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

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

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 (Address of principal executive offices)		48034-8339 (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. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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 23, 2009 was 30,983,373.

 

 

TABLE OF CONTENTS

PART I. — FINANCIAL INFORMATION
ITEM 1.		CONSOLIDATED FINANCIAL STATEMENTS
		Consolidated Income Statements — Three and nine months ended September 30, 2009 and 2008			1
		Consolidated Balance Sheets — As of September 30, 2009 and December 31, 2008			2
		Consolidated Statements of Cash Flows — Nine months ended September 30, 2009 and 2008			3
		Notes to Consolidated Financial Statements			4
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			25
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			37
ITEM 4.		CONTROLS AND PROCEDURES			37
PART II. — OTHER INFORMATION
ITEM 6.		EXHIBITS			38
SIGNATURE					39
INDEX OF EXHIBITS					40
EX-10.(q)(11)
EX-10.(q)(12)
EX-31.(a)
EX-31.(b)
EX-32.(A)
EX-32.(B)

PART I. — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

		Three Months Ended September 30,								Nine Months Ended September 30,
(Dollars in Thousands, Except Per Share Data)		2009				2008				2009				2008
Revenue:
Finance charges		$	84,489			$	75,617			$	242,339			$	210,119
Premiums earned			11,596				12				25,257				65
Other income			4,183				4,478				12,933				15,706
Total revenue			100,268				80,107				280,529				225,890
Costs and expenses:
Salaries and wages			16,862				16,766				50,498				51,205
General and administrative			7,872				6,975				22,767				20,726
Sales and marketing			3,533				4,103				11,020				13,330
Provision for credit losses			(3,591	)			8,383				(7,217	)			31,792
Interest			8,144				10,954				23,352				31,702
Provision for claims			5,148				(13	)			14,786				1
Total costs and expenses			37,968				47,168				115,206				148,756
Operating income			62,300				32,939				165,323				77,134
Foreign currency gain (loss)			3				(2	)			9				(15	)
Income from continuing operations before provision for income taxes			62,303				32,937				165,332				77,119
Provision for income taxes			21,491				12,606				59,358				28,828
Income from continuing operations			40,812				20,331				105,974				48,291
Discontinued operations
(Loss) gain from discontinued United Kingdom operations			(13	)			504				21				548
Provision for income taxes			65				178				75				218
(Loss) gain from discontinued operations			(78	)			326				(54	)			330
Net income		$	40,734			$	20,657			$	105,920			$	48,621
Net income per common share:
Basic		$	1.33			$	0.68			$	3.47			$	1.61
Diluted		$	1.29			$	0.67			$	3.38			$	1.57
Income from continuing operations per common share:
Basic		$	1.33			$	0.67			$	3.47			$	1.60
Diluted		$	1.29			$	0.66			$	3.38			$	1.56
(Loss) gain from discontinued operations per common share:
Basic		$	—			$	0.01			$	—			$	0.01
Diluted		$	—			$	0.01			$	—			$	0.01
Weighted average shares outstanding:
Basic			30,658,969				30,310,053				30,540,274				30,223,586
Diluted			31,539,119				31,024,455				31,370,580				30,994,466

See accompanying notes to consolidated financial statements.

CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS

		As of
		September 30,				December 31,
		2009				2008
(Dollars in thousands, except per share data)		(unaudited)
ASSETS:
Cash and cash equivalents		$	1,610			$	3,154
Restricted cash and cash equivalents			76,019				80,333
Restricted securities available for sale			2,779				3,345
Loans receivable (including $13,351 and $15,383 from affiliates as of September 30, 2009 and December 31, 2008, respectively)			1,180,340				1,148,752
Allowance for credit losses			(123,240	)			(130,835	)
Loans receivable, net			1,057,100				1,017,917
Property and equipment, net			18,801				21,049
Income taxes receivable			4,460				—
Other assets			17,132				13,556
Total Assets		$	1,177,901			$	1,139,354
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Liabilities:
Accounts payable and accrued liabilities		$	81,106			$	83,948
Line of credit			102,500				61,300
Secured financing			436,491				574,175
Mortgage note and capital lease obligations			5,285				6,239
Deferred income taxes, net			100,911				75,060
Income taxes payable			—				881
Total Liabilities			726,293				801,603
Shareholders’ Equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued			—				—
Common stock, $.01 par value, 80,000,000 shares authorized, 30,985,892 and 30,666,691 shares issued and outstanding as of September 30, 2009 and December 31, 2008, respectively			309				306
Paid-in capital			18,491				11,829
Retained earnings			434,098				328,178
Accumulated other comprehensive loss, net of tax of $736 and $1,478 at September 30, 2009 and December 31, 2008, respectively			(1,290	)			(2,562	)
Total Shareholders’ Equity			451,608				337,751
Total Liabilities and Shareholders’ Equity		$	1,177,901			$	1,139,354

See accompanying notes to consolidated financial statements.

CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

		Nine Months Ended September 30,
(Dollars in thousands)		2009				2008
Cash Flows From Operating Activities:
Net income		$	105,920			$	48,621
Adjustments to reconcile cash provided by operating activities:
Provision for credit losses			(7,217	)			31,792
Depreciation			3,939				3,969
Loss on retirement of property and equipment			98				—
Provision for deferred income taxes			25,109				14,192
Stock-based compensation			4,926				2,827
Change in operating assets and liabilities:
Decrease in accounts payable and accrued liabilities			(842	)			(250	)
(Increase) decrease in income taxes receivable / increase (decrease) in income taxes payable			(5,341	)			10,700
Increase in other assets			(3,576	)			(1,838	)
Net cash provided by operating activities			123,016				110,013
Cash Flows From Investing Activities:
Decrease (increase) in restricted cash and cash equivalents			4,314				(8,891	)
Purchases of restricted securities available for sale			(383	)			(1,514	)
Proceeds from sale of restricted securities available for sale			—				271
Maturities of restricted securities available for sale			963				551
Principal collected on Loans receivable			502,453				466,353
Advances to dealers and accelerated payments of Dealer Holdback			(412,423	)			(430,423	)
Purchases of Consumer Loans			(87,840	)			(246,971	)
Payments of Dealer Holdback			(34,300	)			(46,482	)
Net decrease (increase) in other loans			151				(131	)
Purchases of property and equipment			(1,789	)			(5,395	)
Net cash used in investing activities			(28,854	)			(272,632	)
Cash Flows From Financing Activities:
Borrowings under line of credit			523,900				573,900
Repayments under line of credit			(482,700	)			(527,300	)
Proceeds from secured financing			217,500				453,700
Repayments of secured financing			(355,184	)			(339,336	)
Principal payments under mortgage note and capital lease obligations			(954	)			(1,157	)
Repurchase of common stock			(540	)			(66	)
Proceeds from stock options exercised			889				2,102
Tax benefits from stock based compensation plans			1,390				990
Net cash (used in) provided by financing activities			(95,699	)			162,833
Effect of exchange rate changes on cash			(7	)			8
Net (decrease) increase in cash and cash equivalents			(1,544	)			222
Cash and cash equivalents, beginning of period			3,154				712
Cash and cash equivalents, end of period		$	1,610			$	934
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest		$	22,613			$	31,662
Cash paid during the period for income taxes		$	38,886			$	2,033

See accompanying notes to consolidated financial statements.

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, 2008 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, 2008 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.

     As of the date these financial statements were issued, there are no material subsequent events requiring additional disclosure in or amendment to these financial statements.

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.

     A consumer who does not qualify for conventional automobile financing can purchase a used vehicle from a Credit Acceptance Dealer-Partner and finance the purchase through 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.

     We have two 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 for each of the last seven quarters:

Quarter Ended		Portfolio Program				Purchase Program
March 31, 2008			70.2	%			29.8	%
June 30, 2008			65.4	%			34.6	%
September 30, 2008			69.2	%			30.8	%
December 31, 2008			78.2	%			21.8	%
March 31, 2009			82.3	%			17.7	%
June 30, 2009			86.0	%			14.0	%
September 30, 2009			89.0	%			11.0	%

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

2. DESCRIPTION OF BUSINESS — (Continued)

     Portfolio Program

     As payment for the vehicle, the Dealer-Partner generally receives the following:

	•		a down payment from the consumer;
	•		a cash advance from us; and
	•		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 an accelerated Dealer Holdback payment (“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 and any other amounts due to us, 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 of the advance from the Dealer-Partner 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 discretion, for a fee.

     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 (1) the Dealer-Partner’s financial interest in the Consumer Loan and (2) certain elements of our legal relationship with the Dealer-Partner. For each individual Dealer-Partner, the amount of the Dealer Loan recorded in Loans receivable is comprised of the following:

	•		the aggregate amount of all cash advances to the Dealer-Partner;
	•		finance charges;
	•		Dealer Holdback payments;
	•		Portfolio Profit Express payments; and
	•		recoveries.

     Less:

	•		collections (net of certain collection costs); and
	•		write-offs.

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

2. DESCRIPTION OF BUSINESS — (Concluded)

     Purchase Program

     We began offering a Purchase Program on a limited basis in March of 2005. The Purchase Program differs from our 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.

     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 amount of Purchased Loans recorded in Loans receivable is comprised of the following:

	•		the aggregate amount of all amounts paid to purchase Consumer Loans from Dealer-Partners;
	•		finance charges; and
	•		recoveries.

     Less:

	•		collections (net of certain collection costs); and
	•		write-offs.

     Program Enrollment

     Dealer-Partners have two enrollment options available to them for access to our programs. The first enrollment option allows Dealer-Partners to assign Consumer Loans under the Portfolio Program and requires payment of an upfront, one-time enrollment fee of $9,850. The second enrollment option, which became effective September 1, 2009, allows Dealer-Partners to assign Consumer Loans under the Portfolio Program and requires payment of an upfront, one-time enrollment fee of $1,950 and an agreement to allow us to keep 50% of their first Portfolio Profit Express payment. Prior to September 1, 2009, Dealer-Partners who chose the second enrollment option did not pay an upfront fee but agreed to allow us to keep 50% of their first Portfolio Profit Express payment. For all Dealer-Partners enrolling in our program 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.

3. SIGNIFICANT ACCOUNTING POLICIES

Reinsurance

     During the fourth quarter of 2008, we formed VSC Re Company (“VSC Re”), a wholly-owned subsidiary that is engaged in the business of reinsuring coverage under vehicle service contracts sold to consumers by Dealer-Partners on vehicles financed by us. VSC Re currently reinsures vehicle service contracts that are underwritten by two of our three third party insurers. Vehicle service contract premiums, which represent the selling price of the vehicle service contract to the consumer, less commissions and certain administrative costs, are contributed to trust accounts controlled by VSC Re. These premiums are used to fund claims covered under the vehicle service contracts. VSC Re is a bankruptcy remote entity. As such, the exposure to fund claims is limited to the amount of premium dollars contributed, less amounts earned and withdrawn, plus $0.5 million of equity contributed. With the reinsurance structure, we are able to access projected excess trust assets monthly and will record revenue and expense on an accrual basis. We formed VSC Re in order to enhance our control and the security of the trust assets that will be used to pay future vehicle service contract claims. The income we expect to earn from vehicle service contracts over time will likely not be impacted as, both before and after the formation, the income we recognize is based on the amount by which vehicle service contract premiums exceed claims. The only change in our risk associated with adverse claims experience relates to the $0.5 million equity contribution that was required as part of this new structure, which is now at risk in the event claims exceed premiums. Under the prior structure, our risk was limited to the amount of premiums contributed to the trusts.

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

3. SIGNIFICANT ACCOUNTING POLICIES — (Continued)

     Premiums from the reinsurance of vehicle service contracts are recognized over the life of the policy in proportion to expected costs of servicing those contracts. Expected costs are determined based on our historical claims experience. Claims are expensed through a provision for claims in the period the claim was incurred. For the three and nine months ended September 30, 2009, net assumed written premiums were $7.3 million and $23.5 million, respectively, net premiums earned were $11.6 million and $25.3 million, respectively, and provision for claims was $5.2 million and $14.8 million, respectively. For the three and nine months ended September 30, 2009, we amortized $0.5 million and $0.7 million, respectively, of capitalized acquisition costs related to premium tax. Capitalized acquisition costs are amortized over the life of the contracts in proportion to premiums earned. Under the Consolidation Topic of the FASB Accounting Standards Codification (“FASB ASC”), we are considered the primary beneficiary of the trusts and as a result, trust assets of $36.5 million and $29.3 million at September 30, 2009 and December 31, 2008, respectively, have been consolidated on our balance sheet as restricted cash and cash equivalents. As of September 30, 2009 and December 31, 2008, accounts payable and accrued liabilities includes $23.0 million and $23.3 million of unearned premium, respectively, and $1.1 million and $0.9 million of claims reserve related to our reinsurance of vehicle service contracts, respectively. The claims reserve is estimated based on historical claims experience.

     Prior to the formation of VSC Re, our agreements with two of our vehicle service contract third party administrators (“TPAs”) allowed us to receive profit sharing payments depending upon the performance of the vehicle service contract programs. The agreements also required that vehicle service contract premiums be placed in trust accounts. Funds in the trust accounts were utilized by the TPA to pay claims on the vehicle service contracts. Upon the formation of VSC Re during the fourth quarter of 2008, the unearned premiums on the majority of the vehicle service contracts that had been written through these two TPAs were ceded to VSC Re along with any related trust assets. Vehicle service contracts written prior to 2008 through one of the TPAs remain under this profit sharing arrangement. Profit sharing payments, if any, on the vehicle service contracts are distributed to us periodically after the term of the vehicle service contracts have substantially expired provided certain loss rates are met. Under the Consolidation Topic of the FASB ASC, we are considered the primary beneficiary of the trusts. As a result, the assets and liabilities of the remaining trust have been consolidated on our balance sheet. As of September 30, 2009 and December 31, 2008, the remaining trust had $4.4 million and $5.4 million, respectively, in assets available to pay claims and a related claims reserve of $3.6 million and $4.7 million, respectively. The trust assets are included in restricted cash and cash equivalents and restricted securities available for sale. The claims reserve is included in accounts payable and accrued liabilities in the consolidated balance sheets. A third party insures claims in excess of funds in the trust accounts.

     Our determination to consolidate the VSC Re trusts and the profit sharing trusts under the Consolidation Topic of the FASB ASC was based on the following:

	•		First, we determined that the trusts qualified as variable interest entities as defined under the Consolidation Topic of the FASB ASC. The trusts have insufficient equity at risk as no parties to the trusts were required to contribute assets that provide them with any ownership interest.
	•		Next, we determined that we have variable interests in the trusts. We have a residual interest in the assets of the trusts, which is variable in nature, given that it increases or decreases based upon the actual loss experience of the related service contracts. In addition, for VSC Re, we are required to absorb any losses in excess of the trusts’ assets, up to the $0.5 million of equity contributed.
	•		Finally, we determined that we are the primary beneficiary of the trusts. The trusts are not expected to generate losses that need to be absorbed by the parties to the trusts. The trusts are expected to generate residual returns and we are entitled to all of those returns.

Restricted Cash and Cash Equivalents

     Restricted cash and cash equivalents decreased to $76.0 million at September 30, 2009 from $80.3 million at December 31, 2008. The following table summarizes restricted cash and cash equivalents:

		As of
		September 30,				December 31,
(in thousands)		2009				2008
Cash collections related to secured financings		$	37,926			$	48,956
Cash held in trusts for future vehicle service contract claims (1)			38,093				31,377
Total restricted cash and cash equivalents		$	76,019			$	80,333

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

3. SIGNIFICANT ACCOUNTING POLICIES — (Continued)

Restricted Securities Available for Sale

     Restricted securities available for sale 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, 2009
						Gross				Gross
						Unrealized				Unrealized				Estimated
(in thousands)		Cost				Gains				Losses				Fair Value
US Government and agency securities		$	1,072			$	29			$	(1	)		$	1,100
Corporate bonds			1,665				15				(1	)			1,679
Total restricted securities available for sale		$	2,737			$	44			$	(2	)		$	2,779

		As of December 31, 2008
						Gross				Gross
						Unrealized				Unrealized				Estimated
(in thousands)		Cost				Gains				Losses				Fair Value
US Government and agency securities		$	842			$	53			$	—			$	895
Corporate bonds			2,475				9				(34	)			2,450
Total restricted securities available for sale		$	3,317			$	62			$	(34	)		$	3,345

     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.

(in thousands)		As of September 30, 2009								As of December 31, 2008
						Estimated								Estimated
		Cost				Fair Value				Cost				Fair Value
Contractual Maturity
Within one year		$	1,885			$	1,903			$	1,665			$	1,670
Over one year to five years			852				876				1,652				1,675
Total restricted securities available for sale		$	2,737			$	2,779			$	3,317			$	3,345

Deferred Debt Issuance Costs

     As of September 30, 2009 and December 31, 2008, deferred debt issuance costs were $6.0 million (net of accumulated amortization of $6.1 million) and $3.4 million (net of accumulated amortization of $5.6 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 warehouse facilities.

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

3. SIGNIFICANT ACCOUNTING POLICIES — (Concluded)

Accounting Standards Updates

     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 was incorporated into the FASB ASC through Accounting Standards Update (“ASU”) No. 2009-01 on June 30, 2009 and is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures. The adoption on January 1, 2009 had no financial impact on our consolidated financial statements, but expanded our disclosures.

     Interim Disclosures about Fair Value of Financial Instruments. In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 was incorporated into the FASB ASC through ASU No. 2009-01 on June 30, 2009 and is intended to enhance consistency in financial reporting by increasing the frequency of fair value disclosures. The adoption during the second quarter of 2009 had no financial impact on our consolidated financial statements, but expanded our interim disclosures.

     Recognition and Presentation of Other-Than-Temporary Impairments. In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”). FSP FAS 115-2 and FAS 124-2 was incorporated into the FASB ASC through ASU No. 2009-01 on June 30, 2009 and amends the other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The adoption during the second quarter of 2009 did not have an impact on our consolidated financial statements.

     Subsequent Events. In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 was incorporated into the FASB ASC through ASU No. 2009-01 on June 30, 2009 and is intended to establish principles and requirements for subsequent events. The adoption during the second quarter of 2009 had no financial impact on our financial statements, but expanded our disclosures.

     Accounting for Transfers of Financial Assets. In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140” (“SFAS 166”). SFAS 166 is intended to improve the information provided in financial statements about the transfer of financial assets and the effects of the transfer on financial position and performance, and cash flows. This SFAS will be incorporated into the FASB ASC and will be effective for interim and annual reporting periods beginning after November 15, 2009, with early adoption prohibited. This statement must be applied to transfers occurring on or after the effective date. We do not expect SFAS 166 to have a material impact on our consolidated financial statements.

     Amendments to FASB Interpretation No. 46(R). In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 is intended to improve financial reporting related to variable interest entities. This SFAS will be incorporated into the FASB ASC and will be effective for interim and annual reporting periods beginning after November 15, 2009, with early adoption prohibited. We are currently assessing the impact of SFAS 167 on our consolidated financial statements.

     The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 was incorporated into the FASB ASC through ASU No. 2009-02 on June 30, 2009 and identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States (the GAAP hierarchy). The adoption did not have a material impact on our consolidated financial statements.

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, 2009
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	858,559			$	325,535			$	1,184,094
New loans			129,677				19,974				149,651
Transfers			(3,666	)			3,666				—
Dealer Holdback payments			10,335				—				10,335
Net cash collections on Loans			(126,859	)			(36,411	)			(163,270	)
Write-offs			(1,034	)			(25	)			(1,059	)
Recoveries			664				6				670
Net change in other loans			(152	)			—				(152	)
Currency translation			71				—				71
Balance, end of period		$	867,595			$	312,745			$	1,180,340
		Three Months Ended September 30, 2008
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	859,691			$	284,718				1,144,409
New loans			109,027				61,697				170,724
Transfers			(3,473	)			3,473				—
Dealer Holdback payments			13,736				—				13,736
Net cash collections on Loans			(122,400	)			(29,399	)			(151,799	)
Write-offs			(21,411	)			(15	)			(21,426	)
Recoveries			—				3				3
Net change in other loans			(20	)			—				(20	)
Currency translation			(36	)			—				(36	)
Balance, end of period		$	835,114			$	320,477			$	1,155,591
		Nine Months Ended September 30, 2009
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	823,567			$	325,185			$	1,148,752
New loans			412,423				87,840				500,263
Transfers			(11,594	)			11,594				—
Dealer Holdback payments			34,300				—				34,300
Net cash collections on Loans			(390,603	)			(111,850	)			(502,453	)
Write-offs			(2,851	)			(60	)			(2,911	)
Recoveries			2,374				36				2,410
Net change in other loans			(151	)			—				(151	)
Currency translation			130				—				130
Balance, end of period		$	867,595			$	312,745			$	1,180,340
		Nine Months Ended September 30, 2008
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	804,245			$	140,453				944,698
New loans			430,423				246,971				677,394
Transfers			(5,571	)			5,571				—
Dealer Holdback payments			46,482				—				46,482
Net cash collections on Loans			(393,851	)			(72,502	)			(466,353	)
Write-offs			(46,660	)			(34	)			(46,694	)
Recoveries			—				18				18
Net change in other loans			131				—				131
Currency translation			(85	)			—				(85	)
Balance, end of period		$	835,114			$	320,477			$	1,155,591

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

4. LOANS RECEIVABLE — (Concluded)

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

		Three Months Ended September 30, 2009
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	111,721			$	15,432			$	127,153
Provision for credit losses			(1,269	)			(2,322	)			(3,591	)
Write-offs			(1,034	)			(25	)			(1,059	)
Recoveries			664				6				670
Currency translation			67				—				67
Balance, end of period		$	110,149			$	13,091			$	123,240

		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			5,115				3,268				8,383
Write-offs			(21,411	)			(15	)			(21,426	)
Recoveries			—				3				3
Currency translation			(35	)			—				(35	)
Balance, end of period		$	109,483			$	9,701			$	119,184

		Nine Months Ended September 30, 2009
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	113,831			$	17,004			$	130,835
Provision for credit losses			(3,328	)			(3,889	)			(7,217	)
Write-offs			(2,851	)			(60	)			(2,911	)
Recoveries			2,374				36				2,410
Currency translation			123				—				123
Balance, end of period		$	110,149			$	13,091			$	123,240

		Nine Months Ended September 30, 2008
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	133,201			$	944			$	134,145
Provision for credit losses			23,019				8,773				31,792
Write-offs			(46,660	)			(34	)			(46,694	)
Recoveries			—				18				18
Currency translation			(77	)			—				(77	)
Balance, end of period		$	109,483			$	9,701			$	119,184

     For the three and nine months ended September 30, 2009, the provision for credit losses decreased as a result of an improvement in the performance of our Loan portfolio. During the second quarter of 2008, as a result of lower than expected realized collection rates, we reduced the estimated future net cash flows expected from our Loan portfolio, which resulted in a provision for credit losses of $20.8 million.

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

5. DEBT

     We currently use three primary sources of debt financing: (1) a revolving secured line of credit with a commercial bank syndicate; (2) revolving secured warehouse facilities with institutional investors; and (3) SEC Rule 144A asset-backed secured financings (“Term ABS 144A”) with qualified institutional investors. General information for each of the Company’s financing transactions in place as of September 30, 2009 is as follows (dollars in thousands):

Wholly-owned

Issue

Financing

Interest Rate at

Financings

Subsidiary

Number

Close Date

Maturity Date

Amount

September 30, 2009

Revolving Line of Credit

n/a

n/a

June 15, 2009

June 23, 2011

$

140,000

At the Company's

option, either the

Eurodollar rate

plus 275 basis

points or the prime

rate plus 100 basis

points

Warehouse Facility

CAC Warehouse

2003-2

August 24, 2009

August 23, 2011 (7)

$

325,000

Commercial paper

Revolving Secured (1)

Funding Corp. II

rate plus 500 basis

points or LIBOR

plus 600 basis

points (4) (5)

Revolving Secured

CAC Warehouse

2008-2

August 31, 2009

August 31, 2012 (6)

$

75,000

Commercial paper

Warehouse Facility (1)

Funding III, LLC

rates plus 375 basis

points or LIBOR

plus 375 basis

points (3) (4) (5)

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 (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 (3)

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,
		2009				2008				2009				2008
Revolving Line of Credit
Maximum outstanding balance		$	124,600			$	82,900			$	128,900			$	128,400
Average outstanding balance			89,293				56,282				85,785				59,038
Revolving Secured Warehouse Facility (2003-2) (1)
Maximum outstanding balance		$	325,000			$	264,061			$	325,000			$	297,211
Average outstanding balance			290,327				258,743				273,663				262,398
Revolving Secured Warehouse Facility (2008-2)
Maximum outstanding balance		$	50,000			$	50,000			$	50,000			$	50,000
Average outstanding balance			50,000				50,000				50,000				50,000

		As of
		September 30, 2009				December 31, 2008
Revolving Line of Credit
Balance outstanding		$	102,500			$	61,300
Letter(s) of credit			514				555
Amount available for borrowing			36,986				91,645
Interest rate			4.25	%			1.70	%
Revolving Secured Warehouse Facility (2003-2)
Balance outstanding		$	274,500			$	256,000
Amount available for borrowing			50,500				69,000
Contributed eligible Loans			393,056				344,111
Interest rate			5.64	%			3.33	%
Revolving Secured Warehouse Facility (2008-2)
Balance outstanding		$	50,000			$	50,000
Amount available for borrowing			25,000				—
Contributed eligible Loans			93,781				62,562
Interest rate			4.00	%			2.21	%
Term ABS 144A 2007-1
Balance outstanding		$	—			$	33,915
Contributed eligible Dealer Loans			—				87,155
Interest rate			—				5.32	%
Term ABS 144A 2007-2
Balance outstanding		$	15,107			$	84,260
Contributed eligible Dealer Loans			78,295				114,054
Interest rate			6.22	%			6.22	%
Term ABS 144A 2008-1
Balance outstanding		$	96,884			$	150,000
Contributed eligible Loans			159,050				184,595
Interest rate			6.37	%			6.37	%
Residual Credit Facility
Balance outstanding		$	—			$	—
Certificate Pledged			—				52,944
Interest rate			—				—

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

5. DEBT — (Continued)

Line of Credit Facility

     During the second quarter of 2009, we extended the maturity of the line of credit facility with a commercial bank syndicate from June 22, 2010 to June 23, 2011, and we reduced the amount of the facility from $153.5 million to $140.0 million. The interest rate on borrowings under the facility was increased from the prime rate minus 0.60% or the Eurodollar rate plus 1.25%, at the Company’s option, to the prime rate plus 1.0% or the Eurodollar rate plus 2.75%, at the Company’s option. The Eurodollar rate is subject to a floor of 1.50%. In addition, certain financial covenants were modified as follows:

•

The maximum funded debt to tangible net worth ratio was reduced from 4.0 to 1.0 to a ratio of 3.25 to 1.0

•

The minimum fixed charge coverage ratio was increased from 1.75 to 1.0 to a ratio of 2.0 to 1.0

•

The minimum asset coverage ratio was increased from 1.0 to 1.0 to a ratio of 1.1 to 1.0

     Borrowings under the line of 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 line of 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 $75.0 million facility with another institutional investor.

     During the third quarter of 2009, the maturity of the $325.0 million revolving secured warehouse facility was extended. The agreement was modified to provide that in the event that the facility is not renewed after the revolving period ends on August 23, 2010, and the borrower is in compliance with the terms and conditions of the agreement, the facility will amortize for a twelve month period ending August 23, 2011. During this time, the outstanding debt will be paid down through the collections on the contributed assets. At the end of the twelve month period, the balance of the facility will be due and payable. Additionally, the interest rate on borrowings under the facility was increased from the commercial paper rate plus 100 basis points to the commercial paper rate plus 500 basis points. Finally, under the terms of the extension, the minimum levels for the three month average net yield percentage to avoid early amortization or termination of the facility were reduced from 6% and 5%, respectively, to 2% and 1%, respectively. The net yield percentage for any month is equal to the product of (i) 12, and (ii) 20% of collections less the amount of interest and fees due on the facility, divided by the average borrowing base during the month. There were no other material changes to the terms of the facility.

     During the third quarter of 2009, the amount of the $50.0 million revolving secured warehouse facility was increased to $75.0 million. In addition, the expiration of the revolving period on the facility was extended from May 23, 2010 to August 31, 2011 and the maturity of the facility was extended from May 23, 2011 to August 31, 2012. Finally, the interest rate on the facility was increased from a floating rate equal to LIBOR plus 177.5 basis points to LIBOR plus 375.0 basis points. There were no other material changes to the terms of the facility.

     Under both warehouse 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 subsidiary’s assets have been encumbered to secure its obligations to its respective creditors.

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

5. DEBT — (Continued)

     Interest on borrowings under the facilities has been limited to a maximum rate of 6.75% plus the spread over the LIBOR rate or the commercial paper rate, as applicable, 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.

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 contributed 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 contributed 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. As of September 30, 2009, due to downgrades in the debt ratings of the insurer, the Term ABS 114A 2007-2 transaction was rated “Baa2” by Moody’s and “A-” by S&P. The Term ABS 144A 2008-1 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 contributed 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 contributed Loans. The fee is paid out of the collections. Aside from the servicing fee and holdback 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 Loans

Expected

Term ABS 144A

Issue

Contributed at

Annualized

Financing

Number

Close Date

Closing

Revolving Period

Rates (1)

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

%

5. DEBT — (Concluded)

Residual Credit Facility

     Another wholly-owned subsidiary, Credit Acceptance Residual Funding LLC, had a $50.0 million secured credit facility with an institutional investor. On August 26, 2009, the $50.0 million residual credit facility matured and was not renewed. No amounts were outstanding under the $50.0 million residual credit facility at the maturity date.

Mortgage Note

     During 2009, the mortgage note on our Southfield headquarters was amended to extend the maturity date from June 9, 2009 to June 22, 2014. Additionally, the interest rate on the note was increased from 5.35% to 5.70%. There was $4.8 million and $5.3 million outstanding on this loan as of September 30, 2009 and December 31, 2008, respectively.

Debt Covenants

     As of September 30, 2009, we are in compliance with all our debt covenants including those 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 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 revolving secured warehouse facility and on $50.0 million of the $75.0 million revolving secured warehouse facility. As we have not designated these agreements as hedges as defined under the Derivatives and Hedging Topic of the FASB ASC, changes in the fair value of these agreements will increase or decrease interest expense.

     As of September 30, 2009, eight interest rate cap agreements with various maturities between May 2010 and August 2011 were outstanding with a cap rate of 6.75% plus the spread over the LIBOR rate or the commercial paper rate, as applicable, and a nominal fair value. As of December 31, 2008, seven interest rate cap agreements with various maturities between July 2009 and February 2011 were outstanding with a cap rate of 6.75% plus the spread over the LIBOR rate or the commercial paper rate, as applicable, and a nominal fair value.

     Interest Rate Swaps. 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 interest rates of 6.28% and 6.37%, respectively. The interest rate swaps were effective on the closing date of each borrowing. As of September 30, 2009, we had $112.0 million outstanding under those borrowings. 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 the Derivatives and Hedging Topic of the FASB ASC, changes in the fair value of this swap will increase or decrease interest expense.

     We have entered into a third interest rate swap to convert $25.0 million of the $75.0 million revolving secured warehouse facility into fixed rate debt, bearing an interest rate of 5.1%. This interest rate swap was executed in September 2009. The fair value of this interest rate swap 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.

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

6. DERIVATIVE INSTRUMENTS — (Continued)

     We have designated the interest rate swaps related to the $150.0 million floating rate debt and the $25.0 million portion of the $75.0 million revolving secured warehouse facility as cash flow hedges as defined under the Derivatives and Hedging Topic of the FASB ASC. The effective portion of changes in the fair value are recorded in other comprehensive income, net of income taxes, and the ineffective portion of changes in fair value are recorded in interest expense. There has been no such ineffectiveness since the inception of these hedges through September 30, 2009.

     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, 2009, 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.

     Information related to the fair values of derivative instruments in our consolidated balance sheets as of September 30, 2009 and December 31, 2008 is as follows (in thousands):

		Liability Derivatives
		September 30, 2009								December 31, 2008
		Balance Sheet				Fair				Balance Sheet				Fair
		Location				Value				Location				Value
Derivatives designated as hedging instruments
Interest rate swap		Accounts payable and accrued liabilities				$	2,068			Accounts payable and accrued liabilities				$	4,068
Total derivatives designated as hedging instruments						$	2,068							$	4,068
Derivatives not designated as hedging instruments
Interest rate swap		Accounts payable and accrued liabilities				$	57			Accounts payable and accrued liabilities				$	827
Total derivatives not designated as hedging instruments						$	57							$	827
Total derivatives						$	2,125							$	4,895

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

6. DERIVATIVE INSTRUMENTS — (Concluded)

     Information related to the effect of derivative instruments on our consolidated income statements for the three and nine months ended September 30, 2009 and 2008 is as follows (in thousands):

		Gain / (Loss)								Gain / (Loss)
		Recognized in OCI on Derivative								Reclassified from Accumulated
Derivatives in Cash		(Effective Portion)								OCI into Income (Effective Portion)
Flow Hedging		Three Months Ended September 30,												Three Months Ended September 30,
Relationships		2009				2008				Location				2009				2008
Interest rate swap		$	(274	)		$	(250	)		Interest expense				$	(832	)		$	(314	)

		Gain / (Loss)								Gain / (Loss)
		Recognized in OCI on Derivative								Reclassified from Accumulated
Derivatives in Cash		(Effective Portion)								OCI into Income (Effective Portion)
Flow Hedging		Nine Months Ended September 30,												Nine Months Ended September 30,
Relationships		2009				2008				Location				2009				2008
Interest rate swap		$	(972	)		$	(779	)		Interest expense				$	(2,971	)		$	(518	)

     As of September 30, 2009, we expect to reclassify losses of $2.0 million from Accumulated other comprehensive income into Income during the next twelve months.

		Amount of Gain / (Loss) Recognized in Income on Derivative
Derivatives Not Designated as						Three Months Ended September 30,								Nine Months Ended September 30,
Hedging Instruments		Location				2009				2008				2009				2008
Interest rate caps		Interest expense				$	(78	)		$	(26	)		$	(78	)		$	(25	)
Interest rate swap		Interest expense					53				36				66				(588	)
Total						$	(25	)		$	10			$	(12	)		$	(613	)

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

7. FAIR VALUE MEASUREMENTS

     The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate their value.

     Cash and Cash Equivalents and Restricted Cash and Cash Equivalents. The carrying amount of cash and cash equivalents and restricted cash and cash equivalents approximate their fair value due to the short maturity of these instruments.

     Restricted Securities Available for Sale. Restricted securities consist of amounts held in trusts by TPAs to pay claims on vehicle service contracts. 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. The fair value of restricted securities are based on quoted market values.

     Net Investment in Loans Receivable. Loans receivable, net represents our net investment in Consumer Loans. The fair value is determined by calculating the present value of future Loan payment inflows and Dealer Holdback outflows estimated by the Company utilizing a discount rate comparable with the rate used to calculate our allowance for credit losses.

     Derivative Instruments. The fair value of interest rate caps and interest rate swaps are based on quoted prices for similar instruments in active markets.

     Liabilities. The fair value of debt is determined using quoted market prices, if available, or calculated using the estimated value of each debt instrument based on current rates offered to us for debt with similar maturities.

     A comparison of the carrying value and estimated fair value of these financial instruments is as follows (in thousands):

		As of September 30,								As of December 31,
		2009								2008
		Carrying				Estimated				Carrying				Estimated
		Amount				Fair Value				Amount				Fair Value
Assets
Cash and cash equivalents and restricted cash		$	77,629			$	77,629			$	83,487			$	83,487
Restricted securities available for sale			2,779				2,779				3,345				3,345
Net investment in Loans receivable			1,057,100				1,068,557				1,017,917				1,042,790
Liabilities
Line of credit		$	102,500			$	102,500			$	61,300			$	61,300
Secured financing			436,491				436,491				574,175				569,811
Mortgage note			4,797				4,797				5,274				5,415
Derivative instruments			2,125				2,125				4,895				4,895

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

7. FAIR VALUE MEASUREMENTS — (Concluded)

     Effective January 1, 2008, we adopted the Fair Value Measurements and Disclosures Topic of the FASB ASC, 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, the Fair Value Measurements and Disclosures Topic of the FASB ASC establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value. As required under the Fair Value Measurements and Disclosures Topic of the FASB ASC, 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, 2009 (in thousands):

										Total
		Level 1				Level 2				Fair Value
Assets
Restricted securities available for sale		$	2,779			$	—			$	2,779
Liabilities
Derivative instruments		$	—			$	2,125			$	2,125

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

8. RELATED PARTY TRANSACTIONS

     In the normal course of our business, affiliated Dealer-Partners assign Consumer Loans to us under the Portfolio and Purchase Programs. Dealer Loans and Purchased Loans with affiliated Dealer-Partners are on the same terms as those with non-affiliated Dealer-Partners. Affiliated Dealer-Partners are comprised of Dealer-Partners owned or controlled by: (1) our majority shareholder and Chairman; and (2) a member of the Chairman’s immediate family.

     Affiliated Dealer Loan balances were $13.4 million and $15.4 million as of September 30, 2009 and December 31, 2008, respectively. Affiliated Dealer Loan balances were 1.6% and 1.9% of total consolidated Dealer Loan balances as of September 30, 2009 and December 31, 2008. A summary of related party Loan activity is as follows (dollars in thousands):

		Three Months Ended								Three Months Ended
		September 30, 2009								September 30, 2008
		Affiliated								Affiliated
		dealer-partner				% of				dealer-partner				% of
		activity				consolidated				activity				consolidated
New Dealer and Purchased Loans		$	1,244				1.0	%		$	2,217				2.0	%
Dealer Loan revenue		$	921				1.5	%		$	1,024				1.9	%
Dealer Holdback payments		$	360				3.5	%		$	530				3.9	%