UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

Commission File Number 000-20202

CREDIT ACCEPTANCE CORPORATION

(Exact name of registrant as specified in its charter)

MICHIGAN (State or other jurisdiction of incorporation or organization)		38-1999511 (I.R.S. Employer Identification No.)
25505 WEST TWELVE MILE ROAD
SOUTHFIELD, MICHIGAN		48034-8339
(Address of principal executive offices)		(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

The number of shares of Common Stock, par value $0.01, outstanding on October 22, 2010 was 27,141,367.

 

 

TABLE OF CONTENTS

PART I. — FINANCIAL INFORMATION
ITEM 1.		CONSOLIDATED FINANCIAL STATEMENTS
		Consolidated Statements of Income — Three and nine months ended September 30, 2010 and 2009			1
		Consolidated Balance Sheets — As of September 30, 2010 and December 31, 2009			2
		Consolidated Statements of Cash Flows — Nine months ended September 30, 2010 and 2009			3
		Notes to Consolidated Financial Statements			4
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			26
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			37
ITEM 4.		CONTROLS AND PROCEDURES			37
PART II. — OTHER INFORMATION
ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			38
ITEM 6.		EXHIBITS			38
SIGNATURE					39
INDEX OF EXHIBITS					40
EX-31.A
EX-31.B
EX-32.A
EX-32.B

PART I. — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

		Three Months Ended September 30,								Nine Months Ended September 30,
(Dollars in thousands, except per share data)		2010				2009				2010				2009
Revenue:
Finance charges		$	99,255			$	84,489			$	284,467			$	242,339
Premiums earned			8,627				11,596				24,576				25,257
Other income			3,779				4,183				17,659				12,933
Total revenue			111,661				100,268				326,702				280,529
Costs and expenses:
Salaries and wages			16,133				16,862				46,293				50,498
General and administrative			7,208				7,869				19,670				22,758
Sales and marketing			4,972				3,533				14,616				11,020
Provision for credit losses			2				(3,591	)			8,218				(7,217	)
Interest			12,038				8,144				36,010				23,352
Provision for claims			6,112				5,148				17,606				14,786
Total costs and expenses			46,465				37,965				142,413				115,197
Income from continuing operations before provision for income taxes			65,196				62,303				184,289				165,332
Provision for income taxes			23,149				21,491				61,162				59,358
Income from continuing operations			42,047				40,812				123,127				105,974
Discontinued operations
Gain (loss) from discontinued United Kingdom operations			—				(13	)			(30	)			21
Provision for income taxes			—				65				—				75
Loss from discontinued operations			—				(78	)			(30	)			(54	)
Net income		$	42,047			$	40,734			$	123,097			$	105,920
Net income per common share:
Basic		$	1.50			$	1.33			$	4.09			$	3.47
Diluted		$	1.48			$	1.29			$	4.03			$	3.38
Income from continuing operations per common share:
Basic		$	1.50			$	1.33			$	4.09			$	3.47
Diluted		$	1.48			$	1.29			$	4.03			$	3.38
Loss from discontinued operations per common share:
Basic		$	—			$	—			$	—			$	—
Diluted		$	—			$	—			$	—			$	—
Weighted average shares outstanding:
Basic			28,063,104				30,658,969				30,081,696				30,540,274
Diluted			28,451,721				31,539,119				30,540,150				31,370,580

See accompanying notes to consolidated financial statements.

CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS

		As of
		September 30,				December 31,
(Dollars in thousands, except per share data)		2010				2009
		(Unaudited)
ASSETS:
Cash and cash equivalents		$	1,537			$	2,170
Restricted cash and cash equivalents			58,486				82,456
Restricted securities available for sale			815				3,121
Loans receivable (including $9,959 and $12,674 from affiliates as of September 30, 2010 and December 31, 2009, respectively)			1,301,067				1,167,558
Allowance for credit losses			(124,949	)			(117,545	)
Loans receivable, net			1,176,118				1,050,013
Property and equipment, net			16,421				18,735
Income taxes receivable			6,976				3,956
Other assets			23,932				15,785
Total Assets		$	1,284,285			$	1,176,236
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Liabilities:
Accounts payable and accrued liabilities		$	73,747			$	77,295
Line of credit			102,700				97,300
Secured financing			328,100				404,597
Mortgage note and capital lease obligations			4,587				5,082
Senior notes			244,174				—
Deferred income taxes, net			106,552				93,752
Total Liabilities			859,860				678,026
Shareholders’ Equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued			—				—
Common stock, $.01 par value, 80,000,000 shares authorized, 27,141,593 and 31,038,217 shares issued and outstanding as of September 30, 2010 and December 31, 2009, respectively			271				311
Paid-in capital			27,079				24,370
Retained earnings			397,219				474,433
Accumulated other comprehensive loss, net of tax of $85 and $526 at September 30, 2010 and December 31, 2009, respectively			(144	)			(904	)
Total Shareholders’ Equity			424,425				498,210
Total Liabilities and Shareholders’ Equity		$	1,284,285			$	1,176,236

See accompanying notes to consolidated financial statements.

CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

		Nine Months Ended
		September 30,
(Dollars in thousands)		2010				2009
Cash Flows From Operating Activities:
Net income		$	123,097			$	105,920
Adjustments to reconcile cash provided by operating activities:
Provision for credit losses			8,218				(7,217	)
Depreciation and amortization			8,702				6,943
Loss on retirement of property and equipment			64				98
Provision for deferred income taxes			12,358				25,109
Stock-based compensation			3,055				4,926
Change in operating assets and liabilities:
Decrease in accounts payable and accrued liabilities			(2,345	)			(842	)
Increase in income taxes receivable / decrease in income taxes payable			(3,020	)			(5,341	)
Decrease (increase) in other assets			527				(976	)
Net cash provided by operating activities			150,656				128,620
Cash Flows From Investing Activities:
Decrease in restricted cash and cash equivalents			23,970				4,314
Purchases of restricted securities available for sale			(1,063	)			(383	)
Proceeds from sale of restricted securities available for sale			2,112				—
Maturities of restricted securities available for sale			1,256				963
Principal collected on Loans receivable			589,727				502,453
Advances to Dealer-Partners and accelerated payments of Dealer Holdback			(612,653	)			(412,423	)
Purchases of Consumer Loans			(78,110	)			(87,840	)
Payments of Dealer Holdback			(33,419	)			(34,300	)
Net decrease in other loans			135				151
Purchases of property and equipment			(1,154	)			(1,789	)
Net cash used in investing activities			(109,199	)			(28,854	)
Cash Flows From Financing Activities:
Borrowings under line of credit			618,100				523,900
Repayments under line of credit			(612,700	)			(482,700	)
Proceeds from secured financing			217,200				217,500
Repayments of secured financing			(293,697	)			(355,184	)
Principal payments under mortgage note and capital lease obligations			(495	)			(954	)
Proceeds from sale of senior notes			243,738				—
Payments of debt issuance costs			(13,536	)			(5,604	)
Repurchase of common stock			(202,247	)			(540	)
Proceeds from stock options exercised			1,360				889
Tax benefits from stock-based compensation plans			190				1,390
Net cash used in financing activities			(42,087	)			(101,303	)
Effect of exchange rate changes on cash			(3	)			(7	)
Net decrease in cash and cash equivalents			(633	)			(1,544	)
Cash and cash equivalents, beginning of period			2,170				3,154
Cash and cash equivalents, end of period		$	1,537			$	1,610
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest		$	31,862			$	19,609
Cash paid during the period for income taxes		$	56,467			$	38,886

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, 2009 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, 2009 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. We have changed the presentation of our consolidated statement of cash flows to reflect the increased significance of debt issuance costs during the current period. Under our current presentation, payments of debt issuance costs are presented as a separate financing activity and the related amortization is presented within operating activities as depreciation and amortization. Under our previous presentation, payments of debt issuance costs and the related amortization were presented as a net change in other assets within operating activities.

     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.

     We have evaluated events and transactions occurring subsequent to the consolidated balance sheet date of September 30, 2010 for items that could potentially be recognized or disclosed in 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 programs and who share our commitment to changing consumers’ lives as “Dealer-Partners”. Upon enrollment in our financing programs, the Dealer-Partner enters into a dealer servicing agreement with us 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 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 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, 2009			82.3	%			17.7	%
June 30, 2009			86.0	%			14.0	%
September 30, 2009			89.0	%			11.0	%
December 31, 2009			90.8	%			9.2	%
March 31, 2010			90.9	%			9.1	%
June 30, 2010			90.5	%			9.5	%
September 30, 2010			90.5	%			9.5	%

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 non-recourse cash payment (“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. We require Dealer-Partners to group advances into pools of at least 100 Consumer Loans. 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 within a Dealer-Partner’s pool are secured by the future collections on the related Consumer Loans assigned to the pool. 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, which list us as lien holder on the vehicle title.

     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, which generally equals 20% of collections;
	•		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.

     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.

     Dealer-Partners have an opportunity to receive an accelerated Dealer Holdback payment 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.

     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 and Dealer-Partner have signed a Consumer Loan contract, we have received the original Consumer Loan contract and supporting documentation, and we have approved all of the related stipulations for funding. The Dealer-Partner can also opt to repurchase Consumer Loans that have been assigned to us 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;
	•		accelerated Dealer Holdback 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

     The Purchase Program differs from our Portfolio Program in that the Dealer-Partner receives a single payment from us at the time of assignment 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 that enroll in our programs have two enrollment options available to them. The first enrollment option allows Dealer-Partners to assign Consumer Loans under the Portfolio Program and requires payment of an upfront, one-time 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 fee of $1,950 and an agreement to allow us to keep 50% of their first accelerated Dealer Holdback payment. Prior to September 1, 2009, we offered Dealer-Partners an enrollment option that allowed us to keep 50% of their first accelerated Dealer Holdback payment with no upfront fee. For all Dealer-Partners enrolling in our program after August 31, 2008, access to the Purchase Program is only granted after the first accelerated Dealer Holdback payment has been made under the Portfolio Program.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Reinsurance

     VSC Re Company (“VSC Re”), our wholly-owned subsidiary, 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 one of our two 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, our exposure to fund claims is limited to the trust assets controlled by VSC Re and our net investment in VSC Re.

     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. Capitalized acquisition costs are comprised of premium taxes and are amortized as general and administrative expense over the life of the contracts in proportion to premiums earned. A summary of reinsurance activity is as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
(Dollars in thousands)		2010				2009				2010				2009
Net assumed written premiums		$	8,015			$	7,324			$	26,765			$	23,490
Net premiums earned			8,627				11,596				24,577				25,250
Provision for claims			6,112				5,148				17,610				14,788
Amortization of capitalized acquisition costs			219				534				540				787

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

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

     We are considered the primary beneficiary of the trusts and as a result, the trusts have been consolidated on our balance sheet. The trust assets and related reinsurance liabilities are as follows:

(Dollars in thousands)		Balance Sheet location		September 30, 2010				December 31, 2009
Trust assets		Restricted cash and cash equivalents		$	29,855			$	39,127
Unearned premium		Accounts payable and accrued liabilities			24,736				21,180
Claims reserve (1)		Accounts payable and accrued liabilities			1,100				965

     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. We are considered the primary beneficiary of the remaining trust and as a result, the assets of the trust and the related liabilities have been consolidated on our balance sheet. As of September 30, 2010 and December 31, 2009, the remaining trust had $1.0 million and $4.3 million, respectively, in assets available to pay claims. As of September 30, 2010, there was a nominal related claims reserve and as of December 31, 2009, there was a related claims reserve of $3.5 million. 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 account.

     Our determination to consolidate the VSC Re trusts and the remaining profit sharing trust was based on the following:

	•		First, we determined that the trusts qualified as variable interest entities. 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, VSC Re is required to absorb any losses in excess of the trusts’ assets.
	•		Next, we evaluated the purpose and design of the trusts. The primary purpose of the trusts is to provide TPAs with funds to pay claims on vehicle service contracts and to accumulate and provide us with proceeds from investment income and residual funds.
	•		Finally, we determined that we are the primary beneficiary of the trusts. We control the amount of premium written and placed in the trusts through Consumer Loan assignments under our Programs, which is the activity that most significantly impacts the economic performance of the trusts. We have the right to receive benefits from the trusts that could potentially be significant. In addition, VSC Re has the obligation to absorb losses of the trusts that could potentially be significant.

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

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Continued)

Restricted Cash and Cash Equivalents

     Restricted cash and cash equivalents decreased to $58.5 million at September 30, 2010 from $82.5 million at December 31, 2009. The following table summarizes restricted cash and cash equivalents:

		As of
(Dollars in thousands)		September 30, 2010				December 31, 2009
Cash collections related to secured financings		$	28,494			$	42,115
Cash held in trusts for future vehicle service contract claims (1)			29,992				40,341
Total restricted cash and cash equivalents		$	58,486			$	82,456

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, 2010
						Gross				Gross
						Unrealized				Unrealized				Estimated Fair
(Dollars in thousands)		Cost				Gains				Losses				Value
US Government and agency securities		$	298			$	4			$	—			$	302
Corporate bonds			504				12				(3	)			513
Total restricted securities available for sale		$	802			$	16			$	(3	)		$	815

		As of December 31, 2009
						Gross				Gross
						Unrealized				Unrealized				Estimated Fair
		Cost				Gains				Losses				Value
US Government and agency securities		$	726			$	18			$	(2	)		$	742
Corporate bonds			2,381				7				(9	)			2,379
Total restricted securities available for sale		$	3,107			$	25			$	(11	)		$	3,121

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

		As of September 30, 2010								As of December 31, 2009
						Estimated								Estimated
(Dollars in thousands)		Cost				Fair Value				Cost				Fair Value
Contractual Maturity
Within one year		$	499			$	500			$	1,486			$	1,495
Over one year to five years			303				315				1,621				1,626
Total restricted securities available for sale		$	802			$	815			$	3,107			$	3,121

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

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (Concluded)

Deferred Debt Issuance Costs

     As of September 30, 2010 and December 31, 2009, deferred debt issuance costs were $15.1 million (net of accumulated amortization of $2.0 million) and $6.4 million (net of accumulated amortization of $2.8 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 using the effective interest method for term secured financings and senior notes and the straight-line method for lines of credit and revolving secured financings.

New Accounting Pronouncements and Updates

     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 was incorporated into the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) through Accounting Standards Update (“ASU”) No. 2009-16 and 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 for transfers occurring on or after the effective date. The adoption on January 1, 2010 did not 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 was incorporated into the FASB ASC through ASU No. 2009-17 and is intended to improve financial reporting related to variable interest entities. The adoption on January 1, 2010 did not have a material impact on our consolidated financial statements, but expanded our disclosures.

     Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset. In April 2010, the FASB incorporated ASU No. 2010-18 into the FASB ASC. ASU No. 2010-18 is intended to improve comparability by eliminating diversity in practice about the treatment of modifications of loans accounted for within pools under FASB ASC 310-30. Additionally, the amendments clarify guidance about maintaining the integrity of a pool as the unit of accounting for acquired loans with credit deterioration. ASU No. 2010-18 is effective prospectively for modifications of loans accounted for within pools under FASB ASC 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. Early application is permitted. The guidance within ASU No. 2010-18 is consistent with how we have historically accounted for our Loan portfolio; therefore, adoption of this guidance on July 1, 2010 had no impact on our consolidated financial statements.

     Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. In July 2010, the FASB issued ASU No. 2010-20 which amends Topic 310 (Receivables). ASU 2010-20 is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The amendments in ASU 2010-20 encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption. While ASU 2010-20 will not have a material impact on our consolidated financial statements, we expect that it will expand our disclosures related to Loans.

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

4. LOANS RECEIVABLE

     Loans receivable consists of the following:

		As of September 30, 2010
(Dollars in thousands)		Dealer Loans				Purchased Loans				Total
Loans receivable		$	1,029,514			$	271,553			$	1,301,067
Allowance for credit losses			(111,906	)			(13,043	)			(124,949	)
Loans receivable, net		$	917,608			$	258,510			$	1,176,118

		As of December 31, 2009
		Dealer Loans				Purchased Loans				Total
Loans receivable		$	869,603			$	297,955			$	1,167,558
Allowance for credit losses			(108,792	)			(8,753	)			(117,545	)
Loans receivable, net		$	760,811			$	289,202			$	1,050,013

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

4. LOANS RECEIVABLE — (Continued)

     A summary of changes in Loans receivable is as follows:

		Three Months Ended September 30, 2010
(Dollars in thousands)		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	980,952			$	278,695			$	1,259,647
New Consumer Loan assignments (1)			202,470				25,959				228,429
Principal collected on Loans receivable			(160,426	)			(37,145	)			(197,571	)
Dealer Holdback payments			10,537				—				10,537
Transfers			(4,076	)			4,076				—
Write-offs			(433	)			(48	)			(481	)
Recoveries			542				16				558
Net change in other loans			(52	)			—				(52	)
Balance, end of period		$	1,029,514			$	271,553			$	1,301,067

		Three Months Ended September 30, 2009
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	858,559			$	325,535			$	1,184,094
New Consumer Loan assignments (1)			129,677				19,974				149,651
Principal collected on Loans receivable			(126,859	)			(36,411	)			(163,270	)
Dealer Holdback payments			10,335				—				10,335
Transfers			(3,666	)			3,666				—
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

		Nine Months Ended September 30, 2010
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	869,603			$	297,955			$	1,167,558
New Consumer Loan assignments (1)			612,653				78,110				690,763
Principal collected on Loans receivable			(471,513	)			(118,214	)			(589,727	)
Dealer Holdback payments			33,419				—				33,419
Transfers			(13,741	)			13,741				—
Write-offs			(2,493	)			(97	)			(2,590	)
Recoveries			1,688				58				1,746
Net change in other loans			(135	)			—				(135	)
Currency translation			33				—				33
Balance, end of period		$	1,029,514			$	271,553			$	1,301,067

		Nine Months Ended September 30, 2009
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	823,567			$	325,185			$	1,148,752
New Consumer Loan assignments (1)			412,423				87,840				500,263
Principal collected on Loans receivable			(390,603	)			(111,850	)			(502,453	)
Dealer Holdback payments			34,300				—				34,300
Transfers			(11,594	)			11,594				—
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

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

4. LOANS RECEIVABLE — (Concluded)

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

		Three Months Ended September 30, 2010
(Dollars in thousands)		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	112,115			$	12,756			$	124,871
Provision for credit losses			(317	)			319				2
Write-offs			(433	)			(48	)			(481	)
Recoveries			542				16				558
Currency translation			(1	)			—				(1	)
Balance, end of period		$	111,906			$	13,043			$	124,949

		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

		Nine Months Ended September 30, 2010
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	108,792			$	8,753			$	117,545
Provision for credit losses			3,889				4,329				8,218
Write-offs			(2,493	)			(97	)			(2,590	)
Recoveries			1,688				58				1,746
Currency translation			30				—				30
Balance, end of period		$	111,906			$	13,043			$	124,949

		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

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

5. DEBT

     We currently utilize the following forms of debt financing: (1) a revolving secured line of credit with a commercial bank syndicate; (2) revolving secured warehouse facilities with institutional investors; (3) an asset-backed secured financing (“Term ABS”) with qualified institutional investors; and (4) Senior Secured Notes due 2017 issued pursuant to Rule 144A and Regulation S of the Securities Act of 1933, as amended (“Senior Notes”). General information for each of our financing transactions in place as of September 30, 2010 is as follows:

(Dollars in thousands)

Wholly-owned

Issue

Financing

Interest Rate at

Financings

Subsidiary

Number

Close Date

Maturity Date

Amount

September 30, 2010

Revolving Secured Line of Credit

n/a

n/a

June 9, 2010

June 22, 2012

$

170,000

At our option, either the Eurodollar rate plus 225 basis points or the prime rate plus 125 basis points

Revolving Secured Warehouse Facility (1)

CAC Warehouse Funding Corp. II

2003-2

June 16, 2010

June 15, 2013 (2)

$

325,000

Commercial paper rate plus 350 basis points or LIBOR plus 450 basis points (4) (5)

Revolving Secured Warehouse Facility (1)

CAC Warehouse Funding III, LLC

2008-2

September 10, 2010

September 10, 2013 (6)

$

75,000

Commercial paper rate plus 300 basis points or LIBOR plus 300 basis points (3) (4) (5)

Term ABS 2009-1 (1)

Credit Acceptance Funding LLC 2009-1

2009-1

December 3, 2009

May 15, 2011 (2)

$

110,500

Fixed rate

Senior Notes

n/a

n/a

February 1, 2010

February 1, 2017

$

250,000

Fixed rate

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

5. DEBT — (Continued)

     Additional information related to the amounts outstanding on each facility is as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
(Dollars in thousands)		2010				2009				2010				2009
Revolving Secured Line of Credit
Maximum outstanding balance		$	107,800			$	124,600			$	107,900			$	128,900
Average outstanding balance			68,720				89,293				47,950				85,785
Revolving Secured Warehouse Facility (2003-2)
Maximum outstanding balance		$	180,000			$	325,000			$	180,000			$	325,000
Average outstanding balance			141,267				290,327				75,853				273,663
Revolving Secured Warehouse Facility (2008-2)
Maximum outstanding balance		$	70,000			$	50,000			$	75,000			$	50,000
Average outstanding balance			64,783				50,000				71,538				50,000

		As of
(Dollars in thousands)		September 30, 2010				December 31, 2009
Revolving Secured Line of Credit
Balance outstanding		$	102,700			$	97,300
Letter(s) of credit			500				514
Amount available for borrowing			66,800				42,186
Interest rate			3.03	%			4.25	%
Revolving Secured Warehouse Facility (2003-2)
Balance outstanding		$	162,600			$	152,600
Amount available for borrowing			162,400				172,400
Contributed eligible Loans			216,210				192,921
Interest rate			3.81	%			5.24	%
Revolving Secured Warehouse Facility (2008-2)
Balance outstanding		$	55,000			$	75,000
Amount available for borrowing			20,000				—
Contributed eligible Loans			82,343				94,073
Interest rate			3.76	%			4.36	%
Term ABS 2008-1
Balance outstanding		$	—			$	66,497
Contributed eligible Loans			—				142,267
Interest rate			—				6.37	%
Term ABS 2009-1
Balance outstanding		$	110,500			$	110,500
Contributed eligible Loans			142,469				142,315
Interest rate			4.40	%			4.40	%
Senior Notes
Balance outstanding (1)		$	244,174			$	—
Interest rate			9.13	%			—

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

5. DEBT — (Continued)

Revolving Secured Warehouse Facilities

     We have two revolving secured warehouse facilities that are provided to our wholly-owned subsidiaries. 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 second quarter of 2010, we extended the date on which our $325.0 million revolving secured warehouse facility will cease to revolve from August 23, 2010 to June 15, 2013. The interest rate on borrowings under the facility was decreased from a floating rate equal to the commercial paper rate plus 5.0% to the commercial paper rate plus 3.5%. In addition, the agreement was modified to provide that in the event that the facility is not renewed and the borrower is in compliance with the terms and conditions of the agreement, any amounts outstanding will be repaid over time as the collections on the loans securing the facility are received.

     During the third quarter of 2010, we extended the date on which our $75.0 million revolving secured warehouse facility will cease to revolve from August 31, 2011 to September 10, 2013. The maturity of the facility was also extended from August 31, 2012 to September 10, 2014. The interest rate on the facility was decreased from a floating rate equal to LIBOR plus 3.75% to LIBOR plus 3.0%. There were no other material changes to the terms of the facility.

     Under both revolving secured 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 financings create loans for which the subsidiaries are liable and which are secured by all the assets of each subsidiary. Such loans are non-recourse to us, even though we are consolidated for financial reporting purposes with the subsidiaries. Because the subsidiaries are organized as legal entities separate from us, their assets (including the conveyed Loans) are not available to our creditors.

     Interest on borrowings under the $325.0 million revolving secured warehouse facility has been limited through interest rate cap agreements to a maximum rate of 6.75% plus the spread over the LIBOR rate or the commercial paper rate, as applicable. Interest on borrowings for a portion of the $75.0 million revolving secured warehouse facility has also been limited through interest rate cap agreements to a maximum rate of 6.75% plus the spread over the LIBOR rate or the commercial paper rate, as applicable. We have also entered into an 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 4.36%. For additional information, see Note 6 of these consolidated financial statements.

     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, if a facility is amortizing, 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 have been paid in full. If a facility is not amortizing, the applicable subsidiary may be entitled to retain a portion of such collections provided that the borrowing base requirements of the facility are satisfied.

Revolving Secured Line of Credit Facility

     During the first quarter of 2010, we increased the amount of the revolving secured line of credit facility from $140.0 million to $150.0 million and, concurrently with the issuance of the Senior Notes, amended the agreements governing our revolving secured line of credit facility to facilitate the issuance of the Senior Notes and certain future secured indebtedness.

     During the second quarter of 2010, we extended the maturity of the revolving secured line of credit facility from June 23, 2011 to June 22, 2012. Additionally, the interest rate on borrowings under the facility was changed from the prime rate plus 1.0% or the Eurodollar rate plus 2.75%, at our option, to the prime rate plus 1.25% or the Eurodollar rate plus 2.25%, at our option. The floor on the Eurodollar rate was decreased from 1.50% to 0.75%. None of the financial covenants were modified.

     During the third quarter of 2010, we increased the amount of the revolving secured line of credit facility from $150.0 million to $170.0 million.

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

5. DEBT — (Continued)

     Borrowings under the revolving secured line of credit facility, including any letters of credit issued under the 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), 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 quarterly fees on the amount of the facility.

Senior Notes

     During the first quarter of 2010, we issued $250.0 million aggregate principal amount of 9.125% First Priority Senior Notes. The Senior Notes were issued pursuant to an indenture, dated as of February 1, 2010 (the “Indenture”), among us, Buyers Vehicle Protection Plan, Inc. (“BVPP”) and Vehicle Remarketing Services, Inc. (“VRS”), as guarantors (the “Guarantors”), and U.S. Bank National Association, as trustee (the “Trustee”).

     The Senior Notes mature on February 1, 2017 and bear interest at a rate of 9.125% per annum, computed on the basis of 360-day year composed of twelve 30-day months and payable semi-annually on February 1 and August 1 of each year, beginning on August 1, 2010. The Senior Notes were issued at 97.495% of the aggregate principal amount for gross proceeds of $243.7 million, representing a yield to maturity of 9.625%. The discount is being amortized over the life of the Senior Notes using the effective interest method.

     The Senior Notes are guaranteed on a senior secured basis by the Guarantors, which are also guarantors of obligations under our line of credit facility. Our other existing and future subsidiaries may become guarantors of the Senior Notes. The Senior Notes and the Guarantors’ Senior Note guarantees are secured on a first-priority basis (subject to specified exceptions and permitted liens), together with all indebtedness outstanding from time to time under the line of credit facility and, under certain circumstances, certain future indebtedness, by a security interest in substantially all of our assets and those of the Guarantors, subject to certain exceptions such as real property, cash (except to the extent it is deposited with the collateral agent), certain leases, and equity interests of our subsidiaries (other than those of specified subsidiaries including the Guarantors). Our assets and those of the Guarantors securing the Senior Notes and the Senior Note guarantees will not include our assets transferred to special purpose subsidiaries in connection with securitization transactions and will generally be the same as the collateral securing indebtedness under the line of credit facility and, under certain circumstances, certain future indebtedness, subject to certain limited exceptions as provided in the security and intercreditor agreements related to the line of credit facility.

Term ABS Financings

     In 2008 and 2009, two 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. The Term ABS 2008-1 ceased to revolve on April 15, 2009 and was paid in full during the second quarter of 2010. The Term ABS 2009-1 transaction consists of three classes of notes. The Class A Notes are rated “AAA” by S&P and DBRS, Inc. The Class B Notes are rated “AA” by S&P. The Class C Note does not bear interest, is not rated and has been retained by us.

     Each financing at the time of issuance 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.

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

5. DEBT — (Concluded)

     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 we are consolidated for financial reporting purposes with the trusts and the Funding LLCs. Because the Funding LLCs are organized as legal entities separate from us, their assets (including the conveyed Loans) are not available to our creditors. We receive a monthly servicing fee on each financing equal to 6% of the collections received with respect to the conveyed Loans. The fee is paid out of the collections. Except for the servicing fee and Dealer Holdback payments due to Dealer-Partners, if a facility is amortizing, 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 have been paid in full. If a facility is not amortizing, the applicable subsidiary may be entitled to retain a portion of such collections provided that the borrowing base requirements of the facility are satisfied. 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 and/or the trusts 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 Financing:

(Dollars in thousands)

Expected

Issue

Net Book Value of Dealer

Annualized

Term ABS Financing

Number

Close Date

Loans Conveyed at Closing

Revolving Period

Rates (1)

Term ABS 2009-1

2009-1

December 3, 2009

$

142,301

18 months (Through May 15, 2011)

5.2

%

Debt Covenants

     As of September 30, 2010, we are in compliance with all our debt covenants relating to the line of credit facility, including those that require the maintenance of certain financial ratios and other financial conditions. These 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. These 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 these debt covenants may indirectly limit the repurchase of common stock or payment of dividends on common stock.

     In addition to the covenants stated above, our revolving secured warehouse facilities and Term ABS financing contain covenants that measure the performance of the contributed assets. As of September 30, 2010, we were in compliance with all such covenants. As of the end of the quarter, we are also in compliance with our covenants under the Senior Notes Indenture. The Indenture includes covenants that limit the maximum ratio of our funded debt to tangible net worth and also require a minimum collateral coverage ratio.

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

6. DERIVATIVE INSTRUMENTS

     Interest Rate Caps. We purchase interest rate cap agreements to manage the interest rate risk on certain borrowings.

     As of September 30, 2010, we had interest rate cap agreements to manage the interest rate risk on our $325.0 million revolving secured warehouse facility with various maturities between February 2011 and May 2012. We also had an interest rate cap agreement to manage the interest rate risk on a portion of our $75.0 million revolving secured warehouse facility that ceases to revolve in September 2013. These instruments limit the interest rate on both revolving secured warehouse facilities to 6.75% plus the spread over the LIBOR rate or the commercial paper rate, as applicable.

     As of December 31, 2009, we had interest rate cap agreements to manage the interest rate risk on our $325.0 million revolving secured warehouse facility, as well as on $50.0 million of the $75.0 million revolving secured warehouse facility with various maturities between May 2010 and August 2011. These instruments limit the interest rate on both revolving secured warehouse facilities to 6.75% plus the spread over the LIBOR rate or the commercial paper rate, as applicable.

     The interest rate caps have not been designated as hedging instruments.

     Interest Rate Swaps. As of September 30, 2010 we had an interest rate swap outstanding, which matures in August 2011, to convert $25.0 million of the $75.0 million 2008-2 revolving secured warehouse facility into fixed rate debt, bearing an interest rate of 4.36%. This interest rate swap has been designated as a cash flow hedging instrument.

     As of December 31, 2009, in addition to the interest rate swap discussed above, the following were also outstanding:

	•		An interest rate swap to convert the outstanding balance of the 2008-1 floating rate Term ABS financing, which ceased to revolve on April 15, 2009 and was paid in full during the second quarter of 2010, into fixed rate debt, bearing an interest rate of 6.37%. This interest rate swap was designated as a cash flow hedging instrument.
	•		An interest rate swap, also related to the outstanding balance of the 2008-1 floating rate Term ABS financing, that required the counterparties to make a payment depending on our actual debt balance outstanding on the facility relative to our original forecasted balance and on the level of interest rates. This interest rate swap was not designated as a hedging instrument.

     At September 30, 2010, we had minimal exposure to credit loss on the outstanding interest rate swap. 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, 2010 and December 31, 2009 is as follows:

(Dollars in thousands)

						Fair Value
		Balance Sheet				September 30,				December 31,
		location				2010				2009
Derivatives designated as hedging instruments
Liability Derivatives
Interest rate swap		Accounts payable and accrued liabilities				$	241			$	1,445
Derivatives not designated as hedging instruments
Asset Derivatives
Interest rate caps		Other assets				$	34			$	82
Total Asset Derivatives						$	34			$	82
Total Liability Derivatives						$	241			$	1,445

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

6. DERIVATIVE INSTRUMENTS — (Concluded)

     Information related to the effect of derivative instruments designated as hedging instruments on our consolidated income statements for the three and nine months ended September 30, 2010 and 2009 is as follows:

(Dollars in thousands)

		Loss Recognized in OCI on Derivative								Loss 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		2010				2009				Location				2010				2009
Interest rate swap		$	(83	)		$	(274	)		Interest expense				$	(68	)		$	(832	)

		Gain / (Loss)
		Recognized in OCI on Derivative								Loss 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		2010				2009				Location				2010				2009
Interest rate swap		$	528			$	(972	)		Interest expense				$	(676	)		$	(2,971	)

     As of September 30, 2010, we expect to reclassify losses of $0.2 million from accumulated other comprehensive income into income during the next twelve months.

     Information related to the effect of derivative instruments not designated as hedging instruments on our consolidated income statements for the three and nine months ended September 30, 2010 and 2009 is as follows:

(Dollars in thousands)

						Amount of (Loss) / Gain Recognized in Income on Derivative
Derivatives Not Designated as						Three Months Ended September 30,								Nine Months Ended September 30,
Hedging Instruments		Location				2010				2009				2010				2009
Interest rate caps		Interest expense				$	(24	)		$	(78	)		$	(181	)		$	(78	)
Interest rate swap		Interest expense					—				53				(590	)			66
Total						$	(24	)		$	(25	)		$	(771	)		$	(12	)

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

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

     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 us 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, which are influenced by a number of factors, including interest rates, amount of debt outstanding, notional amount of the derivative, and number of months until maturity.

     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:

		As of September 30,								As of December 31,
		2010								2009
		Carrying				Estimated				Carrying				Estimated
(Dollars in thousands)		Amount				Fair Value				Amount				Fair Value
Assets
Cash and cash equivalents		$	1,537			$	1,537			$	2,170			$	2,170
Restricted cash and cash equivalents			58,486				58,486				82,456				82,456
Restricted securities available for sale			815				815				3,121				3,121
Net investment in Loans receivable			1,176,118				1,182,719				1,050,013				1,056,059
Derivative instruments			34				34				82				82
Liabilities
Line of credit		$	102,700			$	102,700			$	97,300			$	97,300
Secured financing			328,100				331,291				404,597				404,725
Mortgage note			4,579				4,590				4,744				4,757
Senior notes			244,174				262,500				—				—
Derivative instruments			241				241				1,445				1,445

     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. 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.

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

7. FAIR VALUE OF FINANCIAL INSTRUMENTS — (Concluded)

     The following table provides the fair value measurements of applicable assets and liabilities, measured at fair value on a recurring basis, as of September 30, 2010 and December 31, 2009:

		As of September 30, 2010												As of December 31, 2009
										Total												Total
(Dollars in thousands)		Level 1				Level 2				Fair Value				Level 1				Level 2				Fair Value
Assets
Restricted securities available for sale		$	815			$	—			$	815			$	3,121			$	—			$	3,121
Derivative instruments			—				34				34				—				82				82
Liabilities
Derivative instruments		$	—			$	241			$	241			$	—			$	1,445			$	1,445