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 March 31, 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		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. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
			(Do not check if a smaller reporting company)

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 April 23, 2009 was 30,842,826.

 

 

TABLE OF CONTENTS

PART I. — FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Income Statements — Three months ended March 31, 2009 and 2008			1
Consolidated Balance Sheets — As of March 31, 2009 and December 31, 2008			2
Consolidated Statements of Cash Flows — Three months ended March 31, 2009 and 2008			3
Notes to Consolidated Financial Statements			4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			32
ITEM 4. CONTROLS AND PROCEDURES			32
PART II. — OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			33
ITEM 6. EXHIBITS			34
SIGNATURES			35
INDEX OF EXHIBITS			36
EX-31.(A)
EX-31.(B)
EX-32.(A)
EX-32.(B)

PART I. — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

CREDIT ACCEPTANCE CORPORATION

		Three Months Ended March 31,
(Dollars in Thousands, Except Per Share Data)		2009				2008
Revenue:
Finance charges		$	76,726			$	63,675
Premiums earned			6,460				32
Other income			4,702				7,071
Total revenue			87,888				70,778
Costs and expenses:
Salaries and wages			17,121				17,740
General and administrative			7,998				7,124
Sales and marketing			3,921				4,671
Provision for credit losses			164				2,649
Interest			7,923				10,864
Provision for claims			4,809				5
Total costs and expenses			41,936				43,053
Operating income			45,952				27,725
Foreign currency gain (loss)			3				(13	)
Income from continuing operations before provision for income taxes			45,955				27,712
Provision for income taxes			16,943				10,131
Income from continuing operations			29,012				17,581
Discontinued operations
(Loss) gain from discontinued United Kingdom operations			(15	)			56
(Benefit) provision for income taxes			(4	)			17
(Loss) gain from discontinued operations			(11	)			39
Net income		$	29,001			$	17,620
Net income per common share:
Basic		$	0.95			$	0.59
Diluted		$	0.93			$	0.57
Income from continuing operations per common share:
Basic		$	0.95			$	0.58
Diluted		$	0.93			$	0.57
(Loss) gain from discontinued operations per common share:
Basic		$	—			$	—
Diluted		$	—			$	—
Weighted average shares outstanding:
Basic			30,479,665				30,106,881
Diluted			31,180,146				30,891,227

See accompanying notes to consolidated financial statements.

		As of
		March 31,				December 31,
		2009				2008
(Dollars in thousands, except per share data)		(unaudited)
ASSETS:
Cash and cash equivalents		$	106			$	3,154
Restricted cash and cash equivalents			86,991				80,333
Restricted securities available for sale			3,136				3,345
Loans receivable (including $14,828 and $15,383 from affiliates as of March 31, 2009 and December 31, 2008, respectively)			1,179,484				1,148,752
Allowance for credit losses			(131,384	)			(130,835	)
Loans receivable, net			1,048,100				1,017,917
Property and equipment, net			20,487				21,049
Other assets			18,157				13,556
Total Assets		$	1,176,977			$	1,139,354
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Liabilities:
Accounts payable and accrued liabilities		$	94,512			$	83,948
Line of credit			99,300				61,300
Secured financing			521,865				574,175
Mortgage note and capital lease obligations			5,862				6,239
Deferred income taxes, net			78,837				75,060
Income taxes payable			8,211				881
Total Liabilities			808,587				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, 30,843,959 and 30,666,691 shares issued and outstanding as of March 31, 2009 and December 31, 2008, respectively			308				306
Paid-in capital			13,080				11,829
Retained earnings			357,179				328,178
Accumulated other comprehensive loss, net of tax of $1,242 and $1,478 at March 31, 2009 and December 31, 2008, respectively			(2,177	)			(2,562	)
Total Shareholders’ Equity			368,390				337,751
Total Liabilities and Shareholders’ Equity		$	1,176,977			$	1,139,354

See accompanying notes to consolidated financial statements.

		Three Months Ended March 31,
(Dollars in thousands)		2009				2008
Cash Flows From Operating Activities:
Net income		$	29,001			$	17,620
Adjustments to reconcile cash provided by operating activities:
Provision for credit losses			164				2,649
Depreciation			1,371				1,231
Provision for deferred income taxes			3,541				6,539
Stock-based compensation			1,484				908
Change in operating assets and liabilities:
Increase in accounts payable and accrued liabilities			11,187				3,905
Decrease in income taxes receivable			—				2,654
Increase in income taxes payable			7,330				—
Increase in other assets			(4,601	)			(7,628	)
Net cash provided by operating activities			49,477				27,878
Cash Flows From Investing Activities:
Increase in restricted cash and cash equivalents			(6,658	)			(8,354	)
Proceeds from sale of restricted securities available for sale			—				271
Maturities of restricted securities available for sale			207				49
Principal collected on Loans receivable			177,021				175,381
Advances to dealers and accelerated payments of dealer holdback			(153,181	)			(179,973	)
Purchases of Consumer Loans			(41,389	)			(104,958	)
Payments of dealer holdback			(12,811	)			(17,242	)
Net (increase) decrease in other loans			(10	)			63
Purchases of property and equipment			(809	)			(2,390	)
Net cash used in investing activities			(37,630	)			(137,153	)
Cash Flows From Financing Activities:
Borrowings under line of credit			152,300				204,600
Repayments under line of credit			(114,300	)			(153,500	)
Proceeds from secured financing			54,900				131,200
Repayments of secured financing			(107,210	)			(75,238	)
Principal payments under mortgage note and capital lease obligations			(377	)			(378	)
Repurchase of common stock			(540	)			(66	)
Proceeds from stock options exercised			156				1,458
Tax benefits from stock based compensation plans			153				482
Net cash (used in) provided by financing activities			(14,918	)			108,558
Effect of exchange rate changes on cash			23				65
Net decrease in cash and cash equivalents			(3,048	)			(652	)
Cash and cash equivalents, beginning of period			3,154				712
Cash and cash equivalents, end of period		$	106			$	60
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest		$	8,729			$	11,217
Cash paid during the period for income taxes		$	5,557			$	217

See accompanying notes to consolidated financial statements.

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 “US 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 US 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.

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 5 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	%

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, 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. The cash amount advanced to the dealer-partner is recorded as an asset on our balance sheet. The aggregate amount of all advances to an individual dealer-partner, plus finance charges, plus dealer holdback payments, plus Portfolio Profit Express payments, less collections (net of certain collection costs), less write-offs, plus recoveries, comprises the amount of the Dealer Loan recorded in Loans receivable.

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 traditional 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 cash amount paid to the dealer-partner is recorded as an asset on our balance sheet. The aggregate amount of all amounts paid to purchase Consumer Loans from dealer-partners, plus finance charges, less collections (net of certain collection costs), less write-offs, plus recoveries, comprises the amount of Purchased Loans recorded in Loans receivable.

     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. Portfolio Profit Express is paid to qualifying dealer-partners after a pool of 100 or more Consumer Loans has been closed. 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. The Company has entered into arrangements with third-party insurance companies that limit our exposure to fund claims 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 SFAS No. 60, “Accounting and Reporting by Insurance Enterprises” (“SFAS 60”). Premiums are earned over the life of the vehicle service contract using an accelerated method (an average of the pro rata and rule of 78 methods), as this method best matches the timing of historical claims. Claims are expensed through a provision for claims in the period the claim was incurred. For the three months ended March 31, 2009, net assumed written premiums were $9.3 million, net premiums earned were $6.5 million, and provision for claims was $4.8 million. For the three months ended March 31, 2009, we amortized $0.1 million 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 $30.7 million and $29.3 million at March 31, 2009 and December 31, 2008, respectively, have been consolidated on our balance sheet as restricted cash and cash equivalents. As of March 31, 2009 and December 31, 2008, accounts payable and accrued liabilities includes $30.0 million and $23.3 million of unearned premium, and $1.2 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 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 a 26 month period (average remaining life of the ceded vehicle service contracts) using an accelerated method (an average of the pro rata and rule of 78 methods), as this method best matches the timing of historical claims. 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 March 31, 2009 and December 31, 2008, the remaining trust had $4.8 million and $5.4 million in assets available to pay claims and a related claims reserve of $4.0 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 of VSC Re, the income we receive 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 increased to $87.0 million at March 31, 2009 from $80.3 million at December 31, 2008. The following table summarizes restricted cash and cash equivalents:

		As of
		March 31,				December 31,
(in thousands)		2009				2008
Cash collections related to secured financings		$	54,651			$	48,956
Cash held in trusts for future vehicle service contract claims (1)			32,340				31,377
Total restricted cash and cash equivalents		$	86,991			$	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 March 31, 2009
						Gross				Gross
						Unrealized				Unrealized				Estimated Fair
(in thousands)		Cost				Gains				Losses				Value
US Government and agency securities		$	842			$	43			$	—			$	885
Corporate bonds			2,269				11				(29	)			2,251
Total restricted securities available for sale		$	3,111			$	54			$	(29	)		$	3,136

		As of December 31, 2008
						Gross				Gross
						Unrealized				Unrealized				Estimated Fair
(in thousands)		Cost				Gains				Losses				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 March 31, 2009								As of December 31, 2008
						Estimated								Estimated
(in thousands)		Cost				Fair Value				Cost				Fair Value
Contractual Maturity
Within one year		$	1,458			$	1,461			$	1,665			$	1,670
Over one year to five years			1,653				1,675				1,652				1,675
Total restricted securities available for sale		$	3,111			$	3,136			$	3,317			$	3,345

Deferred Debt Issuance Costs

     As of March 31, 2009 and December 31, 2008, deferred debt issuance costs were $2.5 million (net of accumulated amortization of $6.5 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 plan to adopt FSP FAS 107-1 and APB 28-1 for the period ending June 30, 2009. The adoption will have no financial impact on our consolidated financial statements but will expand 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 US 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 do not expect FSP FAS 115-2 and FAS 124-2 to have a material impact on our consolidated financial statements.

4. LOANS RECEIVABLE

     A summary of changes in Loans receivable is as follows (in thousands):

		Three Months Ended March 31, 2009
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	823,567			$	325,185			$	1,148,752
New loans (1)			153,181				41,389				194,570
Transfers (2)			(4,330	)			4,330				—
Dealer holdback payments			12,811				—				12,811
Net cash collections on Loans			(137,540	)			(39,505	)			(177,045	)
Write-offs			(570	)			(21	)			(591	)
Recoveries			979				15				994
Net change in other loans			16				—				16
Currency translation			(23	)			—				(23	)
Balance, end of period		$	848,091			$	331,393			$	1,179,484

		Three Months Ended March 31, 2008
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	804,245			$	140,453				944,698
New loans (1)			179,973				104,958				284,931
Transfers (2)			(1,515	)			1,515				—
Dealer holdback payments			17,242				—				17,242
Net cash collections on Loans			(145,531	)			(30,130	)			(175,661	)
Write-offs			(22,728	)			(13	)			(22,741	)
Recoveries			—				5				5
Net change in other loans			(15	)			—				(15	)
Currency translation			(66	)			—				(66	)
Balance, end of period		$	831,605			$	216,788			$	1,048,393

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 March 31, 2009
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	113,831			$	17,004			$	130,835
Provision for credit losses (1)			(350	)			517				167
Write-offs			(570	)			(21	)			(591	)
Recoveries			979				15				994
Currency translation			(21	)			—				(21	)
Balance, end of period		$	113,869			$	17,515			$	131,384

		Three Months Ended March 31, 2008
		Dealer Loans				Purchased Loans				Total
Balance, beginning of period		$	133,201			$	944			$	134,145
Provision for credit losses (2)			2,243				236				2,479
Write-offs			(22,728	)			(13	)			(22,741	)
Recoveries			—				5				5
Currency translation			(63	)			—				(63	)
Balance, end of period		$	112,653			$	1,172			$	113,825

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 March 31, 2009 is as follows (dollars in thousands):

Wholly-owned

Interest Rate at

Financings

Subsidiary

Issue Number

Close Date

Maturity Date

Financing Amount

March 31, 2009

Revolving Line of Credit

n/a

n/a

January 25, 2008

June 22, 2010

$

153,500

At the Company’s option, either the Eurodollar rate plus 125 basis points or the prime rate minus 60 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, 2010 (2)

$

50,000

Commercial paper rate plus 77.5 basis points or LIBOR plus 177.5 basis points (4) (5)

Term ABS 144A 2007-1 (1)

Credit Acceptance Funding LLC 2007-1

2007-1

April 12, 2007

April 15, 2008 (2)

$

100,000

Fixed rate

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 March 31,
		2009				2008
Revolving Line of Credit
Maximum outstanding balance		$	99,300			$	101,500
Average outstanding balance			66,493				46,043
Revolving Secured Warehouse Facility (2003-2) (1)
Maximum outstanding balance		$	275,000			$	285,789
Average outstanding balance			264,900				256,092
Revolving Secured Warehouse Facility (2008-2)
Maximum outstanding balance		$	50,000			$	—
Average outstanding balance			50,000				—

		As of
		March 31, 2009				December 31, 2008
Revolving Line of Credit
Balance outstanding		$	99,300			$	61,300
Letter(s) of credit			555				555
Amount available for borrowing			53,645				91,645
Interest rate			1.80	%			1.70	%
Revolving Secured Warehouse Facility (2003-2)
Balance outstanding		$	249,900			$	256,000
Amount available for borrowing			75,100				69,000
Contributed eligible Loans			342,778				344,111
Interest rate			1.61	%			3.33	%
Revolving Secured Warehouse Facility (2008-2)
Balance outstanding		$	50,000			$	50,000
Amount available for borrowing			—				—
Contributed eligible Loans			62,540				62,562
Interest rate			2.23	%			2.21	%
Term ABS 144A 2007-1
Balance outstanding		$	12,232			$	33,915
Contributed eligible Dealer Loans			71,739				87,155
Interest rate			5.32	%			5.32	%
Term ABS 144A 2007-2
Balance outstanding		$	59,733			$	84,260
Contributed eligible Dealer Loans			100,694				114,054
Interest rate			6.22	%			6.22	%
Term ABS 144A 2008-1
Balance outstanding		$	150,000			$	150,000
Contributed eligible Loans			188,032				184,595
Interest rate			6.37	%			6.37	%
Residual Credit Facility
Balance outstanding		$	—			$	—
Certificate Pledged			65,350				52,944
Interest rate			—				—

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

5. DEBT — (Continued)

Line of Credit Facility

     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.

     In August of 2009, the $325.0 million warehouse facility matures. If we are unsuccessful in renewing the facility, and alternative financing cannot be obtained, additional reductions in Loan origination volumes will be required. As of March 31, 2009, $249.9 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 March 31, 2009, the book value of the Loans was $342.8 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.

     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.

     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.

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

5. DEBT — (Continued)

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 March 31, 2009, due to downgrades in the debt ratings of the insurers, the 2007 transactions were rated “Baa2” by Moody’s. The Term ABS 114A 2007-1 transaction continued to be rated as “AAA” by S&P and the Term ABS 114A 2007-2 transaction was rated as “A-” by S&P. The 2008 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						Expected
Term ABS 144A		Issue				Loans Contributed at						Annualized
Financing		Number		Close Date		Closing				Revolving Period		Rates (1)
Term ABS 144A 2007-1		2007-1		April 12, 2007		$	125,700			12 months (Through April 15, 2008)			7.2	%
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.

     In August of 2009, our $50.0 million residual credit facility matures. No amounts were outstanding under the $50.0 millon residual credit facility as of March 31, 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.

Debt Covenants

     As of March 31, 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 March 31, 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. As of March 31, 2009 we had $42.0 million in fixed rate debt, and $179.9 million in floating rate debt outstanding under Term ABS 144A asset-backed secured borrowings. We have entered into two interest rate swaps, which were effective on the closing date of the financings, to convert $50.0 million and $150.0 million in floating rate Term ABS 144A asset-backed secured borrowings into fixed rate debt bearing a rate of 6.28% and 6.37%, respectively. 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 March 31, 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 March 31, 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 March 31, 2009 and December 31, 2008 is as follows (in thousands):

		Liability Derivatives
		March 31, 2009								December 31, 2008
		Balance Sheet				Fair				Balance Sheet				Fair
		Location				Value				Location				Value
Derivatives designated as hedging instruments under Statement 133
Interest rate swap		Accounts payable and accrued liabilities				$	3,445			Accounts payable and accrued liabilities				$	4,068
Total derivatives designated as hedging instruments under Statement 133						$	3,445							$	4,068
Derivatives not designated as hedging instruments under Statement 133
Interest rate swap		Accounts payable and accrued liabilities				$	487			Accounts payable and accrued liabilities				$	827
Total derivatives not designated as hedging instruments under Statement 133						$	487							$	827
Total derivatives							3,932							$	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 months ended March 31, 2009 and 2008 is as follows (in thousands):

		Gain / (Loss)								Gain / (Loss)
Derivatives in		Recognized in OCI on Derivative								Reclassified from Accumulated
Statement 133 Cash		(Effective Portion)								OCI into Income (Effective Portion)
Flow Hedging		Three Months Ended March 31,												Three Months Ended March 31,
Relationships		2009				2008				Location				2009				2008
Interest rate swap		$	(474	)		$	—			Interest expense				$	(1,097	)		$	—

     As of March 31, 2009, we expect to reclassify losses of $2.9 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 March 31,
Statement 133		Location				2009				2008
Interest rate caps		Interest expense				$	(1	)		$	(52	)
Interest rate swap		Interest expense					(11	)			(980	)
Total						$	(12	)		$	(1,032	)

7. FAIR VALUE MEASUREMENTS

     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 March 31, 2009 (in thousands):

										Total
		Level 1				Level 2				Fair Value
Assets
Restricted securities available for sale		$	3,136			$	—			$	3,136
Derivative instruments			—				—				—
Liabilities
Derivative instruments		$	—			$	3,932			$	3,932

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 $14.8 million and $15.4 million as of March 31, 2009 and December 31, 2008, respectively. Affiliated Dealer Loan balances were 1.7% and 1.9% of total consolidated Dealer Loan balances as of March 31, 2009 and December 31, 2008. A summary of related party Loan activity is as follows (dollars in thousands):

		Three Months Ended								Three Months Ended
		March 31, 2009								March 31, 2008
		Affiliated								Affiliated
		dealer-partner				% of				dealer-partner				% of
		activity				consolidated				activity				consolidated
New Dealer and Purchased Loans		$	2,030				1.3	%		$	3,687				2.0	%
Dealer Loan revenue		$	948				1.8	%		$	985				2.0	%
Dealer holdback payments		$	571				4.5	%		$	539				3.1	%

     Beginning in 2002, entities owned by our majority shareholder and Chairman began offering secured lines of credit to third parties in a manner similar to a program previously offered by us. In December 2004, our majority shareholder and Chairman sold his ownership interest in these entities; however, he continues to have indirect control over these entities and has the right or obligation to reacquire the entities under certain circumstances until December 31, 2014 or the repayment of the related purchase money note.

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

9. CAPITAL TRANSACTIONS

     Net Income Per Share

     Basic net income per share has been computed by dividing net income by the basic number of common shares outstanding. Diluted net income per share has been computed by dividing net income by the diluted number of common and common equivalent shares outstanding using the treasury stock method. The share effect is as follows:

		Three Months Ended March 31,
		2009				2008
Weighted average common and common equivalent shares outstanding:
Basic number of common shares outstanding			30,479,665				30,106,881
Dilutive effect of stock options			541,257				631,835
Dilutive effect of restricted stock and restricted stock units			159,224				152,511
Dilutive number of common and common equivalent shares outstanding			31,180,146				30,891,227

     The computation of diluted net income per share for the three months ended March 31, 2008 excludes the effect of the potential exercise of stock options to purchase 110,000 shares, because the effects of including them would have been anti-dilutive. There were no stock options that would be anti-dilutive for the three months ended March 31, 2009.

     Stock Compensation Plans

     Pursuant to our Incentive Compensation Plan, which was approved by shareholders on May 13, 2004, and subsequently amended and restated on April 6, 2009, we reserved 1.0 million shares of our common stock for the future granting of restricted stock, restricted stock units, stock options, and performance awards to employees, officers, and directors at any time prior to April 1, 2014. If our shareholders adopt the Credit Acceptance Corporation Amended and Restated Incentive Compensation Plan (the “Incentive Plan”) at our annual meeting of shareholders on May 21, 2009, the number of shares reserved for granting of restricted stock, restricted stock units, stock options, and performance awards to employees, officers, directors, and contractors at any time prior to April 6, 2019 will be increased to 1.5 million shares. Through March 31, 2009, 121,736 shares of restricted stock and 62,500 restricted stock units have been granted to employees contingent upon the adoption of the Incentive Plan. Assuming adoption of the Incentive Plan, shares available for future grants under the Incentive Plan totaled 354,939 as of March 31, 2009.

     Below is a summary of the restricted stock activity under the Incentive Plan for the three months ended March 31, 2009 and 2008:

		Number of Shares
		Three Months Ended March 31,
Restricted Stock		2009				2008
Outstanding Beginning Balance			245,329				201,872
Granted			121,736				80,123
Vested			(105,682	)			(20,198	)
Forfeited			(5,711	)			(1,297	)
Outstanding Ending Balance			255,672				260,500

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(UNAUDITED

9. CAPITAL TRANSACTIONS — (Concluded)

     Below is a summary of the restricted stock unit activity under the Incentive Plan for the three months ended March 31, 2009 and 2008:

		Nonvested								Vested								Total
						Weighted-								Weighted-
						Average								Average								Distribution Date
		Number of				Grant-Date				Number of				Grant-Date				Number of				of Vested
		Restricted Stock				Fair Value				Restricted Stock				Fair Value				Restricted Stock				Restricted Stock
Restricted Stock Units		Units				Per Share				Units				Per Share				Units				Units
Outstanding at December 31, 2008			640,000			$	18.99				60,000			$	26.30				700,000
Granted			62,500				21.38				—				—				62,500			February 22, 2016
Vested			(60,000	)			26.30				60,000				26.30				—			February 22, 2014
Forfeited			(7,500	)			13.51				—				—				(7,500	)
Outstanding at March 31, 2009			635,000			$	18.60				120,000			$	26.30				755,000

		Nonvested								Vested								Total
						Weighted-								Weighted-
						Average								Average								Distribution Date
		Number of				Grant-Date				Number of				Grant-Date				Number of				of Vested
		Restricted Stock				Fair Value				Restricted Stock				Fair Value				Restricted Stock				Restricted Stock
Restricted Stock Units		Units				Per Share				Units				Per Share				Units				Units
Outstanding at December 31, 2007			300,000			$	26.30				—			$	—				300,000
Granted			—				—				—				—				—
Vested			(60,000	)			26.30				60,000				26.30				—			February 22, 2014
Outstanding at March 31, 2008			240,000			$	26.30				60,000			$	26.30				300,000

     Stock compensation expense consists of the following (in thousands):

		Three Months Ended March 31,
		2009				2008
Restricted stock		$	510			$	344
Restricted stock units			974				564
		$	1,484			$	908

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

10. BUSINESS SEGMENT INFORMATION

     We have two reportable business segments: United States and Other. The United States segment primarily consists of the United States automobile financing business. The Other segment consists of businesses in liquidation, primarily represented by the discontinued United Kingdom automobile financing business. We are currently liquidating all businesses classified in the Other segment.

     Selected segment information is set forth below (in thousands):

		Three Months Ended March 31,
		2009				2008
Revenue:
United States		$	87,886			$	70,760
Other			2				18
Total revenue		$	87,888			$	70,778
Income (loss) from continuing operations before provision for income taxes:
United States		$	45,970			$	27,861
Other			(15	)			(149	)
Total income from continuing operations before provision for income taxes		$	45,955			$	27,712
		As of
		March 31, 2009				December 31, 2008
Segment Assets
United States		$	1,176,840			$	1,139,214
Other			137				140
Total Assets		$	1,176,977			$	1,139,354
11. COMPREHENSIVE INCOME
Our comprehensive income information is set forth below (in thousands):
		Three Months Ended March 31,
		2009				2008
Net income		$	29,001			$	17,620
Unrealized (loss) gain on securities available for sale, net of tax			(1	)			43
Unrealized gain on interest rate swap, net of tax			386				—
Comprehensive income		$	29,386			$	17,663

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in Item 8 — Financial Statements and Supplementary Data, of our 2008 Annual Report on Form 10-K, as well as Item 1- Consolidated Financial Statements, in this Form 10-Q.

Critical Success Factors

     Critical success factors include the ability to accurately forecast Consumer Loan performance and access to capital.

     At the time of Consumer Loan acceptance or purchase, we forecast future expected cash flows from the Consumer Loan. Based on these forecasts, an advance or one time payment is made to the related dealer-partner at a level designed to achieve an acceptable return on capital. If Consumer Loan performance equals or exceeds our original expectation, it is likely our target return on capital will be achieved.

     Our strategy for accessing the capital required to grow is to: (1) maintain consistent financial performance; (2) maintain modest financial leverage; and (3) maintain multiple funding sources. Our funded debt to equity ratio is 1.7:1 at March 31, 2009. We currently use four primary sources of 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 borrowings (“Term ABS 144A”) with qualified institutional investors; and (4) a residual credit facility with an institutional investor.

Consumer Loan Performance

     At Loan inception, we use a statistical model to estimate the expected collection rate for each Loan. Subsequent to Loan inception, we continue to evaluate the expected collection rate of each Loan. Our evaluation for each Loan becomes more accurate as the Loans age, as we use actual performance data in our forecast. By comparing our current expected collection rate for each Loan with the rate we projected at the time of assignment, we are able to assess the accuracy of our initial forecast. The following table compares our forecast of Consumer Loan collection rates as of March 31, 2009, with the forecasts as of December 31, 2008 and at the time of assignment, segmented by year of assignment:

		Forecasted Collection Percentage as of						Variance in Forecasted Collection Percentage from
Loan Assignment		March 31,		December 31,		Initial		December 31,		Initial
Year		2009		2008		Forecast		2008		Forecast
2000		72.5%		72.5%		72.8%		0.0%		-0.3%
2001		67.4%		67.4%		70.4%		0.0%		-3.0%
2002		70.4%		70.4%		67.9%		0.0%		2.5%
2003		73.8%		73.8%		72.0%		0.0%		1.8%
2004		73.3%		73.4%		73.0%		-0.1%		0.3%
2005		74.1%		74.1%		74.0%		0.0%		0.1%
2006		70.5%		70.3%		71.4%		0.2%		-0.9%
2007		68.2%		67.9%		70.7%		0.3%		-2.5%
2008		67.9%		67.9%		69.7%		0.0%		-1.8%

     During the first quarter of 2009, actual Loan performance was consistent with our forecast at December 31, 2008. As a result of current economic conditions and uncertainty about future conditions, we continue to be cautious about our forecasts of future collection rates. However, we believe our current estimates are reasonable for the following reasons:

	•		Our forecasts start with the assumption that Loans in our current portfolio will perform like historical Loans with similar attributes.
	•		During 2008, we reduced our forecasts on Loans originated in 2006 through 2008 as these Loans began to perform worse than expected. Additionally, we adjusted our estimated timing of future net cash flows to reflect recent trends relating to Loan prepayments and reduced the forecasted collection rate used at Loan inception to price new Loan originations.
	•		During 2008, and during the first quarter of 2009, we reduced the expected collection rate on new Loan originations. The reductions reflect both the experience to date on 2006 through 2008 Loans as well as an expectation that the external environment will continue to negatively impact Loan performance.

	•		Our current forecasting methodology, when applied against historical data, produces a consistent forecasted collection rate as the Loans age.
	•		During the first quarter of 2009, realized net Loan cash flows were consistent with our current forecast.

     Although current economic uncertainly increases the risk of poor Loan performance, we set prices at Loan inception to increase the likelihood of achieving an acceptable return on capital, even if collection results are worse than we currently forecast.

     The following table presents forecasted Consumer Loan collection rates, advance rates (includes amounts paid to acquire Purchased Loans), the spread (the forecasted collection rate less the advance rate), and the percentage of the forecasted collections that had been realized as of March 31, 2009. Payments of dealer holdback and Portfolio Profit Express are not included in the advance percentage paid to the dealer-partner. All amounts are presented as a percentage of the initial balance of the Consumer Loan (principal + interest). The table includes both Dealer Loans and Purchased Loans.

		As of March 31, 2009
		Forecasted						% of Forecast
Loan Assignment Year		Collection %		Advance %		Spread %		Realized
2000		72.5%		47.9%		24.6%		99.3%
2001		67.4%		46.0%		21.4%		98.9%
2002		70.4%		42.2%		28.2%		98.6%
2003		73.8%		43.4%		30.4%		98.3%
2004		73.3%		44.0%		29.3%		97.4%
2005		74.1%		46.9%		27.2%		96.2%
2006		70.5%		46.6%		23.9%		86.0%
2007		68.2%		46.5%		21.7%		62.1%
2008		67.9%		44.6%		23.3%		31.3%
2009		69.3%		42.6%		26.7%		4.5%

     The following table presents forecasted Consumer Loan collection rates, advance rates (includes amounts paid to acquire Purchased Loans), and the spread (the forecasted collection rate less the advance rate) as of March 31, 2009 for Purchased Loans and Dealer Loans separately:

						Forecasted
		Loan Assignment Year				Collection %				Advance %				Spread %
Purchased loans			2007				67.9	%			48.9	%			19.0	%
			2008				66.9	%			46.9	%			20.0	%
			2009				68.2	%			44.9	%			23.3	%
Dealer loans			2007				68.2	%			45.9	%			22.3	%
			2008				68.4	%			43.4	%			25.0	%
			2009				69.5	%			42.0	%			27.5	%

     Although the advance rate on Purchased Loans is higher as compared to the advance rate on Dealer Loans, Purchased Loans do not require the Company to pay dealer holdback. The increase in the spread between the forecasted collection rate and the advance rate during 2008 and 2009 occurred as a result of pricing changes implemented during the first nine months of 2008 and stable forecasted collection rates during the first quarter of 2009.

     The following table summarizes changes in Consumer Loan dollar and unit volume in each of the last 5 quarters as compared to the same period in the previous year:

		Consumer Loans
		Year over Year Percent Change
Three Months Ended		Dollar Volume				Unit Volume
March 31, 2008			28.5	%			16.0	%
June 30, 2008			40.6	%			26.1	%
September 30, 2008			27.5	%			26.9	%
December 31, 2008			-21.0	%			-13.4	%
March 31, 2009			-26.3	%			-13.0	%