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Document

December 23, 2020

VIA EDGAR

Office of Finance

Division of Corporation Finance

U.S. Securities and Exchange Commission

100 F Street, NE Washington, D.C. 20549

Attention:  Amit Pande, Accounting Branch Chief

    Michael Volley, Staff Accountant

Re: Credit Acceptance Corporation

 Form 8-K filed October 29, 2020

 File No. 000-20202

Ladies and Gentlemen:

This letter is in response to the December 9, 2020 comment letter of the Staff of the U.S. Securities and Exchange Commission (the “Staff”) to Credit Acceptance Corporation (the “Company”, “Credit Acceptance”, “we”, “our”, or “us”) with respect to the Company's above referenced current report on Form 8-K.

Set forth below in bold is the comment from the comment letter followed by the Company’s response.

Form 8-K Filed October 29, 2020

Exhibit 99.1

1.We note your disclosure of various non-GAAP measures that exclude “GAAP Provision for credit losses (after tax),” including adjusted net income, adjusted net income per diluted share, adjusted net income plus interest expense (after tax), economic profit, and adjusted return on capital. It appears these performance measures substitute individually tailored recognition and measurement methods for those of GAAP and violate Rule 100(b) of Regulation G. Refer to Question 100.04 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations, which is available on our website at: http://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm. Please refrain from disclosing these performance measures, or any other similar non-GAAP performance measures that exclude all or a portion of the provision for credit losses.

We acknowledge the Staff’s comment and appreciate this opportunity to address the Staff’s views regarding the non-GAAP measures to which the comment refers. For the reasons discussed in this letter, we believe our non-GAAP measures are currently presented in a manner which reflects both the economic reality of our business and how the business is managed, provides valuable supplemental information to investors and is not misleading when taken together with the disclosure that accompanies our non-GAAP measures. Therefore, we believe our current presentation of non-GAAP measures does not violate Rule 100(b) of Regulation G.

Our financing programs are offered through a nationwide network of automobile dealers. Upon enrollment in our financing programs, a dealer enters into a dealer servicing agreement with us that defines the legal relationship between Credit Acceptance and the dealer. The dealer servicing agreement assigns the responsibilities for administering, servicing, and collecting the amounts due on consumer loans from the dealer to us. We are an indirect lender from a legal perspective, meaning the consumer loans are originated by the dealers and assigned to us. We have two financing programs: the Portfolio Program and the Purchase Program. Under the Portfolio Program, we advance money to dealers (referred to as a “Dealer Loan”) in exchange for the right to service the underlying consumer loans. Under the Purchase Program, we buy the consumer loans from the dealers (referred to as a “Purchased Loan”) and keep all amounts collected from the consumer.

The net loan income (finance charge revenue less provision for credit losses expense) that we recognize over the life of a loan equals the cash we collect from the underlying consumer loan less the cash we pay to the dealer. We believe the economics of our business are best exhibited by recognizing loan revenue on a level-yield basis over the life of the loan based on estimated cash flow projections. Our non-GAAP measures are intended to provide insight into our business by showing this level yield measure of income. The level yield that we calculate based upon estimated cash flows takes into account projections of collections. Under GAAP, contractual amounts due in excess of the loan receivable balance at the time of assignment will be reflected as interest income, while contractual amounts due that are not expected to be collected are reflected in the provision for credit losses. Our non-GAAP floating yield adjustment recognizes the net effects of contractual interest income and expected credit losses in a single measure of finance charge revenue, consistent with how we manage our business. The floating yield adjustment recognizes revenue on a level-yield basis based upon forecasted cash flows. The floating yield adjustment does not accelerate revenue recognition. In fact, it reduces revenue by taking amounts that are reported under GAAP as provision for credit losses and instead treating them as reductions of revenue over time.

We have calculated and applied the floating yield adjustment to our financial results consistently since we first presented it in a Form 8-K furnished on January 31, 2006. We previously addressed a Staff comment relating to the floating yield adjustment in 2017. As stated in our April 5, 2017 response to the Staff’s March 9, 2017 comment letter, we believe the presentation of our floating yield adjustment is in compliance with Question 100.04 of the Compliance and Disclosure Interpretations (“Question 100.04”) and Rule 100(b) of Regulation G. A copy of our April 5, 2017 response letter is attached as Exhibit I.

Question 100.04 specifically addresses the issue of a registrant’s non-GAAP performance measure that is adjusted to accelerate revenue recognized ratably over time in accordance with GAAP as though the registrant earned revenue when customers are billed. The Staff’s answer to Question 100.04 stated that “[n]on-GAAP measures that substitute individually tailored revenue recognition and measurement methods for those of GAAP could violate Rule 100(b) of Regulation G” and that “[o]ther measures that use individually tailored recognition and measurement methods for financial statement line items other than revenue may also violate Rule 100(b) of Regulation G”. Rule 100(b) of Regulation G provides that “[a] registrant, or a person acting on its behalf, shall not make public a non-GAAP financial measure that, taken together with the information accompanying that measure and any other accompanying discussion of that measure, contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the presentation of the non-GAAP financial measure, in light of the circumstances under which it is presented, not misleading.”

On January 1, 2020, we adopted Accounting Standards Update 2016-13, Measurement of Credit Losses on Financial Instruments, which is known as the current expected credit loss model, or CECL. Our response to the Staff’s 2017 comment letter explained why we believe the GAAP methodology we employed prior to January 1, 2020 did not provide sufficient transparency into the economics of our business due to its asymmetrical treatment of favorable and unfavorable changes to expected future net cash flows. While CECL eliminated that asymmetrical treatment of changes in expected future net cash flows from the GAAP methodology we employ, it introduced a different asymmetry by requiring us to recognize at the time of the loan’s assignment to us a significant provision for credit losses expense for amounts we never expect to realize and to recognize in subsequent periods finance charge revenue that is significantly in excess of our expected yields. Our floating yield adjustment enables us to provide measures of income that are not impacted by GAAP’s asymmetrical treatments of estimates.

Management uses the adjusted net income, adjusted EPS and economic profit non-GAAP measures (all of which include the floating yield adjustment) to assess our financial performance, make capital allocation decisions and determine incentive compensation (e.g., quarterly profit sharing, annual cash bonuses and vesting of long-term stock awards). Our CEO’s annual shareholder letter (an excerpt from the letter disseminated in May 2020 is attached as Exhibit II) includes an extensive discussion of adjusted net income, adjusted EPS and economic profit. Our Compensation Discussion and Analysis disclosures in our annual proxy statements (a copy of such disclosures from our proxy statement filed in June 2020 is attached as Exhibit III) detail how these performance measures are used in the compensation plans for our named executive officers, including the specific formulas for calculating each named executive officer’s short-term and longer-term incentive compensation. The principal component of our CEO’s incentive compensation is performance-based restricted stock awards granted in 2012 that vest over a 15-year period based upon the achievement of growth targets in economic profit. If the CEO’s vesting targets are achieved, it is likely that the vast majority of his total compensation over this period will be realized from these performance-based

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restricted stock awards. Our Compensation Discussion and Analysis disclosures also detail why our Board of Directors believes the use of these performance measures aligns executive compensation with the interests of shareholders. We believe our floating yield adjustment is critical for ensuring that these performance measures reflect economic reality. In addition, our performance-based restricted stock award grant agreements, including the 15-year CEO grant discussed above, specifically reference the floating yield adjustment as a non-GAAP adjustment that is used to determine the achievement of vesting targets. As the floating yield adjustment directly impacts the performance measures used in our executive compensation plans, we believe disclosure of this adjustment in our earnings releases is relevant to investors.

We currently utilize the following primary forms of debt financing: (1) a revolving secured line of credit; (2) warehouse facilities; (3) asset-backed secured financings (“Term ABS”); and (4) senior notes. Borrowings under our revolving secured line of credit, warehouse facilities and Term ABS financings are subject to limitations based on loan collateral values. Upon the adoption of CECL on January 1, 2020, loan collateral values for our revolving secured line of credit, all warehouse facilities and certain Term ABS financings are based on our non-GAAP loan balances, which reflect the floating yield adjustment. As the floating yield adjustment directly impacts our liquidity and capital resources, we believe disclosure of this adjustment in our earnings releases is relevant to investors.

CECL provides alternative recognition and measurement guidance for purchased financial assets with credit deterioration (“PCD Method”). While the cash flows we expect to collect at the time of assignment are significantly lower than the contractual cash flows owed to us due to credit quality, our loans do not qualify for the PCD Method because the assignment of the consumer loan to us occurs a moment after the consumer loan is originated by the dealer, so “a more-than-insignificant deterioration in credit quality since origination” has not occurred at the time of assignment. In addition, our dealer loans do not qualify for the PCD Method because consumer loans assigned to us under the Portfolio Program are considered to be advances under dealer loans originated by us rather than consumer loans purchased by us. As a result, our loans are accounted for as originated financial assets. In February 2018, we submitted an agenda request to the Financial Accounting Standards Board (“FASB”) requesting that the FASB amend the scope of the PCD Method so that it could be applied to all financial assets with a significant discount due to credit quality, even if that discount is not due to deterioration after origination. Our agenda request letter explained why we believe our loans have the characteristics that caused the FASB to create the PCD Method, and do not have the characteristics that caused the FASB to limit the scope of the PCD Method. However, the FASB denied our agenda request.

The following table provides information on consumer loans assigned to us in 2020:

(In millions) For the Nine Months Ended September 30, 2020

New Consumer Loan Assignments Dealer Loans  Purchased Loans  Total

Contractual net cash flows at the time of assignment (1) $ 2,787.2   $ 2,566.4   $ 5,353.6

Expected net cash flows at the time of assignment (2) 2,471.7   1,633.5   4,105.2

Loans receivable at the time of assignment (3) 1,751.1   1,161.4   2,912.5

Provision for credit losses expense at the time of assignment $ (171.3)   $ (254.9)   $ (426.2)

Expected future finance charges at the time of assignment (4) 891.9   727   1,618.9

Expected net Loan income at the time of assignment (5) $ 720.6   $ 472.1   $ 1,192.7

(1)    The Dealer Loans amount represents repayments that we were contractually owed at the time of assignment on Consumer Loans assigned under our Portfolio Program, less the related Dealer Holdback payments that we would be required to make if we collected all of the contractual repayments.  The Purchased Loans amount represents repayments that we were contractually owed at the time of assignment on Consumer Loans assigned under our Purchase Program.

(2)    The Dealer Loans amount represents repayments that we expected to collect at the time of assignment on Consumer Loans assigned under our Portfolio Program, less the related Dealer Holdback payments that we expected to make.  The Purchased Loans amount represents repayments that we expected to collect at the time of assignment on Consumer Loans assigned under our Purchase Program.

(3)    The Dealer Loans amount represents advances paid to Dealers on Consumer Loans assigned under our Portfolio Program.  The Purchased Loans amount represents one-time payments made to Dealers to purchase Consumer Loans assigned under our Purchase Program. The Loan amounts also represent the fair value at the time of assignment.

(4)    Represents revenue that is expected to be recognized on a level-yield basis over the lives of the Loans.

(5)    Represents the amount that expected net cash flows at the time of assignment (2) exceed Loans receivable at the time of assignment (3).

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Regardless of the accounting method used, the amount of net loan income (finance charge revenue less provision for credit losses expense) that we will recognize over the life of a loan equals the cash we collect from the underlying consumer loan less the cash we pay to the dealer. At the time of assignment for consumer loans assigned to us for the nine months ended September 30, 2020, we expected to recognize $1,192.7 million of net loan income over the life of the loan, which represented the amount that expected net cash flows of $4,105.2 million exceeded the loans receivable balance of $2,912.5 million. Under CECL, we were required to recognize a provision for credit losses expense of $426.2 million at the time of assignment for the $1,248.6 million of contractual cash flows that we never expected to realize, which represented the amount that contractual net cash flows of $5,353.6 million exceeded expected net cash flows of $4,105.2 million. Then, under CECL, we will recognize $1,618.9 million of finance charge revenue over the life of the loan, which is $426.2 million in excess of the $1,192.7 million of net loan income expected at the time of assignment. Under our floating yield adjustment method, we will recognize $1,192.7 million of finance charge revenue over the life of the loan. We believe that the significant change in timing of net loan income recognition under CECL is inconsistent with the economics of our business.

We note the statement in the Staff’s answer to Question 100.04 that “[o]ther measures that use individually tailored recognition and measurement methods for financial statement line items other than revenue may also violate Rule 100(b) of Regulation G” (emphasis a