding to finance its purchase of trust certificates from special-purpose entities (the “Term SPEs”) that have purchased Dealer Loans under our term securitization transactions. Historically, the Term SPEs’ residual interests in Dealer Loans, represented by their trust certificates, have proven to have value that increases as their term securitization obligations amortize. This facility enables the Term SPEs to realize and distribute to us up to 70% of that increase in value prior to the time the related term securitization senior notes are paid in full.

14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(UNAUDITED)

5. DEBT – (Concluded)

     Residual Funding’s interests in Dealer Loans, represented by its purchased trust certificates, are subordinated to the interests of term securitization senior noteholders. However, the entire arrangement is non-recourse to us. Residual Funding is organized as a separate legal entity from the Company. Therefore its assets, including purchased trust certificates, are not available to satisfy our general obligations, even though Residual Funding and the Company are consolidated for financial reporting purposes.

     During the third quarter of 2008, we extended the maturity of the facility from September 9, 2008 to August 26, 2009 and increased the interest rate on borrowings under the facility from a floating rate equal to the commercial paper rate plus 145 basis points, to the commercial paper rate plus 250 basis points.

Debt Covenants

     As of September 30, 2008, we are in compliance with various restrictive debt covenants that require the maintenance of certain financial ratios and other financial conditions. The most restrictive covenants require a minimum ratio of our assets to debt and a minimum ratio of our earnings before interest, taxes and non-cash expenses to fixed charges. The covenants also limit the maximum ratio of our funded debt to tangible net worth. Additionally, we must maintain consolidated net income of not less than $1.00 for the two most recently ended fiscal quarters. Some of the debt covenants may indirectly limit the payment of dividends on common stock.

6. DERIVATIVE INSTRUMENTS

     Interest Rate Caps.We purchase interest rate cap agreements to manage the interest rate risk on our $325.0 million and $50.0 million revolving secured warehouse facilities. As we have not designated these agreements as hedges as defined under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended, changes in the fair value of these agreements will increase or decrease net income.

     As of September 30, 2008, seven interest rate cap agreements with various maturities between July 2009 and February 2011 were outstanding with a cap rate of 6.75% and a fair value of $0.1 million. As of December 31, 2007, four interest rate cap agreements with various maturities between May 2008 and June 2010 were outstanding with a cap rate of 6.75% and a fair value of $6,000.

     Interest Rate Swaps.As of September 30, 2008 we had $106.4 million in fixed rate debt, and $200.0 million in floating rate debt outstanding under Term ABS 144A asset-backed secured borrowings. We have entered into two interest rate swaps to convert $50.0 million and $150.0 million in floating rate Term ABS 144A asset-backed secured borrowings into fixed rate debt bearing a rate of 6.28% and 6.37%, respectively. The fair value of the interest rate swaps is based on quoted prices for similar instruments in active markets, which are influenced by a number of factors, including interest rates, amount of debt outstanding, and number of months until maturity. As we have not designated the interest rate swap related to the $50.0 million in floating rate debt as a hedge as defined under SFAS 133, changes in the fair value of this swap will increase or decrease interest expense. For the three and nine months ended September 30, 2008, the impact on interest expense was ($0.3) million and approximately ($38,000), respectively. As of September 30, 2008, the interest rate swap had a fair value of ($0.4) million.

     We have designated the interest rate swap related to the $150.0 million floating rate debt as a cash flow hedge as defined under SFAS 133. The effective portion of changes in the fair value will be recorded in other comprehensive income, net of income taxes, and the ineffective portion of changes in fair value will be recorded in interest expense. There has been no such ineffectiveness since the inception of this hedge through the third quarter of 2008. For the three and nine months ended September 30, 2008, the impact on other comprehensive income, net of tax, was approximately $40,000 and ($0.2) million, respectively. As of September 30, 2008, the interest rate swap had a fair value of ($0.3) million.

15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(UNAUDITED)

6. DERIVATIVE INSTRUMENTS – (Concluded)

     For those derivative instruments that are designated and qualify as hedging instruments, we formally document all relationships between the hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to specific assets and liabilities on the balance sheet. We also formally assess (both at the hedge’s inception and on a quarterly basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in the future periods. When it is determined that a derivative is not (or has ceased to be) highly effective as a hedge, we would discontinue hedge accounting prospectively.

     At September 30, 2008, we had minimal exposure to credit loss on the interest rate swaps. We do not believe that any reasonably likely change in interest rates would have a materially adverse effect on our financial position, our results of operations or our cash flows.

     We recognize our derivative financial instruments as either other assets or accounts payable and accrued liabilities on our consolidated balance sheets.

7. FAIR VALUE MEASUREMENTS

     Effective January 1, 2008, we adopted SFAS 157, which clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value. As required under SFAS 157, we group assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1	Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2	Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3	Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates or assumptions that market participants would use in pricing the asset or liability.

     The following table provides the fair value measurements of applicable assets and liabilities as of September 30, 2008 (in thousands):

					Total
	Level 1		Level 2		Fair Value
Assets
Restricted securities available for sale	$	3,933	$	—	$	3,933
Derivative instruments		—		92		92
Liabilities
Derivative instruments	$	—	$	701	$	701

16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(UNAUDITED)

8. RELATED PARTY TRANSACTIONS

     In the normal course of our business, we have Dealer Loans with affiliated dealer-partners owned or controlled by: (i) our majority shareholder and Chairman; and (ii) a member of the Chairman’s immediate family. Our Dealer Loans to affiliated dealer-partners and non-affiliated dealer-partners are on the same terms.

     Affiliated Dealer Loan balances were $16.1 million as of September 30, 2008 and December 31, 2007. Affiliated Dealer Loan balances were 1.9% and 2.0% of total consolidated Dealer Loan balances as of September 30, 2008 and December 31, 2007, respectively. A summary of related party Dealer Loan activity is as follows (dollars in thousands):

	Three Months Ended					Three Months Ended
	September 30, 2008					September 30, 2007
	Affiliated					Affiliated
	dealer-partner		% of			dealer-partner		% of
	activity		consolidated			activity		consolidated
New loans	$	2,217		2.0	%	$	1,644		1.6	%
Affiliated dealer-partner revenue	$	1,024		1.9	%	$	1,090		2.2	%
Dealer holdback payments	$	530		3.9	%	$	344		2.1	%

	Nine Months Ended					Nine Months Ended
	September 30, 2008					September 30, 2007
	Affiliated					Affiliated
	dealer-partner		% of			dealer-partner		% of
	activity		consolidated			activity		consolidated
New loans	$	8,736		2.0	%	$	8,202		1.8	%
Affiliated dealer-partner revenue	$	3,036		1.9	%	$	3,503		2.4	%
Dealer holdback payments	$	1,660		3.6	%	$	1,367		2.5	%

     Beginning in 2002, entities owned by our majority shareholder and Chairman began offering secured lines of credit to third parties in a manner similar to a program previously offered by us. In December 2004, our majority shareholder and Chairman sold his ownership interest in these entities; however, he continues to have indirect control over these entities and has the right or obligation to reacquire the entities under certain circumstances until December 31, 2014 or the repayment of the related purchase money note.

17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(UNAUDITED)

9. CAPITAL TRANSACTIONS

     Net Income Per Share

     Basic net income per share has been computed by dividing net income by the basic number of common shares outstanding. Diluted net income per share has been computed by dividing net income by the diluted number of common and common equivalent shares outstanding using the treasury stock method. The share effect is as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Weighted average common and common equivalent shares outstanding:
Basic number of common shares outstanding		30,310,053		30,015,048		30,223,586		30,069,639
Dilutive effect of stock options		591,667		1,056,255		654,531		1,102,069
Dilutive effect of unvested time based restricted stock		62,735		68,309		56,349		57,185
Dilutive effect of vested performance based restricted stock units		60,000		—		60,000		—
Dilutive number of common and common equivalent shares outstanding		31,024,455		31,139,612		30,994,466		31,228,893

     There were no stock options or restricted stock that would be anti-dilutive for the three and nine months ended September 30, 2008 and 2007.

     Stock Compensation Plans

     Pursuant to our Incentive Compensation Plan (the “Incentive Plan”), which was approved by shareholders on May 13, 2004, we reserved 1.0 million shares of our common stock for the future granting of restricted stock, restricted stock units, stock options, and performance awards to employees, officers, and directors at any time prior to April 1, 2014. Shares available for future grants under the Incentive Plan totaled 429,757 as of September 30, 2008.

     Below is a summary of the activity under the Incentive Plan for the nine months ended September 30, 2008 and 2007:

Restricted Stock	Number of Shares
Outstanding as of December 31, 2007		201,872
Granted		80,123
Vested		(20,198	)
Forfeited		(12,560	)
Outstanding as of September 30, 2008		249,237

Restricted Stock	Number of Shares
Outstanding as of December 31, 2006		146,028
Granted		56,669
Vested		(708	)
Forfeited		(17	)
Outstanding as of September 30, 2007		201,972

     On February 22, 2007, the compensation committee approved an award of 300,000 restricted stock units to our Chief Executive Officer. Each restricted stock unit represents and has a value equal to one share of our common stock. The restricted stock units will be earned over a five year period based upon the annual increase in our adjusted economic profit. Any earned shares will be distributed on February 22, 2014. As of September 30, 2008, 60,000 restricted stock units have been earned.

     Expenses related to restricted stock grants and the award of restricted stock units is as follows (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2008		2007			2008		2007
Restricted stock compensation expense	$	483	$	(309	)	$	1,194	$	129
Restricted stock units compensation expense		537		771			1,634		2,175
Total expense	$	1,020	$	462		$	2,828	$	2,304

18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(UNAUDITED)

9. CAPITAL TRANSACTIONS – (Concluded)

     On October 2, 2008, the compensation committee approved an award of 100,000 restricted stock units to our President. Each restricted stock unit represents and has a value equal to one share of our common stock. The restricted stock units will be earned over a five year period based upon the annual increase in our adjusted economic profit. Any earned shares will be distributed on February 22, 2016.

10. BUSINESS SEGMENT INFORMATION

     We have two reportable business segments: United States and Other. The United States segment primarily consists of the United States automobile financing business. We are currently liquidating all businesses classified in the Other segment.

     Selected segment information is set forth below (in thousands):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2008			2007		2008			2007
Revenue:
United States	$	80,101		$	61,031	$	225,856		$	176,593
Other		6			27		34			102
Total revenue	$	80,107		$	61,058	$	225,890		$	176,695
Income (loss) from continuing operations before provision for income taxes:
United States	$	32,968		$	21,302	$	77,260		$	64,550
Other		(31	)		84		(141	)		186
Total income from continuing operations before provision for income taxes	$	32,937		$	21,386	$	77,119		$	64,736

	As of		As of
	September 30, 2008		December 31, 2007
Segment Assets
United States	$	1,169,385	$	940,307
Other		971		1,875
Total Assets	$	1,170,356	$	942,182

11. COMPREHENSIVE INCOME

     Our comprehensive income information is set forth below (in thousands):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2008			2007		2008			2007
Net income	$	20,657		$	14,742	$	48,621		$	42,432
Unrealized (loss) gain on securities available for sale, net of tax		(37	)		24		(32	)		28
Unrealized gain (loss) on interest rate swap, net of tax		40			—		(166	)		—
Comprehensive income	$	20,660		$	14,766	$	48,423		$	42,460

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in Item 8 — Financial Statements and Supplementary Data, of our 2007 Annual Report on Form 10-K, as well as Item 1- Consolidated Financial Statements, in this Form 10-Q.

Critical Success Factors

     Critical success factors for us include access to capital and the ability to accurately forecast Consumer Loan performance.

     Our strategy for accessing the capital required to grow is to: (i) maintain consistent financial performance, (ii) maintain modest financial leverage, and (iii) maintain multiple funding sources. At September 30, 2008 our funded debt to equity ratio is 2.2:1. We currently use four primary sources of debt financing: (i) a revolving secured line of credit with a commercial bank syndicate; (ii) revolving secured warehouse facilities with institutional investors; (iii) SEC Rule 144A asset-backed secured borrowings (“Term ABS 144A”) with qualified institutional investors; and (iv) a residual credit facility with an institutional investor.

     At the time of Consumer Loan acceptance or purchase, we forecast future expected cash flows from the Consumer Loan. Based on these forecasts, an advance or one time payment is made to the related dealer-partner at a level designed to achieve an acceptable return on capital. If Consumer Loan performance equals or exceeds our original expectation, it is likely our target return on capital will be achieved.

Consumer Loan Performance

     The following table compares our forecast of Consumer Loan collection rates as of September 30, 2008, with the forecasts as of June 30, 2008, as of December 31, 2007, and at the time of assignment, segmented by year of assignment:

Loan	Forecasted Collection Percentage as of												Variance in Forecasted Collection Percentage from
Assignment	September 30,			June 30,			December 31,			Initial			June 30,			December 31,			Initial
Year	2008			2008			2007 (1)			Forecast			2008			2007			Forecast
1999		72.1	%		72.1	%		72.0	%		73.6	%		0.0	%		0.1	%		-1.5	%
2000		72.5	%		72.5	%		72.4	%		72.8	%		0.0	%		0.1	%		-0.3	%
2001		67.4	%		67.4	%		67.3	%		70.4	%		0.0	%		0.1	%		-3.0	%
2002		70.4	%		70.4	%		70.6	%		67.9	%		0.0	%		-0.2	%		2.5	%
2003		73.9	%		74.0	%		74.1	%		72.0	%		-0.1	%		-0.2	%		1.9	%
2004		73.5	%		73.5	%		73.5	%		73.0	%		0.0	%		0.0	%		0.5	%
2005		74.1	%		74.1	%		73.8	%		74.0	%		0.0	%		0.3	%		0.1	%
2006		70.3	%		70.2	%		70.9	%		71.4	%		0.1	%		-0.6	%		-1.1	%
2007		68.2	%		68.2	%		71.1	%		70.7	%		0.0	%		-2.9	%		-2.5	%
2008		68.2	%		69.0	%		—			69.7	%		-0.8	%		—			-1.5	%

(1) These forecasted collection percentages differ from those previously reported in our Annual Report on Form 10-K for the year ended December 31, 2007 and our 2007 earnings release as they have been revised for a new methodology for forecasting future collections on Loans that we implemented during the first quarter of 2008.

     We forecast future Loan cash flows by comparing Loans in our current portfolio to historical Loans with the same attributes. The attributes include both variables captured at Loan origination like credit bureau data, application data, Loan data and vehicle data as well as variables captured subsequent to Loan origination such as collection and delinquency data. Our forecast as of March 31, 2008 assumed that Loans within our current portfolio would produce similar collection rates as produced by historical Loans with the same attributes. During the second quarter of 2008, we modified our forecasting methodology, which now assumes that Loans originated in 2006, 2007 and 2008 will perform 100 to 300 basis points worse than historical Loans with the same attributes.

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     During the third quarter, actual Loan performance for 2007 and prior originations was consistent with our revised forecast. As a result, forecasted collection rates on 2007 and prior Loans remained consistent with our forecasts for these same Loans three months ago. Actual Loan performance was slightly worse than expected for 2008 originations. As a result, the table above shows a decline in the forecasted collection rate for 2008 Loans from 69.0% to 68.2%. The forecasted collection rate for 2008 Loans as of September 30, 2008 includes both Loans that were in our portfolio as of June 30, 2008 and Loans received during the most recent quarter. The following table summarizes the change in our forecast for each of these segments:

	Forecasted Collection Percentage as of
	September 30,			June 30,
2008 Loan Assignment Period	2008			2008			Variance
January 1, 2008 through June 30, 2008		68.3	%		69.0	%		-0.7	%
July 1, 2008 through September 30, 2008		68.0	%		—			—

     As a result of the current economic uncertainty, we are cautious about our forecasts of future collection percentages. However, we believe our current estimates are reasonable for the following reasons:

• Our forecasts start with the assumption that Loans in our current portfolio will perform like historical Loans with similar attributes.

• We reduced our forecasts during the second quarter on Loans originated in 2006 through 2008 by 100 to 300 basis points based on recent trends and a concern about the worsening economic environment.

• Actual Loan performance during the third quarter was consistent with our forecast as of June 30, 2008 for Loans originated in 2007 and prior periods.

• Actual Loan performance during the third quarter was slightly below our forecast as of June 30, 2008 for Loans originated during the first six months of 2008, and our forecasted collection rate for these Loans was reduced accordingly.

• We have reduced the forecasted collection rate used at Loan inception to price new Loan originations. As of September 1, 2008, the forecasted collection rate used at Loan inception is approximately 300 basis points lower than identical Loans originated a year ago.

• Our current forecasting methodology, when applied against historical data, produces a consistent result as the Loans age.

     If the economic environment continues to deteriorate, our Loan collection rates may continue to decline. Knowing this, we set prices at Loan inception to increase the likelihood of achieving an acceptable return on capital, even if collection results are worse than we currently forecast. A 100 basis point change in the collection rate impacts the after-tax return on capital by approximately 30 basis points for Dealer Loans, and approximately 65 basis points for Purchased Loans.

     Since the cash flows available to repay Loans are generated, in most cases, from the underlying Consumer Loans, the performance of the Consumer Loans is critical to our financial results. The following table presents forecasted Consumer Loan collection rates, advance rates (includes amounts paid to acquire Purchased Loans), the spread (the forecasted collection rate less the advance rate), and the percentage of the forecasted collections that had been realized as of September 30, 2008. Payments of dealer holdback and Portfolio Profit Express are not included in the advance percentage paid to the dealer-partner. All amounts are presented as a percentage of the initial balance of the Consumer Loan (principal + interest). The table includes both Dealer Loans and Purchased Loans.

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	As of September 30, 2008
	Forecasted			% of Forecast
Loan Assignment Year	Collection %	Advance %	Spread %	Realized
1999	72.1%	48.7%	23.4%	99.6%
2000	72.5%	47.9%	24.6%	99.2%
2001	67.4%	46.0%	21.4%	98.7%
2002	70.4%	42.2%	28.2%	98.3%
2003	73.9%	43.4%	30.5%	97.8%
2004	73.5%	44.0%	29.5%	96.7%
2005	74.1%	46.9%	27.2%	94.0%
2006	70.3%	46.6%	23.7%	78.5%
2007	68.2%	46.5%	21.7%	48.1%
2008	68.2%	44.9%	23.3%	15.1%

     The following table presents forecasted Consumer Loan collection rates, advance rates (includes amounts paid to acquire Purchased Loans), and the spread (the forecasted collection rate less the advance rate) as of September 30, 2008 for Purchased Loans and Dealer Loans separately:

			Forecasted
	Loan Assignment Year		Collection %			Advance %			Spread %
Purchased loans		2007		68.0	%		48.9	%		19.1	%
		2008		67.5	%		47.2	%		20.3	%
Dealer loans		2007		68.2	%		45.9	%		22.3	%
		2008		68.6	%		43.7	%		24.9	%

     Although the advance rate on Purchased Loans is higher as compared to the advance rate on Dealer Loans, Purchased Loans do not require us to pay dealer holdback. The increase in the spread between the forecasted collection rate and the advance rate occurred as a result of pricing changes implemented during the first nine months of 2008.

     The following table summarizes Consumer Loan dollar growth in each of the last seven quarters compared with the same period in the previous year:

Year over Year
Growth in Consumer Loan Dollar Volume
Three Months Ended	% Change
March 31, 2007		41.1	%
June 30, 2007		43.9	%
September 30, 2007		2.2	%
December 31, 2007		23.3	%
March 31, 2008		28.5	%
June 30, 2008		40.6	%
September 30, 2008		27.5	%

     Unit volume and dollar volume grew at roughly the same rate during the third quarter of 2008 due to various pricing changes implemented at the end of the second quarter and in the third quarter of 2008 that have reduced the average loan size.

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     The following table summarizes key information regarding Purchased Loans:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
New Purchased Loan unit volume as a percentage of total unit volume		30.8	%		25.5	%		31.6	%		14.0	%
Net Purchased Loan receivable balance as a percentage of the total net receivable balance as of the end of the period		30.0	%		12.1	%		30.0	%		12.1	%

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Results of Operations

     Three and Nine Months Ended September 30, 2008 Compared to Three and Nine Months Ended September 30, 2007

     The following is a discussion of our results of operations and income statement data on a consolidated basis.

	Three Months						Three Months
	Ended						Ended
	September 30,			% of			September 30,			% of
	2008			Revenue			2007			Revenue
(Dollars in thousands, except per share data)
Revenue:
Finance charges	$	75,617			94.4	%	$	56,743			92.9	%
Other income		4,490			5.6			4,315			7.1
Total revenue		80,107			100.0			61,058			100.0
Costs and expenses:
Salaries and wages		16,766			20.9			13,620			22.3
General and administrative		6,975			8.7			7,266			11.9
Sales and marketing		4,088			5.1			3,835			6.3
Provision for credit losses		8,383			10.5			5,931			9.7
Interest		10,954			13.7			9,030			14.8
Other expense		2			—			16			—
Total costs and expenses		47,168			58.9			39,698			65.0
Operating income		32,939			41.1			21,360			35.0
Foreign currency (loss) gain		(2	)		—			26			—
Income from continuing operations before provision for income taxes		32,937			41.1			21,386			35.0
Provision for income taxes		12,606			15.7			7,917			13.0
Income from continuing operations		20,331			25.4			13,469			22.0
Discontinued operations
Gain (loss) from discontinued United Kingdom operations		504			0.6			(9	)		—
Provision (credit) for income taxes		178			0.2			(1,282	)		(2.1	)
Gain from discontinued operations		326			0.4			1,273			2.1
Net income	$	20,657			25.8	%	$	14,742			24.1	%
Net income per common share:
Basic	$	0.68					$	0.49
Diluted	$	0.67					$	0.47
Income from continuing operations per common share:
Basic	$	0.67					$	0.45
Diluted	$	0.66					$	0.43
Gain from discontinued operations per common share:
Basic	$	0.01					$	0.04
Diluted	$	0.01					$	0.04
Weighted average shares outstanding:
Basic		30,310,053						30,015,048
Diluted		31,024,455						31,139,612

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	Nine Months						Nine Months
	Ended						Ended
	September 30,			% of			September 30,			% of
	2008			Revenue			2007			Revenue
(Dollars in thousands, except per share data)
Revenue:
Finance charges	$	210,119			93.0	%	$	162,240			91.8	%
Other income		15,771			7.0			14,455			8.2
Total revenue		225,890			100.0			176,695			100.0
Costs and expenses:
Salaries and wages		51,205			22.7			38,573			21.8
General and administrative		20,726			9.2			20,542			11.6
Sales and marketing		13,272			5.9			12,451			7.0
Provision for credit losses		31,792			14.1			13,602			7.7
Interest		31,702			14.0			26,781			15.2
Other expense		59			—			74			—
Total costs and expenses		148,756			65.9			112,023			63.3
Operating income		77,134			34.1			64,672			36.7
Foreign currency (loss) gain		(15	)		—			64			—
Income from continuing operations before provision for income taxes		77,119			34.1			64,736			36.6
Provision for income taxes		28,828			12.8			23,387			13.2
Income from continuing operations		48,291			21.3			41,349			23.5
Discontinued operations
Gain (loss) from discontinued United Kingdom operations		548			0.2			(280	)		(0.2	)
Provision (credit) for income taxes		218			0.1			(1,363	)		(0.7	)
Gain from discontinued operations		330			0.1			1,083			0.5
Net income	$	48,621			21.4	%	$	42,432			24.0	%
Net income per common share:
Basic	$	1.61					$	1.41
Diluted	$	1.57					$	1.36
Income from continuing operations per common share:
Basic	$	1.60					$	1.38
Diluted	$	1.56					$	1.32
Gain from discontinued operations per common share:
Basic	$	0.01					$	0.04
Diluted	$	0.01					$	0.03
Weighted average shares outstanding:
Basic		30,223,586						30,069,639
Diluted		30,994,466						31,228,893

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Continuing Operations

     Three and Nine Months Ended September 30, 2008 Compared to Three and Nine Months Ended September 30, 2007

     The following table highlights changes for the three and nine months ended September 30, 2008, as compared to the same periods in 2007:

	Three Months Ended			Nine Months Ended
	September 30, 2008			September 30, 2008
Income from continuing operations		50.9	%		16.8	%
Finance charges		33.3	%		29.5	%
Average outstanding balance of Loan portfolio		37.7	%		35.0	%
Average yield on Loan portfolio		-1.1	%		-1.5	%
Operating expenses		12.6	%		19.1	%
Provision for credit losses		41.3	%		133.7	%

     Income from continuing operations increased for the three and nine months ended September 30, 2008 primarily due to the Company being able to achieve operating expense efficiencies while growing the Loan portfolio. The increase in the average outstanding balance of our Loan portfolio has resulted in an increase in finance charges, partially offset by a decrease in the average yield on our Loan portfolio. The average outstanding balance of our Loan portfolio increased due to increases in both the number of active dealer-partners on our program and volume per active dealer-partner. The average yield on our Loan portfolio decreased primarily due to the continued impact of pricing changes made during 2006 and early 2007 in response to a difficult competitive environment, which also caused finance charges to grow slower than the average outstanding balance of our Loan portfolio.

     For the three months ended September 30, 2008, income from continuing operations grew faster than finance charges, which was caused by slower growth in operating expenses due to efficiencies gained. For the nine months ended September 30, 2008, income from continuing operations grew slower than finance charges due to additional provision for credit losses recorded during the second quarter of 2008 resulting from lower than expected collection results and a reduction in forecasted future collection rates. The additional provision for credit losses was offset by slower growth in operating expenses.

     The following table summarizes the changes in active dealer-partners and corresponding Consumer Loan unit volume:

	Three Months Ended September 30,
	2008			2007			% Change
Consumer Loan unit volume		27,636			21,784			26.9
Active dealer-partners (1)		2,270			1,953			16.2
Average volume per active dealer-partner		12.2			11.2			8.9
Consumer Loan unit volume from dealer-partners active both periods		18,393			17,293			6.4
Dealer-partners active both periods		1,244			1,244			—
Average volume per dealer-partner active both periods		14.8			13.9			6.4
Consumer Loan unit volume from new dealer-partners		1,792			1,190			50.6
New active dealer-partners (2)		300			258			16.3
Average volume per new active dealer-partner		6.0			4.6			30.4
Attrition (3)		20.6	%		19.5	%

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(1)	Active dealer-partners are dealer-partners who have received funding for at least one Loan during the period.
(2)	New active dealer-partners are dealer-partners who enrolled in our program and have received funding for their first Loan from us during the periods presented.
(3)	Attrition is measured according to the following formula: decrease in Consumer Loan unit volume from dealer-partners who have received funding for at least one Loan during the comparable period of the prior year but did not receive funding for any Loans during the current period divided by prior year comparable period Consumer Loan unit volume.

     Other Income.The following table highlights the changes, as a percentage of revenue, of other income for the three and nine months ended September 30, 2008, as compared to the same periods in 2007:

	Three Months Ended			Nine Months Ended
Percentage of Revenue, September 30, 2007		7.1	%		8.2	%
Interest income on secured financings		-0.4	%		-0.5	%
Income from dealer support programs		-0.2	%		-0.5	%
Profit-sharing payments		0.0	%		0.8	%
Other		-0.9	%		-1.0	%
Percentage of Revenue, September 30, 2008		5.6	%		7.0	%

     The decrease in other income was primarily a result of:

• Decreased interest income on secured financings due to a decrease in interest rates earned on cash investments relating to secured financing transactions.

• Decreased income from dealer support programs due to the discontinuance of certain dealer-partner support programs.

     The decreases above, for the nine months ended September 30, 2008, were offset by the following:

• An increase in annual profit-sharing payments received during the first quarter of 2008 from third party vehicle service contract and guaranteed asset protection providers. Since we have only received these payments since 2007, the amounts of these payments are currently not estimable due to a lack of historical information. As a result, the revenue related to these payments is recognized in the period the payments are received. For the nine months ended September 30, 2008 we received a total of $2.9 million in profit sharing-payments compared to $1.2 million in payments received in the same period of 2007.

     Salaries and Wages.For the three months ended September 30, 2008, salaries and wages expense, as a percentage of revenue, decreased from 22.3% to 20.9%, as compared to the same period in 2007. Salaries and wages expense can be categorized into originations, servicing and support functions. Salaries and wages expense related to originations and servicing grew slower than revenue, while support expenses grew faster than revenue, due to the following:

• Origination expenses decreased primarily due to operating efficiencies gained in our dealer-partner service center.

• Servicing expenses decreased primarily due to higher average Loan balances.

• Support expenses increased primarily due to spending in Information Technology.

     For the nine months ended September 30, 2008, salaries and wages expense, as a percentage of revenue, increased from 21.8% to 22.7%, as compared to the same period in 2007. Salaries and wages expense related to servicing remained consistent, as a percentage of revenue, while originations and support grew faster than revenue, due to the following:

• Origination expenses increased primarily due to a smaller percentage of Loan origination costs being deferred. For Dealer Loans, certain underwriting costs are considered Loan origination costs and are deferred and expensed over the life of the loan as an adjustment to finance charge revenue while, for Purchased Loans, all underwriting costs are expensed immediately. Since Purchased Loans represent a greater proportion of Consumer Loans assigned to us, the deferral was lower for the nine months ended September 30, 2008, as compared to the same period in 2007. This increase was offset by operating efficiencies gained in our dealer-partner service center.

• Support expenses increased primarily due to spending in Information Technology, Analytics and Finance.

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     General and Administrative.The following table summarizes the change in general and administrative expenses, as a percentage of revenue, for the three and nine months ended September 30, 2008, as compared to the same periods in 2007:

	Three Months Ended			Nine Months Ended
Percentage of Revenue, September 30, 2007		11.9	%		11.6	%
Data processing and consulting fees		-1.9	%		-1.2	%
Michigan business tax		-0.2	%		-0.4	%
Legal expense		-0.1	%		-0.4	%
Other		-1.0	%		-0.4	%
Percentage of Revenue, September 30, 2008		8.7	%		9.2	%

     The decrease, as a percentage of revenue, in general and administrative expense was primarily a result of:

• Higher expense in 2007 related to data processing and consulting fees for investments in new systems, processes, and facilities to support growth initiatives.

• The Michigan business tax is recorded in provision for income taxes starting in 2008 due to a change in the nature of the tax.

• Higher legal expense in 2007 related to a legal settlement.

     Sales and Marketing.The following table shows the increases in sales and marketing expense and the unit volume of Loan originations for the three and nine months ended September 30, 2008, as compared to the same periods in 2007:

	Three Months Ended			Nine Months Ended
	September 30, 2008			September 30, 2008
Sales and marketing expense		6.6	%		6.6	%
Unit volume of Loan originations		26.9	%		22.0	%

     The increase in sales and marketing expense is due to the increase in the unit volume of Loan originations offset by the discontinuance of certain dealer-partner support programs and lower utilization of various other dealer-partner programs.

     Provision for Credit Losses. The increase in the provision for credit losses for the three months ended September 30, 2008, as compared to the same period in 2007, was consistent with the increase in the average outstanding balance of the Loan portfolio. The increase in the provision for credit losses for the nine months ended September 30, 2008, as compared to the same period in 2007, was primarily due to a reduction in estimated future collection rates resulting from a modification of our forecasting methodology on Consumer Loans during the second quarter of 2008. The modified methodology increased the provision for credit losses as lower forecasted collection rates increased the amount of Loan impairments. For additional information, see discussion of Critical Accounting Estimates.

     Interest.The following table shows the average outstanding debt balance and the pre-tax average cost of debt for the three and nine months ended September 30, 2008, as compared to the same periods in 2007:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2008			2007			2008			2007
Interest expense	$	10,954		$	9,030		$	31,702		$	26,781
Average outstanding debt balance	$	706,637		$	477,930		$	659,193		$	454,595
Pre-tax average cost of debt		6.4	%		7.6	%		6.4	%		7.9	%

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     The increase in interest expense was primarily the result of an increase in the average outstanding debt balance from borrowings used to fund new Loans offset by a reduction in our pre-tax average cost of debt due to overall reductions in underlying market rates.

     Provision for Income Taxes.The effective tax rate increased to 38.3% for the three months ended September 30, 2008, from 37.0% for the same period in 2007. The increase for the quarter was primarily due to a decrease in the provision for uncertain state tax positions recorded in the third quarter of 2007. For the nine months ended September 30, 2008, the effective tax rate increased to 37.4%, from 36.1% in the same period of 2007. The increase was primarily due to a decrease in our reserve for uncertain tax positions recorded in 2007.

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Liquidity and Capital Resources

     We need capital to fund new Loans and pay dealer holdback. Our primary sources of capital are cash flows from operating activities, collections of Consumer Loans and borrowings through four primary sources of financing: (i) a revolving secured line of credit with a commercial bank syndicate; (ii) revolving secured warehouse facilities with institutional investors; (iii) SEC Rule 144A asset-backed secured borrowings (“Term ABS 144A”) with qualified institutional investors; and (iv) a residual credit facility with an institutional investor. There are various restrictive debt covenants for each source of financing and we are in compliance with those covenants as of September 30, 2008. For information regarding these financings and the covenants included in the related documents, see Note 5 to the consolidated financial statements, which are incorporated herein by reference.

     Since the beginning of 2008 we have:

• Expanded our bank line of credit to $153.5 million and renewed to June 2010

• Renewed our $325.0 million warehouse facility to August 2009

• Completed a $150.0 million asset-backed secured financing with an institutional investor

• Completed a $50.0 million two-year revolving credit facility with another institutional investor

• Renewed our $50.0 million residual credit facility to August 2009

     Based on our available capital, we are targeting a 10% reduction in year-over-year Consumer Loan unit volume for the fourth quarter of 2008. Our target growth rate in 2009 will depend on our success in securing additional financing and renewing our existing debt facilities. If no additional capital is obtained, during the first six months of 2009, we expect to continue to target unit volumes that are approximately 10% lower than the prior year comparable period.

     In August of 2009, our $325.0 million warehouse facility and our $50.0 million residual credit facility (collectively referred to as the “maturing facilities”) mature. If we are unsuccessful in renewing the maturing facilities, and alternative financing cannot be obtained, additional reductions in Loan origination volumes will be required. Given current conditions in the credit markets, there can be no assurance that the maturing facilities will be renewed or that alternative financing will be obtained. In the event that the maturing facilities are not renewed, no further advances would be made under the maturing facilities. Assuming the Company continues to be in compliance with all debt covenants, the amount outstanding would be repaid over time as the collections on the Loans securing the maturing facilities are received.

     The following table summarizes targeted Loan origination volumes under two scenarios: (1) the maturing facilities are renewed (or replaced) but no other additional capital is obtained during 2009; and (2) no additional capital is obtained during 2009 and the maturing facilities are not renewed.

	Estimated Loan Origination Volume for the Years Ended December 31,
			2009
			Assuming Maturing		Assuming Maturing
			Facilities are Renewed		Facilities are Not Renewed
(Dollars in thousands)	2008		(or Replaced)		(or Replaced)
Loan dollar volume	$	800,000	$	600,000	$	550,000
Average Loans receivable balance, net	$	1,000,000	$	1,100,000	$	1,050,000

     Cash and cash equivalents increased to $0.9 million at September 30, 2008 from $0.7 million at December 31, 2007. Our total balance sheet indebtedness increased to $691.9 million at September 30, 2008 from $532.1 million at December 31, 2007. This increase was primarily a result of borrowings used to fund new Loans in 2008.

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     Restricted cash and cash equivalents increased to $83.0 million at September 30, 2008 from $74.1 million at December 31, 2007. The following table summarizes restricted cash and cash equivalents:

	As of		As of
	September 30,		December 31,
(in thousands)	2008		2007
Cash collections related to secured financings	$	55,082	$	42,518
Cash held in trusts for future vehicle service contract claims (1)		27,911		18,266
Cash held in escrow related to settlement of class action lawsuit		—		13,318
Total restricted cash and cash equivalents	$	82,993	$	74,102

(1) The claims reserve associated with the trusts are included in accounts payable and accrued liabilities in the consolidated balance sheets.

     Restricted Securities Available for Sale

     Restricted securities consist of amounts held in accordance with vehicle service contract trust agreements. We determine the appropriate classification of our investments in debt securities at the time of purchase and reevaluate such determinations at each balance sheet date. Debt securities for which we do not have the intent or ability to hold to maturity are classified as available for sale, and stated at fair value with unrealized gains and losses, net of income taxes included in the determination of comprehensive income and reported as a component of shareholders’ equity.

     Restricted securities available for sale consisted of the following:

	As of September 30, 2008
			Gross		Gross
			Unrealized		Unrealized			Estimated Fair
(in thousands)	Cost		Gains		Losses			Value
US Government and agency securities	$	1,137	$	46	$	—		$	1,183
Corporate bonds		2,825		8		(83	)		2,750
Total restricted securities available for sale	$	3,962	$	54	$	(83	)	$	3,933

	As of December 31, 2007
			Gross		Gross
			Unrealized		Unrealized			Estimated Fair
(in thousands)	Cost		Gains		Losses			Value
US Government and agency securities	$	1,584	$	40	$	—		$	1,624
Corporate bonds		1,686		10		(30	)		1,666
Total restricted securities available for sale	$	3,270	$	50	$	(30	)	$	3,290

     The cost and estimated fair values of debt securities by contractual maturity were as follows (securities with multiple maturity dates are classified in the period of final maturity). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	As of September 30, 2008				As of December 31, 2007
			Estimated				Estimated
(in thousands)	Cost		Fair Value		Cost		Fair Value
Contractual Maturity
Within one year	$	755	$	750	$	1,096	$	1,100
Over one year to five years		3,207		3,183		2,174		2,190
Total restricted securities available for sale	$	3,962	$	3,933	$	3,270	$	3,290

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     Contractual Obligations

     A summary of the total future contractual obligations requiring repayments as of September 30, 2008 is as follows (in thousands):

	Payments Due by Period
			Less than
	Total		1 year		1-3 Years		3-5 Years		Other
Long-term debt, including current maturities and capital leases (1)	$	691,937	$	421,827	$	270,110	$	—	$	—
Operating lease obligations		1,960		913		611		436		—
Purchase obligations (2)		537		341		196		—		—
Other long-term obligations (3)		11,223		—		—		—		11,223
Total contractual obligations (4)	$	705,657	$	423,081	$	270,917	$	436	$	11,223

(1)	Long-term debt obligations included in the above table consist solely of principal repayments. We are also obligated to make interest payments at the applicable interest rates, as discussed in Note 5 to the consolidated financial statements. Based on the actual amounts outstanding under our revolving line of credit and warehouse facilities at September 30, 2008, the forecasted amounts outstanding on all other debt and the actual interest rates in effect as of September 30, 2008, interest is expected to be approximately $7.9 million during 2008; $13.3 million during 2009; and $6.6 million during 2010 and thereafter.
(2)	Purchase obligations consist solely of contractual obligations related to the information system and facilities needs of the Company.
(3)	Other long-term obligations included in the above table consist solely of reserves for uncertain tax positions recognized under FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Tax — An Interpretation of FASB Statement No. 109” (“FIN 48”).
(4)	We have contractual obligations to pay dealer holdback to our dealer-partners; however, as payments of dealer holdback are contingent upon the receipt of customer payments and the repayment of advances, these obligations are excluded from the table above.

     Based upon anticipated cash flows, management believes that cash flows from operations and its various financing alternatives will provide sufficient financing for debt maturities and for future operations, subject, as discussed above, to the need to reduce Loan originations if we are unable to renew or refinance our maturing facilities. Our ability to borrow funds may be impacted by many economic and financial market conditions. If the various financing alternatives were to become limited or unavailable to us, our operations and liquidity could be materially and adversely affected.

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Critical Accounting Estimates

     Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we review our accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2007 discusses several critical accounting estimates, which we believe involve a high degree of judgment and complexity. There have been no material changes to the estimates and assumptions associated with these accounting estimates from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2007, except as described below:

     The recognition of finance charge revenue and the allowance for credit losses involve significant estimates based on our forecast of future collections. During the first quarter of 2008, we implemented a new methodology for forecasting future collections on Consumer Loans. The new methodology increased the dollar amount of overall forecasted collections by 0.3%. While the new methodology produces overall collection rates that are very similar to those produced by the prior methodology, the new methodology utilizes a more sophisticated approach which allows us to expand the number of variables on which the forecast is based. As a result, we believe the new forecast improves the precision of our estimates in two respects: (i) the new forecast is believed to be more accurate when applied to a smaller group of Consumer Loans which allows us to forecast more accurately at the dealer pool level and more precisely measure the performance of specific segments of our portfolio and (ii) the new forecast is believed to be more sensitive to changes in Consumer Loan performance and will allow us to react more quickly to changes in Consumer Loan performance. Implementation of the new methodology resulted in a reversal of $3.4 million in provision for credit losses as higher forecasted collections reduced the amount of Loan impairment. In conjunction with our implementation of the new forecasting methodology, we reevaluated our forecast of future collections on old, fully-reserved Dealer Loans. As a result, we wrote off $22.7 million of Dealer Loans and the related allowance for credit losses as we were no longer forecasting any future collections on these Dealer Loans. This write-off had no impact on net income for the first quarter of 2008 as all of these Dealer Loans were fully-reserved.

     Our forecast of future collections as of March 31, 2008 assumed that Loans within our current portfolio would produce similar collection rates as produced by historical Loans with the same attributes and we expected net cash flows of $1.3 billion from our Loan portfolio. During the second quarter of 2008, we modified our forecasting methodology which now assumes that Loans originated in 2006, 2007 and 2008 will perform 100 to 300 basis points lower than historical Loans with the same attributes. As a result we reduced our estimate of future cash flows on these same Loans by $22.2 million, or 1.7%. Of the total reduction, $20.8 million was recorded as provision for credit losses during the second quarter of 2008. This new expectation is consistent with recent experience and included both the lower realized collection rates experienced during the second quarter of 2008 as well as lower expected recoveries on repossession sales as a result of a decline in used vehicle values that occurred during the second quarter of 2008. We did not modify our forecast related to 2005 and prior Loans as these Loans continue to perform as expected.

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Off-Balance Sheet Arrangements

     We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Forward-Looking Statements

     We make forward-looking statements in this report and may make such statements in future filings with the Securities and Exchange Commission. We may also make forward-looking statements in our press releases or other public or shareholder communications. Our forward-looking statements are subject to risks and uncertainties and include information about our expectations and possible or assumed future results of operations. When we use any of the words “may,” “will,” “should,” “believes,” “expects,” “anticipates,” “assumes,” “forecasts,” “estimates,” “intends,” “plans”, “target” or similar expressions, we are making forward-looking statements.

     We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all of our forward-looking statements. These forward-looking statements represent our outlook only as of the date of this report. While we believe that our forward-looking statements are reasonable, actual results could differ materially since the statements are based on our current expectations, which are subject to risks and uncertainties. Factors that might cause such a difference include, but are not limited to, the factors set forth in Item 1A of our Form 10-K for the year ended December 31, 2007, other risk factors discussed herein or listed from time to time in our reports filed with the Securities and Exchange Commission and the following:

• Our inability to accurately forecast and estimate the amount and timing of future collections could have a material adverse effect on results of operations.

• We may be unable to continue to access or renew funding sources and obtain capital on favorable terms needed to maintain and grow the business.

• The conditions of the U.S. and international capital markets may adversely affect lenders the Company has relationships with, causing us to incur additional cost and reducing our sources of liquidity, which may adversely affect our financial position, liquidity and results of operations.

• Due to increased competition from traditional financing sources and non-traditional lenders, we may not be able to compete successfully.

• We may not be able to generate sufficient cash flow to service our outstanding debt and fund operations.

• Requirements under credit facilities to meet financial and portfolio performance covenants.

• Interest rate fluctuations may adversely affect our borrowing costs, profitability and liquidity.

• The substantial regulation to which we are subject could result in potential liability.

• Adverse changes in economic conditions, or in the automobile or finance industries or the non-prime consumer market, could adversely affect our financial position, liquidity and results of operations and our ability to enter into future financing transactions.

• Litigation we are involved in from time to time may adversely affect our financial condition, results of operations and cash flows.

• We are dependent on our senior management and the loss of any of these individuals or an inability to hire additional personnel could adversely affect our ability to operate profitably.

• Our inability to properly safeguard confidential consumer information.

• Our operations could suffer from telecommunications or technology downtime or increased costs.

• Natural disasters, acts of war, terrorist attacks and threats or the escalation of military activity in response to such attacks or otherwise may negatively affect our business, financial condition and results of operations.

     Other factors not currently anticipated by management may also materially and adversely affect our results of operations. We do not undertake, and expressly disclaim any obligation, to update or alter our statements whether as a result of new information, future events or otherwise, except as required by applicable law.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Refer to our Annual Report on Form 10-K for the year ended December 31, 2007 for a complete discussion of our market risk. There have been no material changes to the market risk information included in our 2007 Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES.

     Evaluation of disclosure controls and procedures.

     (a) Disclosure Controls and Procedures.Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

     (b) Internal Control Over Financial Reporting.There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. — OTHER INFORMATION

ITEM 6. EXHIBITS

     See Index of Exhibits following the signature page, which is incorporated herein by reference.

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SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CREDIT ACCEPTANCE CORPORATION
(Registrant)
By:	/s/ Kenneth S. Booth
Kenneth S. Booth
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
October 31, 2008

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INDEX OF EXHIBITS

Exhibit
No.		Description
4(f)(113)	1	Amendment No. 4 as of August 27, 2008, to the Second Amended and Restated Loan and Security Agreement, dated as of August 31, 2007 among the Company, CAC Warehouse Funding Corporation II, Wachovia Bank, National Association, Variable Funding Capital Company, LLC, Wachovia Capital Markets, LLC and Systems & Services Technologies, Inc.
4(f)(114)	1	Second Amendment dated as of August 27, 2008, to the Certificate Funding Agreement dated September 20, 2006, among the Company, Credit Acceptance Residual Funding LLC, Wachovia Bank, National Association, Variable Funding Capital Company LLC, and Wachovia Capital Markets, LLC.
4(f)(115)	2	Amendment No. 3 dated as of July 10, 2008, to the Second Amended and Restated Loan and Security Agreement, dated as of August 31, 2007, among the Company, CAC Warehouse Funding Corporation II, Wachovia Bank, National Association, JPMorgan Chase Bank, N.A., Variable Funding Capital Company, LLC, Park Avenue Receivables Company LLC, Wachovia Capital Markets, LLC and Systems & Services Technologies, Inc.
4(f)(116)	2	Third Amendment, dated as of July 31, 2008, to Intercreditor Agreement dated as of June 10, 2002, among Comerica Bank, as collateral agent, and various lenders and note holders.
4(f)(117)	2	Fifth Amendment, dated as of July 31, 2008, to the Fourth Amended and Restated Credit Agreement, dated February 7, 2006, between Credit Acceptance Corporation, the Banks which are parties thereto from time to time, and Comerica Bank as Administrative Agent for the Banks.
31(a)	2	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b)	2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32(a)	2	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32(b)	2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

1.	Previously filed as an exhibit to the Company’s Current Report on Form 8-K, dated August 29, 2008, and incorporated herein by reference.
2.	Filed herewith.

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