SOUTHFIELD, Mich. -

Credit Acceptance chief executive officer Brett Roberts approached the topic of competition from three different angles when the subprime auto finance company took questions from investment analysts who wanted more details about its second-quarter performance, which included a year-over-year rise of more than $10 million in consolidated net income.

The first way Roberts described how Credit Acceptance is tackling competition stemmed from how the finance company watched its active dealer network jump by 18 percent to 7,181 stores that originate at least one deal during a quarter. However, active volume per dealer softened by nearly 2 percent, a trend Credit Acceptance has seen previously.

“I think from an environment standpoint, it's pretty much consistent with what we would have said last quarter,” Roberts said. “Volume per dealer is probably the easiest number to look at just to get a sense for the competitive environment. It was down this quarter, not down a lot but 1.8 percent.

“So looking at that number I don't think you can conclude the environment got a lot easier, so I would probably say more of the same: a difficult environment but not changing a lot from last quarter,” he continued.

When the Wall Street observer immediately asked whether an active dealer base above 7,000 should be Credit Acceptance’s “new normal,” Roberts added, “We had nice growth in active dealers but yes, sequentially second quarter tends to be a little bit tougher of a quarter to grow, but I think you’re right that having a sequential decline isn't something that has happened in a long time.

“Attrition was higher this quarter and again, we’d probably attribute that to the competitive environment,” he went on to say.

The attrition Roberts mentioned came in at a decline of 17.2 percent in Q2. In the year-ago period, it was 13.9 percent. Credit Acceptance explained that attrition is measured according to the following formula: Decrease in consumer loan unit volume from dealers who have received funding for at least one dealer loan or purchased loan during the comparable period of the prior year but did not receive funding for any dealer loans or purchased loans during the current period divided by prior year comparable period consumer loan unit volume.

Later in the call, the competitive environment Credit Acceptance is facing was approached from another perspective: whether the finance company would have to price a little “more aggressively,” and if Q2 levels for average term and advance rate would be a good benchmark. Credit Acceptance’s average term for contracts originated in Q2 was 53.2 months, up from 51.3 months a year earlier. Meanwhile the finance company’s advance rate was 44 percent in Q2.

To answer that question after Credit Acceptance originated 76,520 installment contracts in Q2, Roberts said, “We look at pricing. We look at loan performance. We look at where our volume is coming from every quarter or every month, and we make changes where we see opportunities. There was a change in the mix of loans in the second quarter. We did more purchase loans, which tend to be larger, and then both within dealer and purchased loans we did a little bit larger loan, little bit longer term. Again, that’s just based on our pricing algorithms and where we think the best opportunities are.”

In yet another way of approaching competition, Roberts responded to finance companies modeling their business structure similar to Credit Acceptance's. The investment analyst coupled the question by inquiring about whether Credit Acceptance has seen any additional activity with companies such as GO Financial and Dealer Funding opting to depart the industry. GO Financial made its decision back in May while SubPrime Auto Finance News learned about Dealer Funding’s plans in late June.

“It’s such a big market that what one player does really doesn’t impact us so much,” Roberts said. “It’s really just such a large market that as long as the flow of the capital is there, there’s going to be plenty of competition, and what one player does isn't going to impact us too much.”

Used-vehicle price impact

The Manheim Used Vehicle Value Index moved higher for the fourth consecutive month. Wholesale used vehicle prices (on a mix-, mileage- and seasonally adjusted basis) increased in July by 2.3 percent, leaving the latest index reading at 127.0. It’s the highest point for the monthly reading in more than five years. The last time Manheim put its index mark at 127 or higher was June 2011, when it came in at 127.5.

With those metrics in mind, Roberts replied to inquiries about any used-vehicle price projection Credit Acceptance has and how the finance company leverages that metric into its underwriting scorecards and more.

“We really don’t have an outlook for used vehicle prices going forward. We take into consideration anything that's happened to date, but we really think it's very difficult to predict where the prices are going to be,” Roberts said.

“If you think about it, you write a loan today, it’s a 50-month loan. The price of the vehicle over the next 50 months is really almost impossible for us to predict,” he continued.

“So instead of trying to be experts at predicting the future, what we try to do is just structure our business so that in the event we have periods where our loans don’t perform as well as we’d like, whether it’s because of macro factors or used-vehicle prices or the competitive cycle, that the loans that we did write are likely to be very profitable. That’s more how we approach it,” Roberts went on to say.

In light of that explanation, Roberts then explained why Credit Acceptance slightly modified its forecasted collections.

“I think used-car prices is probably a factor there," Roberts said. “I think the competitive environment is the other factor that we talked about last quarter.

“If you look at that table where we show variance by year of origination, the best performance versus our initial forecast was in 2009; that was a year that was very favorable from a competitive perspective,” he continued. “Since 2009, the environment has gotten more competitive, and you can see that positive variance has narrowed.

“And for 2015 we have, for the first time in a while, a negative variance. So it’s really just following the competitive cycle, which is pretty much as expected,” Roberts went on to say.