Credit Acceptance's Q3 2025: Contradictions in Competitive Environment, Scorecard Adjustments, and Prepay Trends

Business Commentary:

• Loan Performance and Volume Decline:
• Credit Acceptance Corporation experienced a decline in loan performance with 2022, 2023, and 2024 vintages underperforming expectations, while the 2025 vintage exceeded expectations.

• Overall forecasted net cash flows declined by 0.5% or $59 million. The decline in unit and dollar volumes was attributed to a scorecard change in Q3 2024, which resulted in lower advance rates, and increased competition in the market.

• Record Loan Portfolio and Market Share:

• The company's loan portfolio remained at a record high of $9.1 billion, up 2% from last Q3.

• Despite a record loan portfolio, the company's market share in its core segment of used vehicles financed by subprime consumers was down to 5.1%, compared to 6.5% in the same period last year, due to increased competition and a decline in unit and dollar volumes.

• Engineering and Technology Modernization:

• Credit Acceptance is investing in its engineering team to modernize its key technology architecture and enhance dealer experiences.

• The modernization of the loan origination system has increased the speed of enhancements by almost 70% compared to the previous year, enabling faster innovation and value delivery to dealers and customers.

• Awards and Workplace Recognition:

• The company received four awards for its workplace, including being named one of the Best Workplaces in Financial Services and Insurance by the Great Place to Work and Fortune Magazine for the 11th year in a row.

• This recognition highlights the company's commitment to providing a supportive and connected work environment, contributing to a strong company culture.

• Leadership Transition:

• Long-time CEO Kenneth Booth announced his retirement after 34 years with the company, including 22 years at Credit Acceptance.
• The company has named Vinayak as the new CEO, citing his valuable experience in technology, marketing, engineering, and product, which will complement the experienced management team.

Sentiment Analysis:

Overall Tone: Neutral

• Management described mixed results: record-high adjusted loan portfolio ($9.1B, +2% vs prior Q3) but declines in unit and dollar volumes, underperformance in 2022–24 vintages and a 0.5% ($59M) decline in forecasted net cash flows. Leadership emphasized competitive pressures, affordability headwinds, and a deliberate focus on margins and long-term economic profit.

Q&A:

• Question from John Rowan (Janney Montgomery Scott LLC, Research Division): Your asset-backed securities used to have a covenant in them that said if there was a 10% forecast shortfall that would enter into early amortization. Does the current ABS still have that? And are you close on any of those? I mean just given -- looking at the 2022 vintage, it's down 8% relative to the initial forecast. Is that the right way to look at it? Just walk us through kind of the ABS covenants there.
  Response: Yes — the covenant remains in ABS and warehouse facilities; due to pooling and ongoing contributions and collection rates running above 100%, no securitizations are near the 90% early-amortization trigger.

• Question from John Rowan (Janney Montgomery Scott LLC, Research Division): G&A was still higher than I expected. Obviously, last quarter, you had a contingent loss in there, but it didn't go back to like the run rate to prior quarters. Can you give us an idea if there's any kind of onetime items in the $36 million G&A expense?
  Response: Adjusted results exclude contingent losses; GAAP included a $23.4M contingent loss in Q2 and an additional $15M this quarter, and adjusted G&A as a % of average capital is consistent with prior quarters.

• Question from John Rowan (Janney Montgomery Scott LLC, Research Division): Can you let us know what your repurchase authorization is?
  Response: About just over 2 million shares remain under the Board's repurchase authorization.

• Question from John Rowan (Janney Montgomery Scott LLC, Research Division): I was a little bit surprised to see the advance rate was actually up a little bit in the quarter relative to the first half of the year, but unit volume still continues to decline. Obviously, the advance rate is not back to where it was. But can you just talk us through that a little bit? Are you still having trouble competitively speaking, even at a higher advance rate?
  Response: The advance-rate uptick reflects a mix shift to more purchase loans and a higher proportion of better-credit products, not necessarily improved competitiveness; competition still pressures unit volumes.

• Question from Robert Wildhack (Autonomous Research US LP): Are you seeing any of your peers pull back at all in the industry? I just would love to get sort of the boots on the ground view of what's happening at the industry level in the wake of some of the headlines we've seen around subprime auto in the last couple of weeks.
  Response: Some peers have pulled back, but overall the environment remains highly competitive, which is contributing to lower volume per dealer.

• Question from Robert Wildhack (Autonomous Research US LP): Why do you think the competitive intensity hasn't really reacted to like the poor credit results that we've seen for the last few vintages? I would have expected people to pull back a little bit more with the delinquencies and losses as high as they are.
  Response: Competition often stays intense early in downturns and the market is fragmented; Credit Acceptance prioritizes long-term economic profit and prefers lower volume at solid margins rather than chasing volume.

• Question from Robert Wildhack (Autonomous Research US LP): We noticed that attrition had been increasing in the last few quarters. I mean could you comment on some of the drivers there? Is there a chance that dealers are pushing back on the scorecard change or anything like that?
  Response: Attrition is partly due to the scorecard change and lower overall volume—some dealers simply aren't transacting now—though company remains near historical highs versus tough comparables.

• Question from Ryan Shelley (BofA Securities, Research Division): I wanted to ask around the impact of tariffs. I mean, obviously, it's kind of on again, off again. But have you guys seen any profound impacts, whether it's in the marketplace or to your own business from federal policy? And just going into next year, how do you guys kind of handicap that?
  Response: Anything that reduces consumer affordability is negative for originations; tariffs can hurt affordability but the precise magnitude is uncertain.

• Question from Ryan Shelley (BofA Securities, Research Division): On the scorecard change. Forgive me if you've already clarified this. But going forward, is there a potential for any loosening or change back maybe come next year or the year after? Or is that a permanent change going forward?
  Response: The scorecard is dynamic and will be adjusted to maximize originated economic profit as loan performance and capital-market conditions evolve; not necessarily permanent.

• Question from Moshe Orenbuch (TD Cowen, Research Division): Do you attribute volume and market share declines to supply of vehicles being down, or are cars being sold and some competitors financing them? Given you fully anniversaried the scorecard change by October and still down double digits, how should we think about that?
  Response: Declines reflect a mix of tougher year‑ago comparables (Q4 last year was very strong), elevated competitive intensity, and affordability pressures that particularly impact deeper-subprime consumers; scorecard anniversary doesn't fully explain the drop.

• Question from Moshe Orenbuch (TD Cowen, Research Division): Given competition, wouldn't prepays be higher rather than slower? We still have a full quarter of the '22 vintage on the books at the end of September.
  Response: Historically competition accelerates prepays, but currently prepays haven't picked up—management attributes this to a unique environment and possible lag effects.

• Question from Moshe Orenbuch (TD Cowen, Research Division): That $15 million contingent loss related to previously disclosed legal matters—are the dollars coming because you're making settlement offers? Any other terms we should be aware of?
  Response: It's related to ongoing legal matters; the company cannot provide details beyond what's disclosed in the 10‑Q.

• Question from Moshe Orenbuch (TD Cowen, Research Division): Can you talk about your leverage and outlook given growth trends and how that impacts your thoughts on share repurchase?
  Response: Adjusted leverage sits at the high end of the historical ~2–3x adjusted debt-to-equity range; repurchases are tied to leverage and growth—company generally buys more when leverage/growth are lower and considers leverage in buyback decisions.

• Question from Kyle Joseph (Stephens Inc., Research Division): Update on capital markets activity given recent industry developments—are credit markets differentiating between quality operators and what's the investor appetite in fixed income?
  Response: ABS market has been favorable with tight spreads aside from brief disruptions; recent widening tied to Tricolor bankruptcy affected deeper layers, not where they issue; their new ABS saw robust demand and they had $1.6B of unused revolver availability at quarter end.

Contradiction Point 1

Competitive Environment and Market Share

It reflects differing perspectives on the competitive intensity in the market, which directly impacts the company's volume and market share, affecting financial performance and strategic decisions.

Are your peers pulling back in the industry, and are there industry-level impacts from recent subprime auto loan headlines? - Robert Wildhack(Autonomous Research)

2025Q3: Overall, while there have been some that have had struggles and have pulled back, in general, the environment is very competitive right now. - Kenneth Booth(CEO)

What caused the slowing growth? Is the slowdown due to internal changes or external factors like environment/competition? - Moshe Orenbuch(TD Cowen)

2024Q4: It's hard to tell exactly, but our volume per dealer declined about 3.7% versus Q4 2023, which could indicate a competitive environment. - Kenneth Booth(CEO)

Contradiction Point 2

Scorecard Changes and Volume Impact

It involves the impact of scorecard changes on the company's volume and market share, which are critical for understanding strategic decisions and financial forecasting.

Can you explain why the advance rate increased slightly in the quarter compared to the first half of the year while unit volume remains declining? Are you still facing competitive challenges despite the higher advance rate? - John Rowan(Janney Montgomery Scott)

2025Q3: Our volume per dealer is down, and it's a competitive market. - Kenneth Booth(CEO)

Collections decreased by $60M last quarter, yet adjusted yield increased. What factors caused the adjusted yield to increase despite lower collections? - Moshe Orenbuch(TD Cowen)

2024Q4: The decline in collections was offset by the business written in the subsequent period, which increased our overall yield. The yield recognized on the business written in the fourth quarter more than offset the decline in forecasted collections from the third quarter. - Kenneth Booth(CEO)

Contradiction Point 3

Competitive Environment and Market Share

It involves differing perspectives on the competitive landscape and its impact on market share, which are crucial for understanding the company's growth trajectory.

Are there any signs of industry peers pulling back in light of recent subprime auto headlines? - Robert Wildhack (Autonomous Research)

2025Q3: Yes. I think overall, while there have been some that have had struggles and have pulled back, in general, the environment is very competitive right now. So we're seeing a lot of competition out there. - Kenneth Booth(CEO)

Did the higher percentage of purchased loans versus portfolio loans this quarter indicate increased dealer-level competition? - Moshe Orenbuch (TD Cowen)

2025Q1: There's no significant change in the mix of loans; it's just a modest 2 percentage point difference. It's more a matter of randomness or mix, not necessarily due to increased competition. - Ken Booth(CEO)

Contradiction Point 4

Scoring and Pricing Strategy

It involves differing perspectives on the company's strategic approach to pricing and scoring, which directly impacts its market positioning and risk management.

Are there potential loosening or reversals of the scorecard changes in the next two years? - Ryan Shelley (BofA Securities)

2025Q3: We always try to price to maximize the amount of economic profit we originate. So we consider recent trends in loan performance and capital market conditions, and we adjust our scorecard and our pricing based upon what we think we're going to collect and how we think we can maximize that economic profit originated. - Kenneth Booth(CEO)

Why are collection rates staying high despite ongoing adjustments? - Moshe Orenbuch (TD Cowen)

2025Q2: I do expect our efforts to improve the quality of our product will over time help us to compete more aggressively out in the market. - Kenneth Booth(CEO)

Contradiction Point 5

Prepay Behavior and Competition

It involves the impact of competition on prepay behavior, which is crucial for understanding the company's ability to retain customers and manage its loan portfolio.

Why are loans staying on the books longer this year, and why would a competitive environment make refinancing or vehicle trades harder rather than easier, as mentioned in the Q2 call? - Moshe Orenbuch (TD Cowen)

2025Q3: Yes. I think generally, over time, what you've seen is sort of a lag effect of when competition heats up, prepays tend to speed up because obligors have other options. And I think what you're pointing out here, Moshe, is that we're not really seeing that. It's tough to say. There is always a natural lag. I just think we're in a unique environment right now. - Douglas Busk(CFO)

Why has cash balance increased in the last three quarters compared to previous periods? - Robert Wildhack (Autonomous Research)

2025Q1: We ended the quarter with $0.3 billion of earning assets in the securitization warehouses. This is an increase from $0.2 billion in the prior quarter, primarily due to the acceleration of dealer holdback. - Jay Brinkley (Senior Vice President, Treasurer)