UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2009

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

For the transition period from                      to                     

CREDIT ACCEPTANCE CORPORATION

(Exact name of registrant as specified in its charter)

MICHIGAN		38-1999511
(State or other jurisdiction of incorporation or organization)		(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):

Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o

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 July 31, 2009 was 30,869,905.

 

 

TABLE OF CONTENTS

PART I. — FINANCIAL INFORMATION
ITEM 1.		CONSOLIDATED FINANCIAL STATEMENTS
		Consolidated Income Statements — Three and six months ended June 30, 2009 and 2008			1
		Consolidated Balance Sheets — As of June 30, 2009 and December 31, 2008			2
		Consolidated Statements of Cash Flows — Six months ended June 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			38
ITEM 4.		CONTROLS AND PROCEDURES			38
PART II. — OTHER INFORMATION
ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			39
ITEM 6.		EXHIBITS			40
SIGNATURES					41
INDEX OF EXHIBITS					42
EX-31.A
EX-31.B
EX-32.A
EX-32.B

PART I. — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)

		Three Months Ended June 30,								Six Months Ended June 30,
(Dollars in Thousands, Except Per Share Data)		2009				2008				2009				2008
Revenue:
Finance charges		$	81,124			$	70,827			$	157,850			$	134,502
Premiums earned			7,201				21				13,661				53
Other income			4,048				4,157				8,750				11,228
Total revenue			92,373				75,005				180,261				145,783
Costs and expenses:
Salaries and wages			16,515				16,699				33,636				34,439
General and administrative			6,897				6,627				14,895				13,751
Sales and marketing			3,566				4,556				7,487				9,227
Provision for credit losses			(3,790	)			20,760				(3,626	)			23,409
Interest			7,285				9,884				15,208				20,748
Provision for claims			4,829				9				9,638				14
Total costs and expenses			35,302				58,535				77,238				101,588
Operating income			57,071				16,470				103,023				44,195
Foreign currency gain (loss)			3				—				6				(13	)
Income from continuing operations before provision for income taxes			57,074				16,470				103,029				44,182
Provision for income taxes			20,924				6,091				37,867				16,222
Income from continuing operations			36,150				10,379				65,162				27,960
Discontinued operations
Gain (loss) from discontinued United Kingdom operations			49				(12	)			34				44
Provision for income taxes			14				23				10				40
Gain (loss) from discontinued operations			35				(35	)			24				4
Net income		$	36,185			$	10,344			$	65,186			$	27,964
Net income per common share:
Basic		$	1.18			$	0.34			$	2.14			$	0.93
Diluted		$	1.15			$	0.33			$	2.08			$	0.90
Income from continuing operations per common share:
Basic		$	1.18			$	0.34			$	2.14			$	0.93
Diluted		$	1.15			$	0.33			$	2.08			$	0.90
Gain (loss) from discontinued operations per common share:
Basic		$	—			$	—			$	—			$	—
Diluted		$	—			$	—			$	—			$	—
Weighted average shares outstanding:
Basic			30,600,531				30,252,873				30,510,439				30,179,877
Diluted			31,423,187				31,088,428				31,285,734				30,970,387

See accompanying notes to consolidated financial statements.

CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS

		As of
		June 30,				December 31,
		2009				2008
(Dollars in thousands, except per share data)		(unaudited)
ASSETS:
Cash and cash equivalents		$	1,609			$	3,154
Restricted cash and cash equivalents			75,663				80,333
Restricted securities available for sale			2,905				3,345
Loans receivable (including $14,125 and $15,383 from affiliates as of June 30, 2009 and December 31, 2008, respectively)			1,184,094				1,148,752
Allowance for credit losses			(127,153	)			(130,835	)
Loans receivable, net			1,056,941				1,017,917
Property and equipment, net			19,635				21,049
Other assets			14,539				13,556
Total Assets		$	1,171,292			$	1,139,354
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Liabilities:
Accounts payable and accrued liabilities		$	84,691			$	83,948
Line of credit			113,900				61,300
Secured financing			470,716				574,175
Mortgage note and capital lease obligations			5,498				6,239
Deferred income taxes, net			88,494				75,060
Income taxes payable			832				881
Total Liabilities			764,131				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, 30,869,525 and 30,666,691 shares issued and outstanding as of June 30, 2009 and December 31, 2008, respectively			308				306
Paid-in capital			15,130				11,829
Retained earnings			393,364				328,178
Accumulated other comprehensive loss, net of tax of $937 and $1,478 at June 30, 2009 and December 31, 2008, respectively			(1,641	)			(2,562	)
Total Shareholders’ Equity			407,161				337,751
Total Liabilities and Shareholders’ Equity		$	1,171,292			$	1,139,354

See accompanying notes to consolidated financial statements.

CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

		Six Months Ended June 30,
(Dollars in thousands)		2009				2008
Cash Flows From Operating Activities:
Net income		$	65,186			$	27,964
Adjustments to reconcile cash provided by operating activities:
Provision for credit losses			(3,626	)			23,409
Depreciation			2,723				2,571
Loss on retirement of property and equipment			98				—
Provision for deferred income taxes			12,893				4,464
Stock-based compensation			3,155				1,807
Change in operating assets and liabilities:
Increase in accounts payable and accrued liabilities			2,184				1,737
(Increase) decrease in income taxes receivable			(49	)			8,286
Increase in other assets			(983	)			(1,775	)
Net cash provided by operating activities			81,581				68,463
Cash Flows From Investing Activities:
Decrease (increase) in restricted cash and cash equivalents			4,670				(12,790	)
Purchases of restricted securities available for sale			—				(1,514	)
Proceeds from sale of restricted securities available for sale			—				271
Maturities of restricted securities available for sale			461				298
Principal collected on Loans receivable			339,183				314,554
Advances to dealers and accelerated payments of Dealer Holdback			(282,746	)			(321,396	)
Purchases of Consumer Loans			(67,866	)			(185,274	)
Payments of Dealer Holdback			(23,965	)			(32,746	)
Net increase in other loans			(1	)			(151	)
Purchases of property and equipment			(1,407	)			(4,291	)
Net cash used in investing activities			(31,671	)			(243,039	)
Cash Flows From Financing Activities:
Borrowings under line of credit			411,200				415,900
Repayments under line of credit			(358,600	)			(414,100	)
Proceeds from secured financing			124,400				407,700
Repayments of secured financing			(227,859	)			(237,481	)
Principal payments under mortgage note and capital lease obligations			(741	)			(790	)
Repurchase of common stock			(540	)			(66	)
Proceeds from stock options exercised			352				1,911
Tax benefits from stock based compensation plans			336				865
Net cash (used in) provided by financing activities			(51,452	)			173,939
Effect of exchange rate changes on cash			(3	)			7
Net decrease in cash and cash equivalents			(1,545	)			(630	)
Cash and cash equivalents, beginning of period			3,154				712
Cash and cash equivalents, end of period		$	1,609			$	82
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest		$	15,917			$	20,843
Cash paid during the period for income taxes		$	23,870			$	2,039

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.

     Other than those disclosed in Note 12 to these financial statements, as of August 5, 2009, 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 primary programs: the Portfolio Program and the Purchase Program. Under the Portfolio Program, we advance money to dealer-partners (referred to as a “Dealer Loan”) in exchange for the right to service the underlying Consumer Loan. Under the Purchase Program, we buy the Consumer Loan from the dealer-partner (referred to as a “Purchased Loan”) and keep all amounts collected from the consumer. Dealer Loans and Purchased Loans are collectively referred to as “Loans”. The following table shows the percentage of Consumer Loans assigned to us under each of the programs for each of the last six 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	%

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 from the dealer-partner of the advance except in the event the dealer-partner is in default of the dealer servicing agreement. Advances are made only after the Consumer Loan is approved, accepted and assigned to us and all other stipulations required for funding have been satisfied. The dealer-partner can also opt to repurchase Consumer Loans assigned under the Portfolio Program, at their 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 that enroll in our programs have the option to either pay an upfront, one-time enrollment fee of $9,850 or defer payment by agreeing to allow us to keep 50% of their first Portfolio Profit Express payment. Dealer-partners that enrolled in our programs prior to 2008 have the option to assign Consumer Loans under either the Portfolio Program or the Purchase Program. During 2008, we changed our eligibility requirements for new dealer-partner enrollments to restrict access to the Purchase Program. For dealer-partners that enrolled in our programs during the first eight months of 2008, only dealer-partners that elected to pay the upfront, one-time enrollment fee were initially allowed to assign Consumer Loans under both programs. Dealer-partners that elected the deferred option during this period were only granted access to the Purchase Program after the first Portfolio Profit Express payment has been made under the Portfolio Program. For all dealer-partners enrolling in our programs after August 31, 2008, access to the Purchase Program is only granted after the first Portfolio Profit Express payment has been made under the Portfolio Program.

3. SIGNIFICANT ACCOUNTING POLICIES

Premiums Earned

     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 in accordance with the short-duration contract provisions of SFAS No. 60, “Accounting and Reporting by Insurance Enterprises” (“SFAS 60”). 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 historical loss experience. Claims are expensed through a provision for claims in the period the claim was incurred. For the three and six months ended June 30, 2009, net assumed written premiums were $7.1 million and $16.2 million, net premiums earned were $7.2 million and $13.7 million, and provision for claims was $4.8 million and $9.6 million, respectively. For the three and six months ended June 30, 2009, we amortized $0.1 million and $0.2 million, respectively, of capitalized acquisition costs related to premium taxes. Capitalized acquisition costs are amortized over the life of the contracts in proportion to premiums earned. Under FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), we are considered the primary beneficiary of the trusts and as a result, trust assets of $35.1 million and $29.3 million at June 30, 2009 and December 31, 2008, respectively, have been consolidated on our balance sheet as restricted cash and cash equivalents. As of June 30, 2009 and December 31, 2008, accounts payable and accrued liabilities includes $29.7 million and $23.3 million of unearned premium, 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.

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

3. SIGNIFICANT ACCOUNTING POLICIES — (Continued)

     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. As the trust assets transferred to VSC Re exceeded the ceded unearned premiums, we recorded a deferred gain of $4.3 million upon the formation of VSC Re. The deferred gain will be recognized as premiums earned revenue over the life of the policy in proportion to expected costs of servicing those contracts. Expected costs are determined based on historical loss experience. For the three and six months ended June 30, 2009, $0.6 million and $1.3 million of the deferred gain were amortized into income. 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 FIN 46, 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 June 30, 2009 and December 31, 2008, the remaining trust had $4.6 million and $5.4 million in assets available to pay claims and a related claims reserve of $3.8 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.

     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.

     Our determination to consolidate the VSC Re trusts and the profit sharing trusts under FIN 46 was based on the following:

	•		First, we determined that the trusts qualified as variable interest entities as defined under FIN 46. 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 $75.7 million at June 30, 2009 from $80.3 million at December 31, 2008. The following table summarizes restricted cash and cash equivalents:

		As of
		June 30,				December 31,
(in thousands)		2009				2008
Cash collections related to secured financings		$	38,918			$	48,956
Cash held in trusts for future vehicle service contract claims (1)			36,745				31,377
Total restricted cash and cash equivalents		$	75,663			$	80,333

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

3. SIGNIFICANT ACCOUNTING POLICIES — (Continued)

Restricted Securities Available for Sale

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

     Restricted securities available for sale consisted of the following:

		As of June 30, 2009
						Gross				Gross
						Unrealized				Unrealized				Estimated
(in thousands)		Cost				Gains				Losses				Fair Value
US Government and agency securities		$	843			$	35			$	—			$	878
Corporate bonds			2,013				16				(2	)			2,027
Total restricted securities available for sale		$	2,856			$	51			$	(2	)		$	2,905

		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.

		As of June 30, 2009								As of December 31, 2008
						Estimated								Estimated
(in thousands)		Cost				Fair Value				Cost				Fair Value
Contractual Maturity
Within one year		$	2,409			$	2,433			$	1,665			$	1,670
Over one year to five years			447				472				1,652				1,675
Total restricted securities available for sale		$	2,856			$	2,905			$	3,317			$	3,345

Deferred Debt Issuance Costs

     As of June 30, 2009 and December 31, 2008, deferred debt issuance costs were $2.6 million (net of accumulated amortization of $6.6 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 financings.

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

3. SIGNIFICANT ACCOUNTING POLICIES — (Concluded)

New Accounting Pronouncements

     Disclosures About Derivative Instruments and Hedging Activities. In March 2008, the FASB issued SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures. The adoption of SFAS 161 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 is intended to enhance consistency in financial reporting by increasing the frequency of fair value disclosures. This FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted FSP FAS 107-1 and APB 28-1 for the period ending June 30, 2009. The adoption 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 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. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted FSP FAS 115-2 and FAS 124-2 for the period ending June 30, 2009. The adoption of FSP FAS 115-2 and FAS 124-2 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 is intended to establish principles and requirements for subsequent events. This SFAS is effective for interim reporting periods ending after June 15, 2009. We adopted SFAS 165 for the period ending June 30, 2009. The adoption 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 is 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 is 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 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). This SFAS is effective for interim and annual reporting periods ending after September 15, 2009. We do not expect SFAS 168 to 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 June 30, 2009
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	848,091			$	331,393			$	1,179,484
New loans			129,565				26,477				156,042
Transfers			(3,598	)			3,598				—
Dealer Holdback payments			11,154				—				11,154
Net cash collections on Loans			(126,204	)			(35,934	)			(162,138	)
Write-offs			(1,247	)			(14	)			(1,261	)
Recoveries			728				15				743
Net change in other loans			(12	)			—				(12	)
Currency translation			82				—				82
Balance, end of period		$	858,559			$	325,535			$	1,184,094

		Three Months Ended June 30, 2008
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	831,605			$	216,788				1,048,393
New loans			141,423				91,214				232,637
Transfers			(584	)			584				—
Dealer Holdback payments			15,504				—				15,504
Net cash collections on Loans			(125,920	)			(23,871	)			(149,791	)
Write-offs			(2,368	)			(6	)			(2,374	)
Recoveries			23				9				32
Net change in other loans			(10	)			—				(10	)
Currency translation			18				—				18
Balance, end of period		$	859,691			$	284,718			$	1,144,409

		Six Months Ended June 30, 2009
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	823,567			$	325,185			$	1,148,752
New loans			282,746				67,866				350,612
Transfers			(7,928	)			7,928				—
Dealer Holdback payments			23,965				—				23,965
Net cash collections on Loans			(263,744	)			(75,439	)			(339,183	)
Write-offs			(1,817	)			(35	)			(1,852	)
Recoveries			1,710				30				1,740
Net change in other loans			1				—				1
Currency translation			59				—				59
Balance, end of period		$	858,559			$	325,535			$	1,184,094

		Six Months Ended June 30, 2008
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	804,245			$	140,453				944,698
New loans			321,396				185,274				506,670
Transfers			(2,098	)			2,098				—
Dealer Holdback payments			32,746				—				32,746
Net cash collections on Loans			(271,451	)			(43,103	)			(314,554	)
Write-offs			(25,249	)			(19	)			(25,268	)
Recoveries			—				15				15
Net change in other loans			151				—				151
Currency translation			(49	)			—				(49	)
Balance, end of period		$	859,691			$	284,718			$	1,144,409

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 June 30, 2009
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	113,869			$	17,515			$	131,384
Provision for credit losses			(1,706	)			(2,084	)			(3,790	)
Write-offs			(1,247	)			(14	)			(1,261	)
Recoveries			728				15				743
Currency translation			77				—				77
Balance, end of period		$	111,721			$	15,432			$	127,153

		Three Months Ended June 30, 2008
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	112,653			$	1,172			$	113,825
Provision for credit losses			15,490				5,270				20,760
Write-offs			(2,368	)			(6	)			(2,374	)
Recoveries			23				9				32
Currency translation			16				—				16
Balance, end of period		$	125,814			$	6,445			$	132,259

		Six Months Ended June 30, 2009
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	113,831			$	17,004			$	130,835
Provision for credit losses			(2,059	)			(1,567	)			(3,626	)
Write-offs			(1,817	)			(35	)			(1,852	)
Recoveries			1,710				30				1,740
Currency translation			56				—				56
Balance, end of period		$	111,721			$	15,432			$	127,153

		Six Months Ended June 30, 2008
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	133,201			$	944			$	134,145
Provision for credit losses			17,904				5,505				23,409
Write-offs			(25,249	)			(19	)			(25,268	)
Recoveries			—				15				15
Currency translation			(42	)			—				(42	)
Balance, end of period		$	125,814			$	6,445			$	132,259

     For the three and six months ended June 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 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 four 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; (3) SEC Rule 144A asset-backed secured financings (“Term ABS 144A”) with qualified institutional investors; and (4) a residual credit facility with an institutional investor. General information for each of the Company’s financing transactions in place as of June 30, 2009 is as follows (dollars in thousands):

Wholly-owned

Interest Rate at

Financings

Subsidiary

Issue Number

Close Date

Maturity Date

Financing Amount

June 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

Revolving Secured Warehouse Facility (1)

CAC Warehouse Funding Corp. II

2003-2

August 27, 2008

August 26, 2009

$

325,000

Commercial paper rate plus 100 basis points or LIBOR plus 200 basis points (4) (5)

Revolving Secured Warehouse Facility (1)

CAC Warehouse Funding III, LLC

2008-2

May 27, 2008

May 23, 2011 (6)

$

50,000

Commercial paper rate plus 77.5 basis points or LIBOR plus 177.5 basis points (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)

Residual Credit Facility (1)

Credit Acceptance Residual Funding LLC

2006-3

August 27, 2008

August 26, 2009

$

50,000

Commercial paper rate plus 250 basis points or LIBOR plus 350 basis points (4)

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

5. DEBT — (Continued)

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

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
Revolving Line of Credit
Maximum outstanding balance		$	128,900			$	128,400			$	128,900			$	128,400
Average outstanding balance			101,316				74,819				84,001				60,431
Revolving Secured Warehouse Facility (2003-2) (1)
Maximum outstanding balance		$	276,900			$	297,211			$	276,900			$	297,211
Average outstanding balance			265,482				272,398				265,193				264,245
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
		June 30, 2009				December 31, 2008
Revolving Line of Credit
Balance outstanding		$	113,900			$	61,300
Letter(s) of credit			514				555
Amount available for borrowing			25,586				91,645
Interest rate			4.25	%			1.70	%
Revolving Secured Warehouse Facility (2003-2)
Balance outstanding		$	255,900			$	256,000
Amount available for borrowing			69,100				69,000
Contributed eligible Loans			339,608				344,111
Interest rate			1.66	%			3.33	%
Revolving Secured Warehouse Facility (2008-2)
Balance outstanding		$	50,000			$	50,000
Amount available for borrowing			—				—
Contributed eligible Loans			62,577				62,562
Interest rate			2.06	%			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		$	36,256			$	84,260
Contributed eligible Dealer Loans			91,108				114,054
Interest rate			6.22	%			6.22	%
Term ABS 144A 2008-1
Balance outstanding		$	128,560			$	150,000
Contributed eligible Loans			176,410				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 $50.0 million facility with another institutional investor.

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

     On August 26, 2009, the $325.0 million warehouse facility matures. If we are unsuccessful in renewing the facility, and alternative financing cannot be obtained, Loan origination volume will be impacted. As of June 30, 2009, $255.9 million was outstanding under the facility. In the event that this facility is not renewed, no further advances would be made under the facility, and the amount outstanding would be repaid by the proceeds from the Loans securing the facility. We currently expect such amounts to be repaid over time as collections on such Loans are received, even if the lender under such facility has the right to cause the Loans securing the facility to be sold to repay the outstanding indebtedness. Although the facility is non-recourse to the Company, the sale of the Loans by the lender at less than their book value could result in significant losses to the Company. As of June 30, 2009, the book value of the Loans was $339.6 million. Given current conditions in the credit markets, there can be no assurance that the facility will be renewed or that alternative financing will be obtained. In addition, we may be required to incur significant fees or other costs in connection with extending or replacing the facility.

      On May 23, 2010, our $50.0 million warehouse facility ceases to revolve. After this date, amounts outstanding on the facility will be repaid over time as collections on the Loans securing the facility are received until May 23, 2011, at which time all principal and interest is due in full. As of June 30, 2009, $50.0 million was outstanding under this 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% 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 June 30, 2009, due to downgrades in the debt ratings of the insurers, 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

Term ABS 144A

Contributed at

Expected Annualized

Financing

Issue 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

%

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

5. DEBT — (Concluded)

Residual Credit Facility

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

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

     On August 26, 2009, our $50.0 million residual credit facility matures. No amounts were outstanding under the $50.0 million residual credit facility as of June 30, 2009. In the event that this facility is not renewed, any amounts then outstanding under this facility are required to be repaid in full at maturity.

Mortgage Note

     We amended the mortgage note on our Southfield headquarters to extend the maturity date to June 22, 2014 and increased the interest rate on the note from 5.35% to 5.70%. The balance on the mortgage note at the time of the amendment was $4.8 million.

Debt Covenants

     As of June 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 and $50.0 million revolving secured warehouse facilities. As we have not designated these agreements as hedges as defined under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended, changes in the fair value of these agreements will increase or decrease interest expense.

     As of June 30, 2009 and 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% 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 June 30, 2009, we had $146.8 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 SFAS 133, changes in the fair value of this swap will increase or decrease interest expense.

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

6. DERIVATIVE INSTRUMENTS — (Continued)

     We have designated the interest rate swap related to the $150.0 million floating rate debt as a cash flow hedge as defined under SFAS 133. The effective portion of changes in the fair value is recorded in other comprehensive income, net of income taxes, and the ineffective portion of changes in fair value is recorded in interest expense. There has been no such ineffectiveness since the inception of this hedge through June 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 June 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 June 30, 2009 and December 31, 2008 is as follows (in thousands):

		Liability Derivatives
		June 30, 2009					December 31, 2008
		Balance Sheet					Balance Sheet
		Location		Fair Value			Location		Fair Value
Derivatives designated as hedging instruments under Statement 133
		Accounts payable					Accounts payable
		and accrued					and accrued
Interest rate swap		liabilities		$	2,627		liabilities		$	4,068
Total derivatives designated as hedging instruments under Statement 133				$	2,627				$	4,068
Derivatives not designated as hedging instruments under Statement 133
		Accounts payable					Accounts payable
		and accrued					and accrued
Interest rate swap		liabilities		$	237		liabilities		$	827
Total derivatives not designated as hedging instruments under Statement 133				$	237				$	827
Total derivatives				$	2,864				$	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 six months ended June 30, 2009 and 2008 is as follows (in thousands):

Derivatives in		Gain / (Loss)								Gain / (Loss)
Statement 133		Recognized in OCI on Derivative								Reclassified from Accumulated
Cash Flow		(Effective Portion)								OCI into Income (Effective Portion)
Hedging		Three Months Ended June 30,												Three Months Ended June 30,
Relationships		2009				2008				Location				2009				2008
Interest rate swap		$	(224	)		$	(529	)		Interest expense				$	(1,042	)		$	(204	)
Derivatives in		Gain / (Loss)								Gain / (Loss)
Statement 133		Recognized in OCI on Derivative								Reclassified from Accumulated
Cash Flow		(Effective Portion)								OCI into Income (Effective Portion)
Hedging		Six Months Ended June 30,												Six Months Ended June 30,
Relationships		2009				2008				Location				2009				2008
Interest rate swap		$	(698	)		$	(529	)		Interest expense				$	(2,139	)		$	(204	)

     As of June 30, 2009, we expect to reclassify losses of $2.4 million from Accumulated other comprehensive income into Income during the next twelve months.

Derivatives Not Designated as		Amount of Gain / (Loss) Recognized in Income on Derivative
Hedging Instruments under						Three Months Ended June 30,								Six Months Ended June 30,
Statement 133		Location				2009				2008				2009				2008
Interest rate caps		Interest expense				$	1			$	51			$	—			$	(1	)
Interest rate swap		Interest expense					24				356				13				(624	)
Total						$	25			$	407			$	13			$	(625	)

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 June 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		$	77,272			$	77,272			$	83,487			$	83,487
Restricted securities available for sale			2,905				2,905				3,345				3,345
Net investment in Loans receivable			1,056,941				1,077,746				1,017,917				1,042,790
Liabilities
Line of credit		$	113,900			$	113,900			$	61,300			$	61,300
Secured financing			470,716				470,716				574,175				569,811
Mortgage note			4,859				4,859				5,274				5,415
Derivative instruments			2,864				2,864				4,895				4,895

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

7. FAIR VALUE MEASUREMENTS — (Concluded)

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

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

     The following table provides the fair value measurements of applicable assets and liabilities as of June 30, 2009 (in thousands):

										Total
		Level 1				Level 2				Fair Value
Assets
Restricted securities available for sale		$	2,905			$	—			$	2,905
Liabilities
Derivative instruments		$	—			$	2,864			$	2,864

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 $14.1 million and $15.4 million as of June 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 June 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
		June 30, 2009								June 30, 2008
		Affiliated								Affiliated
		dealer-partner				% of				dealer-partner				% of
		activity				consolidated				activity				consolidated
New Dealer and Purchased Loans		$	1,591				1.2	%		$	2,832				2.0	%
Dealer Loan revenue		$	958				1.6	%		$	1,028				1.9	%
Dealer Holdback payments		$	494				4.4	%		$	591				3.8	%